Why bitcoin still has a lot further to go

Bitcoin © Getty Images

To say it’s had a rocky start to the year is an understatement.

It’s been up and down like a … well, you know the rest of the expression.

Today we turn our attention to what was the world’s top performing currency in 2016.

Bitcoin…

Bitcoin’s eventful New Year

Bitcoin was number one in 2015 as well, by the way, when it rose 40%.

But 2016 was even better. It began the year at $434 and ended it at $968. That’s a gain of about 120%.

I don’t know about top-performing currency – it’s beaten most stockmarkets as well.

And so to 2017.

As I write, the price is $910, so you might think these first nine days of the year have just seen a gentle decline of five or so percent, perhaps as a result of some profit-taking after a stellar 2016.

The truth is rather different.

The first three days of the year saw the price rise by 20%. The next three days saw it fall by 30%. The following three saw it “stabilize” around $900.

How’s that for volatility?

Having been bearish or neutral in 2014, I’ve been banging the bitcoin drum for some time now. It’s going through a classic hype cycle.

What does that mean?

It’s a term, for which tech research company Gartner in the US has been credited, to describe the cycles a new technology goes through as it evolves from conception to mainstream adoption.

Gartner has put the chart below together. It’s a wonderful tool to help you gauge where a tech is in its emergence. I’ve posted it before, but I post it again now as I think it is so useful.

170111-bitcoin

A tech is conceived, the prototype finds some sophisticated, early adopters, who begin to get very excited about it. That’s the technology trigger stage.

That excitement spreads to the media, who hype it, significant investment pours in and the whole thing gets overblown. That’s your peak of inflated expectations. Bitcoin was there in late 2013 when it, briefly, became as valuable as an ounce of gold.

Then it’s discovered the tech doesn’t work as well as people hoped. There are some negative stories. People get bored and lose interest. There are some high-profile failures. And the reality sets in that there is a long way to go before this thing catches on. That’s your trough of disillusionment. Bitcoin sunk into that trough in 2014.

But then, quietly, it began to emerge from that trough. More and more people start to use the tech. The second-generation products start to work. Better practices pervade the industry – and you are on the slope of productivity.

That’s where I argued that we were in April last year and I’d say we are somewhere further up that same slope today.

Why this is still just the beginning for bitcoin

It’s got a lot further to go. Most people still don’t own any bitcoins.

Bitcoin, as an alternative internet cash system, is pretty useful. It will find more and more users. But alternative competing crypto currencies already exist that in many ways are better. Either they’re more anonymous, or they’re faster, or their mining systems are more efficient, or there’s some other way in which they have improved on the original.

Bitcoin has tremendous first-mover advantage, of course. It has had far more coverage, investment and usage. But it may be that as an alternative cash system it gets superseded.

Already on the Dark Net, for example, monero is rapidly gaining popularity.

But in designing an alternative cash system, Satoshi Nakamoto accidentally stumbled upon something that has a much wider potential application. I’m talking, of course, about blockchain tech.

As far as I can see – and I’ll be glad for readers to suggest better solutions in the comments – the simplest, most uncluttered way to play this blockchain technological revolution is to own bitcoins.

You might find a fund that invests in start-ups, you might find a start-up, but there is so much that can go wrong. Owning bitcoin is like owning an exchange-traded fund (ETF) for the whole movement.

As Charlie Morris, investment director of The Fleet Street Letter says, owning bitcoins is the equivalent of owning “shares in the internet” in the early to mid 1990s. You don’t have to pick individual company winners, which is nigh on impossible at this early stage.

Ethereum is a legitimate alternative by the way – more on that another time.

Just as the international monetary system used to be built on top of a gold base – the so-called gold standard – so is bitcoin the bedrock of the crypto system.

What’s next for bitcoin?

From a charting point of view, the problem bitcoin has in the short term is the old highs from 2013. Depending on which index you use, the high was $1,160 – that’s where crypto news site Coindesk puts it – or $1,240 where it traded on the now-defunct MtGox exchange.

Either way, the area from $1,150 to $1,250 is a huge barrier of resistance overhead.

Last week, bitcoin made its first attempt at that hurdle and was slapped down. I imagine it will take several attempts to get through.

There are so many parallels between gold and bitcoin that I imagine the gold price, wherever it is, will also act as a barrier. As soon as they hit parity – and they did for a few moments at $1,150 last week, as well as in November 2013 – bitcoin gets slapped down.

The volatility of the past few days will also, I imagine, need some time to work off.

However, as more and more vehicles come on board by which institutions can invest, we should comfortably see enough capital come into bitcoin to take it past its old highs and much higher.

Once it is through $1,250, there is nothing but blue sky overhead. It has the potential to soar. But investing is, as much as anything, a patience game and my outlook is that over the next few weeks or months patience will be needed as it consolidates and settles after all the recent volatility.

But if you like the idea of this sector, make sure you have a position. When bitcoin moves, it moves like a rocket. You want to be in your seat and strapped in. Not hoping to hop aboard.

  • Alan Morris

    One problem I see is that for ordinary folks (+ many geeks), the job of keeping a significant investment in bitcoin safe on their computers/devices is too hard. And it’s unwise to trust all that to a third party instead. But there is a solution: Hardware wallets ( I’ve got Ledger Nano). Plus – how does an ordinary Joe buy Bitcoin? The answer is in a trusted service using escrow. Yes it costs a bit more, but it’s worth it surely. (I use Bittylicios).

    Why not a feature in Moneyweek on how to buy, keep & sell Bitcoin in relative safety? (Anything to increase demand and push the value of my bitcoin up!)

