Forget taking the family to the amusement park. If you want all the thrills and spills associated with a roller coaster, all you need to do is invest in bitcoin, the largest cryptocurrency in the world.
Bitcoin, which currently boasts the largest market cap of all digital currencies at $190 billion, and is also the most accepted virtual token in the world by merchants, catapulted very briefly to $20,000 per coin on Dec. 17, according to CoinMarketCap.com. Mind you, bitcoin was valued at less than $0.01 in March 2010. However, over the next month and a half, it would go on to lose roughly 70% of its value, bottoming out at $6,048 on Feb. 6. As of Feb. 20, it once again came within a stone's throw of $12,000 per token, meaning it'd essentially doubled in a span of just two weeks.
Here's how bitcoin staged an incredible two-week rally
How exactly does the world's best-known cryptocurrency string together a rally that sees its token increase in price by more than $5,900 in 14 days? The following four catalysts should help explain it.
1. South Korea's cryptocurrency regulations aren't as harsh as believed
One of the biggest reasons bitcoin fell off a cliff in January, and accelerated to nearly $6,000 per coin on Feb. 6, was the expectation of heightened regulations in South Korea. With the exception of the U.S. dollar, more global trading occurs in South Korean won than in any other currency. Therefore, any regulatory crackdown on cryptocurrencies in the country would have been viewed very poorly by investors.
However, a few weeks later, crypto investors have discovered that the new regulations are actually pretty benign. South Korean regulators aren't looking to stand in the way of cryptocurrency markets, so much as they simply want to improve the transparency behind each transaction. Moving forward, investors seeking to put new money to work in virtual currencies will need to verify their identity with banks, who are responsible for linking bank accounts to cryptocurrency exchanges. Increased transparency is really a feather in the cap for bitcoin, as it helps to validate it as a true asset.
Perhaps the one class of coin hurt most by South Korea's push against anonymity are privacy coins, such as Dash and Monero. The entire purpose of these coins is to obfuscate the sender and receiver of funds, as well as the amount being sent. Their thesis conflicts with the new South Korean regulations. But for bitcoin, it'll require few changes.
2. Retail investors are still in charge
Another important thing to remember is that bitcoin is still largely controlled by retail investors. Institutional investors really don't want any part of decentralized cryptocurrency exchanges, meaning their only access to bitcoin has been through futures trading on either the CME Group's or Cboe Global Markets' platforms. Though futures trading does give pessimists and skeptics a means to bet against bitcoin for the first time, it's not exactly easy to access futures for the average investor -- these contracts are for one or five bitcoins at a respective cost of $12,000 or $60,000.
What's this mean exactly? Namely that emotionally vested retail traders are still guiding the trading action in bitcoin. Since these investors only make money if bitcoin goes up in value, and there are virtually no pathways for the average investor to bet against bitcoin, the natural inclination of retail investors is to continually push prices higher. It's a bit of an unfair market, but it's certainly one that favors bitcoin bulls.
3. Crypto investors are quick to put bad news in the rearview mirror
In addition to South Korea weighing on bitcoin last month and the early portion of February, cryptocurrency hacks took center stage for a short period of time. On Feb. 2, Japanese cryptocurrency exchange Coincheck was hit with the largest hack of all time. Some $534 million worth of NEM coins (known as XEM) were stolen from a hot wallet with apparently low security standards.
Similarly, in December 2017, crypto-mining marketplace NiceHash had roughly 4,700 bitcoins stolen by hackers, valued at $70 million at the time, according to The Wall Street Journal.
Yet, virtual currency investors have been historically quick to brush aside PR flubs, citing generally improved security measures with blockchain technology relative to the current banking system and software in place today. In other words, "out of sight, out of mind" has become something of a motto for cryptocurrency investors.
4. Profit-taking and stop-loss cascades are short-term events
Finally, we can't discount the possibility that bitcoin's price collapsed following profit-taking and a wave of stop losses being hit. Selling at the beginning of a new year can make perfect sense if you have bills to pay (including taxes), but don't want to deal with the repercussions of your capital gain until April of the following year.
Likewise, we've witnessed what look like numerous stop-loss cascades in cryptocurrencies in recent years. Though it depends on liquidity, stop losses can be taken out in relatively short order on decentralized exchanges, artificially pushing prices down in a very short period of time. Both profit-taking-induced selling and stop-loss cascades have very short-term influences on the price of virtual currencies like bitcoin.
Now here's a reason for bitcoin investors to worry
However, if you want a genuine reason to be concerned, look no further than bitcoin's blockchain. As a reminder, blockchain is the digital, distributed, and decentralized ledger tethered to cryptocurrencies that's responsible for recording all transactions without the need for a financial intermediary.
When bitcoin debuted in 2009, it was the new kid on the block with an entirely new way to send peer-to-peer payments. Even today, a number of cryptocurrency and blockchain developers use bitcoin's blockchain infrastructure as sort of a foundation upon which to build.
Unfortunately, bitcoin's network is slower than molasses by crypto standards. Whereas many of its largest peers, such as Ethereum, Ripple, and Litecoin, can validate and settle transactions in mere seconds or minutes, bitcoin transactions take more than an hour to process, on average. What's more, they cost a veritable arm and a leg -- around $28. Bitcoin's enormous open-source community makes reaching consensus for needed software upgrades extremely difficult, allowing other digital currencies and blockchain projects to leave it behind.
Yes, bitcoin has more merchant partners than any other virtual currency and, yes, it's the world's most valuable digital token by market cap. But this investor doesn't expect it to stay that way for much longer.
Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool recommends Cboe Global Markets and CME Group, but has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.