Created in 2008, Bitcoin was the first of a new generation of cryptocurrencies — digital forms of currency that exist only in electronic form with no physical banknotes or coins. Its creator is an unknown person, or group of people, who are only identified by their presumed pseudonym of Satoshi Nakamoto.
Bitcoin’s genesis was to serve as a platform for the autonomous exchange of commerce. The identity of the buyer and seller, along with the transaction details, is concealed via complex cryptography. This allows the currency, along with its users, to operate outside the scope of governmental or private entity oversight.
For most of its existence, Bitcoin remained in relative anonymity. However, its success — or, maybe more its notoriety — quickly spawned thousands of other cryptocurrencies. In December 2017, there were 1,324 different cryptocurrencies. Today, that number is 8,330.
Since 2008, the value of Bitcoin has steadily grown from just a few pennies to tens of thousands of dollars. There’s no greater example than late-2017, when the global “Bitcoin craze” caught hold, sending the price of a single Bitcoin from $1,000 to more than $19,000 in one month. Not surprisingly, many other cryptocurrencies also experienced a similar meteoric rise in price.
But concerns over high transaction costs, extreme price swings and theft by computer hackers called into question Bitcoin’s ability to function as a safe, stable and practical form of currency. Two months later, in early 2018, its price had plummeted to $6,100. By 2019, its price was below $4,000.
In the second half of 2020, Bitcoin caught its second wind. By December, its price exceeded $29,000 and on Jan. 8 of this year, reached an all-time record high of $41,941, according to CoinMarketCap, a leading cryptocurrency website. Bitcoin has pulled back slightly and is currently valued around $31,000.
Despite its attempt to become a mainstream form of currency, Bitcoin’s relevance, for now, is more of a high-risk investment than a cutting-edge means of transacting commerce. A simple look at any historical price chart will convey Bitcoin’s greatest challenge — its volatility. In the exchange of commerce, buyers and sellers need stability in the value of payment. If a merchant sells $1,000 worth of goods, he/she expects to receive payment in value of $1,000. But the daily price of Bitcoin can fluctuate by 5%, 10%, 20% or even more on any given day. How likely is that vendor to sell $1,000 worth of goods if the $1,000 in Bitcoin received as payment suddenly drops to just $800?
The U.S. dollar is the world’s de facto currency. It is the most liquid and is readily accepted for trade around the globe. In fact, it is estimated that 65% of all U.S. currency printed is held outside the U.S. borders. Eighty-five percent of all foreign transactions involve the U.S. dollar, and nearly two-thirds of all known foreign central bank cash reserves are held in the American greenback.
But there’s a reason the U.S. dollar reigns supreme. It’s not because of its bright and fancy design, which it clearly lacks. No, our rather dull and dreary currency is king because of its stability. And stability is a critical component that Bitcoin has yet to achieve.
Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.
Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.