What's more powerful than a speeding locomotive and can leap tall buildings in a single bound? No, it's not Superman -- it's bitcoin. Seemingly nothing can stop the world's most valuable and popular cryptocurrency at the moment.
Earlier this week, bitcoin hit the psychologically important $10,000 per coin mark, then it proceeded to blow right through it and surpass $11,000 per coin less than 24 hours later. In less than a year, we've witnessed bitcoin increase in value by more than 1,000%, with its market cap briefly topping $175 billion, placing it well ahead of Dow Jones Industrial Average stalwarts like Walt Disney, General Electric, and drug giant Merck. Bitcoin also comprises more than half the aggregate cryptocurrency market cap of 1,300-plus virtual currencies combined.
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Bitcoin has been unstoppable because of these four factors
Why is bitcoin suddenly the go-to investment, you ask? It looks to be a mixture of four factors.
For starters, there's excitement about blockchain technology, which is the digital and decentralized ledger than underlies bitcoin (and most cryptocurrencies) and records transactions without the need for a financial intermediary like a bank. Blockchain is considered to be especially secure and efficient given that logged data is stored in open source networks where it'd be nearly impossible to alter data without someone else noticing. There's a good possibility that blockchain could become the preferred transaction facilitator for the financial services industry, and other industries, over the long run.
Secondly, investors are encouraged by the uptake of bitcoin as a payment facilitator. Though a handful of brand-name businesses have been accepting bitcoin since 2014, including Overstock.com, which accepts six major cryptocurrencies, it's bitcoin's growing merchant base over the years that has investors excited.
Third, we've seen a lot of positive news-driven events. This includes the acceptance by Japan of bitcoin as legal tender, as well as the more recent announcement that the CME Group (CME +0.16%) is going to list bitcoin futures for trading before the end of the year. These events not only keep bitcoin in the spotlight, but they add validity to a somewhat still taboo topic.
Lastly, the fear of missing out on bitcoin's incredible run higher and emotional investing appear to be playing a role. Institutional investors have mostly been kept on the sidelines because of regulatory concerns surrounding bitcoin, meaning retail investors, who are far more prone to allowing their emotions to come into play, have been the driving force behind bitcoin.
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You thought this was good news, but it could be devastating to bitcoin
Of course, no asset rises 1,000% during the course of 11 months without raising a few eyebrows and bringing skeptics out of the woodwork. Thankfully for crypto-bulls and investors, betting against bitcoin isn't something that has been an option to this point. The virtual currency can be bought and sold on decentralized cryptocurrency exchanges, but that's been the extent of its investable capacity since 2011.
However, the CME Group is about to shake things up.
While a number of folks see nothing but positives surrounding the CME Group's announcement that it'll begin offering bitcoin futures, and there is validity to the idea that it'll draw in tons of new money from institutional investors who've previously been stuck on the sidelines, it could also bring about a bitcoin crash. You see, for the first time ever, institutional investors will be able to bet against bitcoin, creating the first true market in the world's most popular virtual currency since its inception.
It's pretty much no secret that a number of institutional investors believe bitcoin is overvalued at the moment, with some still struggling to figure out where it'll find its niche. That looks to be a recipe for futures trading to push bitcoin substantially lower in the weeks to come.
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Caveat emptor
But you should keep in mind that this is just a new risk that can be added to a handful of broader concerns.
One of the bigger worries with developing blockchain and introducing new virtual currencies is that there's a very low barrier to entry. Essentially anyone with time, some money, and the knowledge to develop blockchain technology can bring a new virtual currency and blockchain to market. We've witnessed hundreds of new virtual currencies debut since the year began, which is a direct threat to bitcoin's current dominance.
Along those same lines, who's to say that bitcoin will remain the top dog as a crypto-payment facilitator, or that its blockchain will generate interest with businesses? For those who may not recall, bitcoin upgraded its blockchain four months ago, boosting its capacity while lowering transaction fees and settlement times. This was done to attract big businesses, but there's nothing to guarantee that bitcoin's blockchain will be the preferred choice when there are so many other choices.
It's possible a perfect storm is setting up that could turn bitcoin investors' cheers into tears in short order.
