20 March, 2018
Bitcoin as an innovative investment mechanism
The rapid development of information technology and financial engineering led to the transformation of the standard concept of money and financial assets. Today people all over the world are talking about the currency of the new generation – the bitcoin, which demonstrates the phenomenal dynamics of the growth of value. The first bitcoin-transaction took place nine years ago, which marked the beginning of a comprehensive distribution of cryprocurrency, the level of which has not reached its peak position to this day. At the end of 2017 bitcoin became the most popular asset and in the literal sense of the word turned the idea of the means of payment on its head. According to statistics, at the beginning of 2018, an average daily number of bitcoins-transactions has reached 314 000 per day, market capitalization (the total value of all coins issued) has reached a level of $ 235 billion, and the world has already produced 16,805,075 BTC of 21 million possible. All this testifies to the growing popularity of bitcoin every day and causes an urgent need to study it as the founder of crypto-currencies.
For starters, you need to have a very clear idea of the concept of bitcoin as a kind of crypto currency. The most correct definition of bitcoin, taking into account its main features, can be formulated as follows: it is a decentralized deflationary digital asset using cryptography technology to guarantee the invariability of the chain of transaction blocks in the block, in other words it is a kind of digital currency based on encryption methods existence of which is not tied to any state or financial organization, and the issue is limited to a volume of 21 million coins.
Thus, the question of how to release and distribute bitcoin is reasonable. Being an non-issue instrument of payment medium, bitcoin is produced by means of “mining” – the only way to obtain the specified crypto currency. The essence of mining is simple enough and consists in solving mathematical problems by a computer network that can be located anywhere in the world, the result of computing activity is the unit of crypto currency – bitcoin. The technological process itself consists in the fact that the “miner” (a person extracting bitcoin through mining) needs to find a unique data block to confirm the transaction. A search for a data block is carried out by using specialized equipment, usually a set of video cards, of different capacities, in practice the result, and accordingly the amount of compensation received in bitcoins, depends on the performance of the acquired equipment. In 2009, the compensation for one block found was 50 BTC, but due to the limited bitcoine emissions, it occurs according to the established plan, which provides for a reduction in the level of compensation for finding a unit of the block by 50% every 210,000 units, which usually occurs every 4 years. The first payoff halving occurred in 2012, when the award for the block found fell to 25 BTC, the next decline occurred in 2016, which led to a decrease of compensation to 12.5 BTC. The next 50% reduction in the amount of compensation is expected to be held in the summer of 2020. The actual information on the amount of compensatio, as well as the time to its halving, is here .
Thus, the creators envisaged an artificial four-year cycle that leads to serious changes in the economic bitcoin-ecosystem, which can lead to serious redistributions of capital. In our opinion, this rule, first of all, demotivates the miners in the further production of bitcoins, which leads to high congestion and increasing in the cost of the commission for the transaction, and investors in its turn can stop injecting assets into the industry, whose profitability has halved and made a loss-making the work of hundreds of crypto-currency farms. To date, the world financial and IT community is quite lively debate on the appropriateness of the rule, examining options for improving the protocol and the scheme for paying rewards, however, no specific steps have been taken in this direction.
Based on the above data, it is possible to distinguish features characteristic of bitcoin:
Decentralization. As it became clear from the above, decentralization implies the absence of a single issuing authority. Perhaps this feature of bitcoin is fundamental because it reflects the main idea that made this crypto currency a revolutionary asset: for issuing and making calculations in bitcoin, mediators in the form of a state mega-regulator and a banking institution are not needed. Nevertheless, the growing popularity of bitcoin has led to the fact that financial mega-regulators around the world are trying to apply attempts to introduce mechanisms to regulate bitcoin currency.
Thus, bitcoin has been recognized and fully legalized as a means of payment in such countries as Japan, Australia, Estonia, Denmark, South Korea, Sweden, Netherlands, Finland. It is interesting that not all countries that have legalized crypto currency and bitcoin in particular take it for a full-fledged means of payment. For example, the regulators of the financial market in Canada, one of the first countries which adopted bitcoin, classify it as a commodity, and all transactions involving bitcoins are accepted for barter, the revenues received are recognized as profit from doing business, which is the basis for calculating tax. In the United States, bitcoin is defined as property from which taxes are levied, and in the United Kingdom bitcoin is considered as a private cash. Having an army of supporters, bitcoin has a huge number of ardent opponents.
So the state bodies of China are trying their best to limit the distribution of bitcoin and crypto-currency exchanges, seeing in it a direct threat to the national currency and the economic system as a whole. The ban on the use of crypto currency is imposed in such countries as Bolivia, whose authorities arrested 60 people for conducting training activities in the use of crypto currency; Ecuador, whose authorities banned the use of crypto currency due to the impossibility of its regulation by the Central Bank of the country and binding to the fiat currency; Nepal, where more than a dozen people are held in custody on charges of using crypto currency; Bangladesh and Kyrgyzstan, where the use of crypto currency is interpreted as a method of money laundering, which entails criminal liability.
Deflationary nature. This feature was laid down by the creators in bitcoin algorithmically, which consists in a rigid limitation of the money supply, which can’t exceed 21,000 thousand coins. Limited emission will not be able to fully satisfy the market demand, which will lead to a constant rise in the price of bitcoin assets, and accordingly, deflation. The main problem associated with the deflationary economic system is stagnation. Those the constant growth of the bitcoin rate will induce people to accumulate, and profit from simple accumulation will lead to demotivation of people in the production of new goods and services. As a result, you can achieve a state of deep crisis of the entire economic system because society can’t live in prosperity when no one does anything.
