Cryptocurrencies: Bitcoin’s long and winding journey

Bitcoin (and cryptocurrencies in general) has come a long way. What started as a concept on a white paper written by one Satoshi Nakamoto in 2008 has become a thriving technology-backed digital currency that has disrupted many sectors.

As at Dec 18, cryptocurrencies had a market capitalisation of about US$178 billion (according to data provided by CoinGecko, which tracks 6,412 coins). Bitcoin’s market capitalisation alone stood at US$120 billion.

For context, the current market capitalisation of Netflix and Facebook — two of the world’s biggest tech stocks — are US$138 billion and US$565 billion respectively, according to Bloomberg data. Meanwhile, the market size of various gold sectors (including bars, coins, jewellery and exchange-traded funds) stood at US$7.886 trillion as at February, according to the World Gold Council.

Kenrick Drijkoningen, founding partner at LuneX, a fund that invests in blockchain assets globally, says it took a long time for investors to fully recognise bitcoin as a viable asset class. In 2009, when the cryptocurrency was introduced, it was almost worthless. The price only increased to less than half a US cent the following year.  

In 2010, a year before bitcoin reached US$1 apiece, the first real-world transaction happened. A bitcoin miner in Florida bought two pizzas for 10,000 bitcoins. This translated to about US$30 at the time.

In the early days, most of bitcoin’s adopters were tech geeks or those with strong libertarian beliefs, says Bobby Ong, co-founder of CoinGecko. He adds that back then, many of the early adopters had a strong belief that bitcoin would become significant and could even go as far as becoming the single unified currency for the world.

“That said, many of the early adopters knew that bitcoin was an experiment in defining a new monetary system for the world and there was a non-trivial probability that it would fail and the value would plummet to zero,” says Ong.

Along the way, bitcoin’s reputation was damaged due to its use as a method of payment in dark markets such as Silk Road, a digital marketplace that connected vendors of illegal drugs with potential buyers. In a 2011 exposé, it was revealed that bitcoin was the only method of payment accepted on the now-defunct platform. Credit cards or payment accounts such as PayPal were not allowed on the platform to retain the anonymity of those involved in the transactions.

However, while the identities of bitcoin owners may be anonymous, their transactions are traceable, having been recorded on a public ledger. Law enforcement agencies could use sophisticated network analysis to decipher the transaction flow and track down individual bitcoin users. In fact, on Oct 16, the US and South Korean authorities announced that they had broken up one of the world’s largest child pornography sites, “Welcome to Video”, by following a bitcoin trail.

Henri Arslanian, PwC’s fintech and crypto lead for Asia, says several catalysts may have drawn people’s attention to bitcoin and changed their perception towards it, the most prominent being a rally that started in October 2017. Two months later, the price of bitcoin reached an all-time high of almost US$20,000 before crashing to US$7,000 in April 2018.

Not a single catalyst was said to have caused the crash. However, there was negative newsflow during the period, including rumours of South Korean authorities banning cryptocurrency trading, the hacking of Japan’s largest over-the-counter cryptocurrency market Coincheck and the initial coin offering (ICO) advertising ban on all major social media platforms.

The rally, coupled with the ICO boom that took place around the same time, attracted a lot of attention from the public that bitcoin could potentially be a lucrative asset class, says Ong.

 

The rise and fall of bitcoin

Over the past decade, the price of bitcoin has been on a roller-coaster ride. The first notable rally happened in 2013. At the beginning of that year, the cryptocurrency began trading at about US$13.50 apiece. By early April, it had risen to US$220, before falling to about US$70 in the next few weeks.

In October that year, the price of bitcoin went from US$100 to US$195. Thanks to several factors, including miners from China entering the marketplace, bitcoin rose to US$1,120 each the following month.

At this point, bitcoin experienced a bear market and bottomed at US$152 on Jan 14, 2015, having lost about 87% of its value from an all-time high two years ago. Throughout 2016, bitcoin rose steadily and moved above the US$1,000 mark early the following year.

The upward trend did not stop in 2017. In October of that year, bitcoin reached US$5,000 apiece before doubling the following month. In December, the price surged to almost US$20,000.

Last year was not a good one for bitcoin. According to CoinGecko data, the price plunged about 70%. Bitcoin was trading at about US$13,000 in June but by Dec 14, the price had dropped to US$7,076.

Drijkoningen says the bitcoin community is looking forward to a major event next May, when the cryptocurrency will be halved. Once every four years, the issuance rate of the entire bitcoin network is reduced by 50%, which reduces the amount of new bitcoins entering circulation every day and increases mining costs to secure the network.

Historically, this event can be seen as one of the driving factors behind bitcoin’s previous bull runs. Next year, bitcoin’s block reward will be halved from 12.5 BTC to 6.25 BTC per block.

Will investors see another bull run like the one in 2017? “Some people think it will be tough for us to see another bull run like the one in 2017, when the bitcoin price increased almost 20 times that year. That was a once-in-a-lifetime opportunity as most people were hearing about bitcoin and blockchain technology for the first time. Today, almost every educated person has heard about blockchain technology,” says Ong.

“That said, I think there is a [slim] chance that a repeat of 2017 may happen again in the future. Most of the wealth in the world is still in traditional asset classes such as fiat currencies, real estate, stocks and commodities. Under perfect conditions, such as the erosion of trust in national governments like in Venezuela, we may see people move money into cryptocurrencies at a rapid pace and we could see another huge price increase. When or if it will happen is, of course, a tough thing to predict.”