Volatile week marks bitcoin birthday

EIGHT YEARS

ARMINA LIGAYA Bitcoin marked its eighth birthday this week with a wild, roller-coaster ride that saw the cryptocurrency’s price surge past US$1,000 and set a new record high before diving more than 20 per cent in a matter of hours the following day.

Yet, despite this flurry of activity in the virtual world, it remained business as usual at a Bitcoin ATM in a Cash Shop on Toronto’s Yonge Street.

“There are four, five people every day” using the machine, and that hasn’t wavered, says Mukesh Bali, manager of the store where the InstaCoin ATM was installed six months ago. “It’s a normal routine.”

Since it was first created by a mysterious programmer going by the name of Satoshi Nakamoto, the cryptocurrency has garnered greater consumer awareness and seen exponential growth in its market capitalization, with millions of bitcoin now available on the network.

But everyday economic use still only accounts for a fraction of its price moves, says Gil Luria, director of research at Wedbush Securities.

“Sending someone money, using bitcoin to buy something online, in my mind that explains 10 per cent of the value right now,” he said in a phone interview. “Ninety per cent of the value is the fact that people expect there to be many multiples more real economic activity in the future.”

That speculative side has fuelled volatility since the currency’s birth in 2009.

In the wake of the global financial crisis, the concept of a decentralized, digital currency appealed to enough people to drive bitcoin’s price to a then-record US$$1,137 in November, 2013, according to Bloomberg data.

Just months later, its upward trajectory was halted when Mt. Gox, once the world’s biggest bitcoin exchange, filed for bankruptcy. By January, 2015, bitcoin had slipped to US$183.07 and would hover at those depths for months.

Meanwhile, interest simmered. There was attention from major banks and companies, and a wave of investment in startups based on the currency and the blockchain technology behind it.

In September, 2015, bitcoin began to slowly gain again. And over the course of 2016 it soared roughly 120 per cent to hit US$952.01.

On Tuesday, the first trading day of 2017, the cryptocurrency again surpassed the US$1,000 threshold on its way to Wednesday’s alltime high of US$1,161.89.

The latest rally has been driven in part by global uncertainty and the cryptocurrency’s growing appeal, particularly in China, and other countries such as Venezuela and India where traditional currencies are facing more restrictions.

“Concerns about increased capital control for Chinese citizens may have contributed to more Chinese buying bitcoin in order to get money out of the country, or some people speculating about those restrictions,” Luria said.

China is also home to the biggest pool of miners of bitcoin in the world, comprising more than 50 per cent, says Manie Eagar, chair of the Bitcoin and Blockchain Alliance of Canada.

(Mining refers to the process in which new bitcoins are issued, where individuals use special software to solve complicated math problems and get bitcoins in exchange).

On Thursday, a day after hitting a record, the price of bitcoin fell by some 20 per cent in four hours to hit US$888.99. It was the currency’s worst daily performance in nearly two years.

Investors who bought bitcoin at high prices in the past likely saw its record-setting run as an opportunity to get some of their investment back, Eagar said.

“I see this as a consolidation or correction at the high price levels, where people are obviously wanting to cash in,” he said. “They can’t believe their luck that it got this high.”

Thursday’s fall coincided with a sharp rise in the Chinese yuan, underscoring the close relationship with Chinese markets.

“The appreciation of the value of the yuan lessens the need for capital flight, and reduces the demand for bitcoin,” said Luria.

Still, both Luria and Eagar say this does not diminish the cryptocurrency’s future.

Even at prices in the threedigit range, the market capitalization of bitcoin remains far higher than it was during the peak of 2013, says Luria.

“What we can say is as long as the usage of bitcoin grows and the expectation that it will grow more in the future, then the price will continue to go up,” said Luria. “But will it go up to US$1,000 or will it go back down and up from there? That’s much harder to predict.” $1,161.89