High volatility. This feature is a significant change in the value of the crypto currency in a short period of time, which in turn creates huge prospects for using bitcoin as a speculative tool for earning. To date bitcoin is the most volatile crypto currency of all the existing ones, to a greater extent due to the decentralized nature of bitcoin. The rate of this currency is built exclusively at the level of supply and demand, which is provided by the expectations of market participants, thus creating a positive environment for large-scale information impact, which was observed during 2009 – 2018. Even the slightest impact from the mass-media and market-makers can lead to a significant change in the rate both upward and downward. In 2017 the growth of bitcoin was + 1460%, the last estimate of the volatility index for the 30-day period is 7.36%; while gold volatility averages 1.2%; other major currencies reach the level of 0.5% – 1%.
Figure 1 – Graph of volatility of bitcoin
Nevertheless, according to a study conducted by experts at Chappuis Halder & Co, by 2019, it is forecasted to reduce bitcoin volatility to the level of existing fiat currencies (USD, EUR, CNY).
As can be seen from the graph, the current volatility of bitcoin is quite low compared to the same periods of the previous years and fluctuates within 5%, with the largest outbreaks observed until the end of 2014, when bitcoin wasn’t known to the general public and only gaining popularity.
The first significant jump in the cost of bitcoin occurred in April 2013. As of the end of April 2013, the market price of bitcoin was about 145 USD, but by May 3, 2013 the price had fallen by 40%, dropping to the level of $ 83, which was mainly caused by a lack of confidence in the market due to pop-up information about DDoS attacks on the network. However, by the end of May, bitkoin managed to regain his positions. In the same 2013, one of the largest drops of bitcoin occurred. So, from December 4 to December 8, 2013, bitcoin fell by 42%, falling for 4 days from $ 1,145 to $ 800, and by December 18, the value dropped another 25% to $ 550 per unit. This state of affairs was provoked by the ban imposed in China on carrying out bitcoins transactions by financial institutions of the country. To reach the pre-crisis level of 1,000 US dollars bitcoin was possible only in January 2014.
The greatest volatility of the rate for 2014 was observed in the period March-August, when the market price jumps reached 50%. The largest impact on the level of pricing in 2014 was provided by events such as the closure of the Mt.Gox exchange (led to a fall in the exchange rate of USD 57), as well as the determination of bitcoin as one of the property types by the US Tax Service (led to a fall in the exchange rate of 150 USD). At the end of December, the bitcoin rate dropped to $ 300.
2015 for bitcoin was relatively quiet, a sharp jump in the rate was noted in November, when it reached $ 500, but was further adjusted to an average annual level of $ 200- $ 300. Peak growth was noted only at the end of the year, when it reached the level of $ 450 per 1 BTC., Which was due to the overestimated expectations of investors, traditional for the end of the year.
The following 2016 was quiet enough for bitcoin. Having reached the level of $ 434 at the beginning of the year, bitcoin went up until June, when it grew by 40% or to $ 700 in monetary terms. At the beginning of August 2013, the exchange rate fell by 20% to the level of 540 USD, which was due to the most significant bitcoin theft at 120,000 BTC from the user accounts of the Hong Kong Stock Exchange Bitfinex. Further fluctuations of the exchange rate were noted within 15%, which continued until the end of October. Then the rate went up the upward trend and by the end of the year it grew by 28%, reaching the mark of 970 $.
Figure 2 – Graph of the bitcoin price for 2017.
2017 was the most productive from the point of view of investing in bitcoin, but on the other hand it was just as crowded. Starting from the mark of $ 970, bitcoin fueled by the rush, as well as the positive expectations of the financial mega-regulators of the world’s leading economies (in particular, legislative codification of bitcoin in Japan as an official means of payment) grew until November and, breaking the historic high of $ 7,460, collapsed by 26% , which was due to the cancellation of the expected hardfork bitcoin (update segwit2x). However, having survived the fall and pessimistic mood of the market players, by the middle of the month it was adjusted to the level of $ 7300. Further rapid growth, fueled by news on the release of futures in bitcoins, allowed the currency to reach a new historic high of $ 11,000, followed by a sharp drop to $ 9,000, which was affected by reports of disruptions in the work of one of the largest US exchange Coinbase and the attendant desire of traders to record profits from the continued growth of the crypto currency.
As it becomes clear, bitcoin is a very specific investment asset. The decentralized nature of this crypto currency, even given the fact of issuing bitcoins of futures on the Chicago Mercantile Exchange, makes the bitcoin rate highly dependent on the current information effectiveness of the market and the mood of the players, so long-term forecasting is highly subjective, and the use of technical analysis for large periods of time isn’t effective. Nevertheless, the existing trends allow us to conclude that there are two possible options for the development of the bitcoin market:
- While maintaining relatively free market regulation for 2018, it is possible to predict the progressive growth of bitcoin by the end of the year, but with a slowdown in growth compared to the rapid leaps in 2017. At the beginning of the year, it is projected to reach the bottom of the depression phase and break through the minimum at $ 7,700- $ 8 400 $, with the most negative scenario up to $ 5,000, after which the market will go on an uptrend. With a volatility index of 7.5% during the year, it is possible to achieve a price level at around $ 50,000 by the end of the year.
- The second development scenario presupposes the strengthening of state regulation in the crypto-currency market, in particular, from the Asian region, which is in favor of limiting the distribution of bitcoin. The adoption of restrictive measures will lead to a gradual withering away of mining and a reduction in the turnover of bitcoin in the region. Given the fact that the main turnover of bitcoin falls to the countries of the Asian region, the introduction of strict regulation will not allow bitcoin to rise above the traded corridor of $ 10,000 – 12,000.
Because of the interest in crypto currency, more and more brokers are adding crypto-currency pairs for trading. Below you can see the rating of brokers that provide the opportunity to trade options for crypto-currency assets: