When the calendar changes to 2018, it's very possible that 2017 will go down as the year of the cryptocurrency. This past weekend, bitcoin, the kingpin of all digital currencies, logged yet another new all-time high. The mother of all cryptocurrencies wound up hitting an intraday high of $6,151 per coin, which also pushed its market cap briefly over $100 billion. By comparison, the aggregate value of the remaining 1,184 cryptocurrencies combined, as of Oct. 21, 2017, was just $70 billion.
Since the year began, bitcoin has rallied by more than 500%, and some pundits believe it's still just clearing its throat. Next on the docket could be a march to $10,000 per coin. After all, what's another 67% gain when it's up by more than 500% this year, more than 2,000% in two years, and 2,000,000% (yes, 2 million percent) since March 2010?
So, what catalysts are the likeliest to push bitcoin to new heights? My suspicion is a mixture of four tangible and emotional factors will play a role.
1. The rise of blockchain
The most tangible and fundamental catalyst behind the rise in bitcoin is the potential that blockchain brings to the table. Blockchain is the digital and decentralized ledger that records all bitcoin transactions without the need for a financial intermediary. Since blockchains are usually open source, altering transaction data without having someone else see it would be nearly impossible. This added security is what could make blockchain particularly attractive in future peer-to-peer and business-to-business transactions.
While there are plenty of criticisms of bitcoin's valuation, few industry pundits are questioning the value of what blockchain could bring to the table. Recently, bitcoin implemented a software upgrade to its blockchain that wound up taking some information off its blockchain to boost capacity. At the same time, transaction settlements have been sped up, and transaction fees have been lowered. This upgrade is squarely targeted at luring in enterprises.
2. U.S. dollar weakness
Another tangible catalyst for bitcoin has been the falling U.S. dollar. Recently, the U.S. dollar hit a more than two-year low against the euro and more than a one-year low against other major currencies. While a weaker dollar can boost U.S. exports, much to the delight of President Trump, they're bad news for investors who are holding cash.
When the U.S. dollar is declining, investors will traditionally seek the safety of gold, since it's a finite resource and a proven store of value. After all, gold has been used as a currency for centuries. Of late, though, bitcoin has also been used as a safe-haven asset. Protocols limit the number of bitcoins that can be mined to 21 million, making it somewhat of a "finite" resource, too. If the dollar remains weak, it's certainly plausible that bitcoin pushes higher as investors seek its perceived safety.
3. Payment platform adoption
A number of bitcoin's investors are particularly excited about bitcoin as a mode of payment. In 2014, a handful of brand-name companies began accepting bitcoin, and since that time we've seen dozens of other merchants join in. While it's still difficult to live your life by solely paying for things with bitcoin, consumers' ability to use digital currencies to pay for goods and services is improving.
For example, specialty services are finding success acting as an intermediary between marijuana retailers and card-carrying consumers. Since banks want nothing to do with cannabis-based businesses, middleman-type companies have popped up that allow consumers to purchase bitcoin with their credit or debit card, and then use that bitcoin to buy cannabis. In turn, cannabis businesses can then turn that bitcoin back into cash for a fee. If more businesses jump onboard bitcoin as a payment platform, it could head even higher.
4. Emotions (don't miss the boat)
Finally, emotions are likely to play a role in pushing bitcoin higher. When an asset rises 500% in a year, or more than 2,000% in two years, it's bound to draw interest from people who simply don't want to miss the boat. The scary thing about such a scenario is that the "don't miss the boat" thesis can draw in novice investors who have little or no understanding of what bitcoin is, or what it's trying to accomplish as a currency.
There are also very few institutional investors currently willing to dabble in bitcoin. Fidelity Investments' CEO admitted to running a profitable bitcoin and Ethereum mining operation, and Goldman Sachs is toying with the idea of running a trading platform in bitcoin. Yet the bulk of bitcoin's investment activity is coming from retail investors who are far more prone to trade on emotion than institutional investors are.
Three big reasons you should still avoid bitcoin
While bitcoin does have a number of catalysts that could push it to the psychological $10,000 mark, there are still three very good reasons bitcoin shouldn't be in your investment portfolio.
To begin with, regulation is a double-edged sword for bitcoin. Though an increase in regulation would, in a way, validate bitcoin as a legal or acceptable form of tender, it could also cut off opportunities in various countries. For instance, China and South Korea have both put an end to initial coin offerings (ICO), with China suggesting that ICOs are a pathway for fraud. China also announced that it'd be shuddering its domestic cryptocurrency exchanges.
Second, there's no guarantee that blockchain will be adopted as rapidly as some investors believe, or that bitcoin's blockchain will be preferred among businesses. Most virtual currencies have an underlying blockchain, and we're nearing 1,200 total virtual currencies. That's a lot of potential competition, and the barrier to entry in terms of developing blockchain is exceptionally low. Bitcoin's blockchain isn't guaranteed success by any means.
The third and final factor that concerns me is that investors are focused more on bitcoin as a mode of payment than for its blockchain. Although there's no guarantee that bitcoin's blockchain will be successful, its blockchain is where the true value of this cryptocurrency lies. There are no "assets" that back up the value of bitcoin, nor any government backing. This is what I believe makes bitcoin such a dangerous investment, and why it shouldn't be anywhere near your portfolio.