Bitcoin cost $300 in 2015, $1,000 at the start of 2017, and peaked to astronomical levels above $19,500 last week – all hail the #HODLers* 😊.  I’m often asked about Bitcoin and where it’s from and why the price has risen so much?  So here is my quick take on the cryptocurrency revolution.

Bitcoin was born in 2009 in the wake of the 2008 financial crisis.  An open source computing project inspired by the mysterious Satoshi Nakamoto (whose identity remains unknown – we don’t know if it’s a single person, a group of people, or if any such person even existed) who came up with the idea to produce a peer to peer electronic decentralised cash system which is independent of any central authority.  This idea gave birth to cryptocurrencies, a digital currency or medium of exchange, and to blockchain, the enabling underlying technical architecture facilitating exchange.  In short, cryptocurrencies are digital code residing on your computer (in a ‘wallet’ or exchange) that are protected by cryptography and used to make payments of any value on a blockchain without fees and free from government control.  Bitcoin is the most popular cryptocurrency but there are over 1,000 different types of cryptocurrency each with different characteristics.  Outside of Bitcoin, some of the most popular cryptocurrencies include Ethererum, Bitcoin Cash, Ripple and Litecoin.

The rise in price of cryptocurrencies can be compared to the rise of tulips in the 1600’s, silver in the 1980’s and highly reminiscent of the dot com boom two decades ago with one exception – the increase in value of cryptocurrencies is dramatically greater than any of these previous events despite having no yield, no store of value and no means of exchange (although this is changing as I write).  Some reasons for the boom include the use of cryptocurrencies for money laundering, illegal drugs and terrorist activities.  Other reasons include growing institutional sponsorship, improving transaction platforms (see the ‘hard fork’, or Segwit2x for a more technical description), and increasing block sizes (an area of debate amongst the crypto currency community).  But there are two other reasons which I think are far greater – 1) the public mistrust in traditional institutions and 2) the fear of missing out and making a quick profit.

The last two years of political shocks have highlighted a shift in public attitudes who mistrust traditional structures, forms and authorities.  These same forces are attempting to change the paradigm in the world of finance with technology as the enabler through the use of cryptocurrencies which are unregulated and free of government control – ‘the people’s central bank’.  It’s not just ideologists looking for alternative investments.  The media has dramatically increased the profile and awareness of cryptocurrencies and retail investors are looking to make a quick profit and get rich despite the absence of any fundamental understanding of the technology and associated businesses (e.g. crypto currency mining).

Some leading figures in the finance world are calling cryptocurrencies a ‘faith based asset’, ‘a misnomer’, and ‘a bubble’, however the rise cannot be ignored and many leading institutions are taking note.  The Nasdaq are planning to launch bitcoin future contacts next year with similar decisions having been made by the Chicago Mercantile Exchange and Chicago Board Options Exchange.  Jamie Dimon, the JP Morgan Chase CEO, called Bitcoin a ‘fraud, yet JP Morgan and Goldman Sachs are thinking of helping clients trade Bitcoin futures in response to growing client demand.  Central banks are looking to develop their own fiat backed cryptocurrencies in direct response to the threat posed to their institutional standing.

Despite cryptocurrencies turning mainstream, we are starting to see some enthusiasm tempered amid security concerns.  A cyber-attack on one of South Koreas crypto exchanges, Yapian, has forced them to stop trading and file for bankruptcy after losing a large chunk of their reserves.  Similar incidents took place in 2016 on a Hong Kong based exchange causing investors losses in the region of $70m and in 2014 when the then biggest exchange globally, based in Tokyo, caused losses of $450m.  Some countries have banned or are looking to ban ICO’s (initial coin offerings) and others are contemplating capital gains tax from cryptocurrency trading.

Cryptocurrencies are the fastest growing asset this year and no longer something the financial world can ignore.  A recent study by the London Block Exchange predicts that one in three millennials will be invested in cryptocurrency by the end of 2018.  For any n00bs (tech speak for newbie) asking if they should invest – the current boom in Bitcoin and other cryptocurrencies could go either way.  It may be the birth of a new paradigm or a speculative bubble that collapses and during this journey I expect extreme price volatility as market participants increase and true price discovery is achieved.  But even if existing cryptocurrencies collapse, I do believe digital currencies and the underlying blockchain technology will persist in some shape or form with the potential to change the world’s financial banking and currency system.  As Bob Dylan once sang, ‘Oh the times they are a-changin’.

Happy hodling everyone and see you in the New Year!

*’hodling’ is not a typo 😛  ‘Hodling’ is a term initially used by a Bitcoin enthusiast who misspelt the world ‘holding’.  Since then the term ‘hodl’ has been used in the cryptocurrency community for someone who believes their holding in cryptocurrency will be profitable one day (if its not already today).  It has also become a humorous bacronym, ‘Hold On for Dear Life’ 😊