Image: Tradingview.com: Data: Poloniex Bitcoin exchange data
Over the past few days Bitcoin, the enfant terrible of the cryptocurrency world and the first use case for the Blockchain, has punched its way through a major psychological price point – $500 USD. The cryptocurrency rose 18% from $457USD to its 20 month high price of $540USD. This sudden shift in market dynamics makes interesting reading in its own right, but perhaps more importantly, marks the potential of the cryptocurrency to become the digital gold standard globally, and here’s why.
Right from the get-go, the elusive creator of bitcoin, Satoshi Nakamoto, designed the technology underlying Bitcoin to ensure the supply of the cryptocurrency coins was always going to be limited. The total bitcoins currently in circulation stand at 15.6m (bitcoinblockhalf.com ), out of a maximum 21m that will be produced through the mining process. To ensure the total number of coins issued is to be limited, every four years the bitcoin protocol automatically halves the number of new bitcoins that can be mined by miners who look after the network (check out my introductory videos on bitcoin and on the Blockchain if you are not too sure how this works). This halving is expected to happen on or around July 10th 2016, meaning the ongoing supply will half from the current daily production of 3,600 bitcoin. The schoolgirl economics of demand and supply would suggest the Bitcoin Price would rise as a result.
Within the trading forums, most traders that specialize in trading crytpocurrencies felt this price increase would be gradual, as we this “halving date” loomed in front of us. This recent marked rise in the price of Bitcoin, however, caught many off guard, with most expecting the major price rises 2-4 weeks ahead of the halving date. So there are other factors at play, which have brought together the beginnings of a perfect storm; a perfect storm that could push Bitcoin increasingly towards becoming the next digital gold standard. Those factors relate to China and their pivotal roles within the bitcoin community.
China is a funny beast. On the one hand, the Chinese Government hates bitcoin – as it represents a form of currency that by virtue of its decentralized nature cannot be easily be controlled. Yet, they allow bitcoin mining and trading. Indeed, at a scaling bitcoin conference earlier this year, the main representatives of the bitcoin mining industry were all on stage – representing 95% of the mining power ; the majority were Chinese. Equally, over 80% of the global trading of bitcoins are accounted for by two exchanges, both in China – Huobi and Okcoin. In addition, the gloomy economic clouds hovering over China at the moment are causing uncertainty and concern, resulting in the Chinese Government alluding to some potentially unpalatable economic activity to many.
China has been rumoured to be considering the devaluation of the local currency to help get the economy back on its high growth trajectory. When this is combined with the currency restrictions regards the export of capital, something has to give – and cyrptocurrencies are a way of those with wealth to consider exporting currency under the noses of central authorities.
Whilst the on-ramping and off-ramping into and out of cyrptocurencies remains a user experience nightmare, once funds are in the cryptocurency space, transferring them across the globe is easy, very cheap to transfer and pseudononymous (i.e. partially anonymous), making them very difficult, although not impossible, to audit by centralised authorities. Unlike it gold counterpart , capital outflows can easily be achieved, does not involve the physical transportation across boundaries ; it is merely the insertion of a bitcoin address and hitting send. Whilst it may be illegal, it is very simple to do and is indeed considered by many to be the primary reasons behind the very recent price hike – and this is where the Australian Police have the opportunity to make a killing.
It was announced yesterday that the Australian Police will be selling 24,500 confiscated bitcoins that were seized as part of alleged drug bust of an online dealer back in 2013. Given the official confiscation order was first reported by the Sydney Morning Herald in March 2015, the timing for the police right now could not be better.
In March 2015 the price of bitcoin averaged around $250 USD, as can be seen from the diagram below.
Image: Tradingview.com: Data: Poloniex Bitcoin exchange data
As a result, with the Australian Police selling the coins (via Ernst and Young) means at the peak price this week these bitcoins would have been worth $13.2m USD as compared to just $6.1mUSD in March 2015 -generating over 100% return over the 14 month period- and a nice little $7.1mUSD windfall bonus ! Now given there are 3,600 bitcoins mined daily, the Australian Police are holding the equivalent of around 6.5 days of bitcoin production – so the exact timing of any sales would need to be carefully planned so as not to destabilize the bitcoin market.
So overall we can see that bitcoin has the power to be a safe haven, acting as a quick and convenient methodology for capital flight. When combined with the upcoming halving, these forces have led to the rise in the bitcoin price. This price rise shows that crytptocurrencies do have a value, can represent a store of value and, in the case of the Australian police, a pretty good investment.
Disclaimer : Cryptocurrency trading is fraught with risks. The above article should not be considered as investment advice and professional advice sought be sought before considering trading in cryptocurrencies
Disclosure : the author holds bitcoins in his investment portfolio
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