    • Andrew Goodman

      print yourself some paper wallets. It’s pretty easy instructions here:https://blockchain.info/wallet/paper-tutorial

    • Alex

      I also have a Ledger Nano S. It is absolutely fantastic. It only has two buttons and I thought it would be fiddly as hell, but it is so easy to use. They are set to add support for Monero at some point in the comings months, and already have support for Ethereum, Dash and one or two others.

      You hear of bitcoins being stolen all the time, but I have never once heard of someone stealing coins from a Ledger.

  • inpips

    Alan, or you can simply generate paper wallets offline and use them for “cold storage” its very easy.

    • Alan Morris

      Good solution as I understand it. “Easy”? Not so sure (for ordinary folks)! Plus, let me ask you a question: Let’s say you had 50K in bitcoin, but unfortunately your PC had malware (a key logger). Are you safe when you open your paper wallet to trade? (Asking, ‘cos I don’t know). I believe my hardware wallet puts a firewall between my keyboard and my bitcoin.

      • inpips

        http://www.bitaddress.org

        For paper wallets you should load the above page then turn off WIFI, generate wallet/s, print 1,2,or 3 copies. Clear browsing data, quit browser.

        Bitcoins stored on paper wallets cant be hacked, when you want to trade them in future import to you hardware wallet.

        I would break them down into say 5 coins per wallet if you have 50k.

        Keep the paper wallets secure.

        • Alan Morris

          I think that if you started that process on a compromised machine (which you may not be aware of), doing things such as turning off WiFI, clearing browser cache etc will not help you. It’s shutting the stable door after the horse has bolted. Of course it’s a matter of weighing up the risk…

          If you’re worried about this this (“if), then it’s possible to try to create a clean, isolated OS (eg Ubuntu on a stick). But that’s where I came in – you’re going beyond the competence & interest of most folks by this point (& in any case, it’s not trivial to be certain that your “apparently” clean OS really is clean, and remains clean).

          Regarding eg BitAddress, Coindesk say “Also note, that you will have to use the same website in the future to decrypt the private key”. http://www.coindesk.com/information/paper-wallet-tutorial/ What if that web site’s gone the way of the Dodo?

          My hardware wallet is pretty simple to use. No geek stuff is required, and so it’s suitable for general, public take up. It’s safe even on a comprised device or network & beyond the reach of key logging malware. Furthermore there is paper backup and recoverability in case the device fails or locks me out.

          On the other hand, it costs about £70!

          • inpips

            Alan a key logger logs keystrokes, no keystrokes are required to generate a paper wallet. As for decryption, dont encrypt. Simple.

            Anyway each to their own, just trying to be helpful.

  • Triple H

    Well you could argue about gains by trading Bitcoin on a purely speculative basis, how on earth can you link BlockChain technology to Bitcoin? Say, if more institutes adopt the BlockChain, how on earth does Bitcoin have its value added to? Only because it will generate more hype and more people will buy into it.

    Let me be clear. I am all for an alt-decentralized-currency to take us out of centralized/demonic control. But I do not believe that any government will let that happen unless the entire house is brought down by the populace demanding as such.

    So to sum it up, Bicoin’s value will keep increasing (or not depending on the mood) not because more people will adopt it, but because there will be more hype/news/recommendations around it prompting people to ‘own’ Bitcoins.

    • inpips

      Bitcoin has by far and away the most secure blockchain. Why would you use a much less secure blockchain possibly relying on trusted third parties?

      • Triple H

        It’s not about the superiority(or otherwise) of a technical implementation. The fact is Blockchain as a technical concept is independent of Bitcoin and can/will/(probably already is) be used by established players, such as financial institutes and governments.

        • inpips

          The bitcoin blockchain enables trustless consensus. Should a Government or financial Institution implement its own “blockchain” it would be about as radical as a database.

          So as long as we all trust Governments and Financial Institutions to be 100% honest and secure then you’re absolutely correct.

          • Triple H

            I am not contending anything about the trustworthiness of governments or financial institutes ( I have an extremely low opinion of them). Only stating that Bitcoin itself will be deemed a parallel currency and thereby forbidden to be used openly, thereby losing its value. But yes, for the near term, Bitcoin will rise in value as the hype grows.

  • Andrew Goodman

    Hi Dominic,

    I don’t think Bitcoin gets slapped down as such. I think it’s investors cashing in. A lot of people who got into Bitcoin in the previous hype phase will have been waiting for the price to get back to where it was so they can collect some or all of their ‘winnings’. As this happens, it clears out the early adopter investors who want to cash in their Bitcoins. The next bunch of investors buys at the new price; say £1,000 and are not willing to cash in until the price hits, say £2,000 and so on, and so forth. Having had its ‘hype phase clear out’ I think Bitcoin will easily rise through the old plateau.
    That the market it heavily skewed towards China, and the cash rich Chinese mom and pop day traders doesn’t help the volatility. Though you could arguably trade based solely on announcements from the PBOC. We need greater uptake, more players in the game, only then will the price volatility stabilise.
    All the best
    Andrew

  • disqus_IfSTdHhGW6

    I like bitcoin is because it’s supply is limited. Gold’s supply is not limited. With BTC the only way to get more supply is to chop the BTC’s into smaller and smaller denominations in order that more and more investors can trade it. You used to be able to buy whole BTC’s and now we are already into the 0.01 BTC, so as the volume builds, I see the value of a whole BTC must advance, and exponentially.

    • Alex

      You can still buy a whole bitcoin. In fact I am holding a few. Want to buy any? I’ll only charge 5% higher than the market rate 😉

  • hyc

    Bitcoin wasn’t the number one currency in 2016. Monero was, with a 2910% gain. Bitcoin was only #25 last year. https://bitcointalk.org/index.php?topic=1732516.0