Sales vs Crashes - Why You Should Care
Bitcoin has most often been compared to Tulip Mania in the 1600s. People think that Bitcoin is an imaginary thing, driven only by hype, and will soon collapse under its own weight. At the same time, Bitcoin has been around for 9 years, and has only been growing since the beginning. There are some hiccups along the way, there have been some rises and falls but overall the trend is growth. How can you learn to differentiate between the natural growth of the currency, and the huge spikes of a bubble?
Keep reading to learn more about the history of the price of Bitcoin, what drives the price, and some predictions on what the price will be in the future.
To get the bad news out of the way first, it’s basically agreed upon that the future price of bitcoin is either huge ($100 000 +) or zero. People agree that the technology behind Bitcoin (the blockchain specifically) is very valuable, and will apply to many of our future technologies. But Bitcoin itself may be overtaken by a different cryptocurrency, or destroyed by malicious actors, some bug in the code, or some unforeseen circumstance.
However, each day that Bitcoin exists (9 years and counting) the network grows stronger and stronger, so the chance of it disappearing grows smaller and smaller. One big argument people say is that “The government will ban it”, except that has been tried already. Since Bitcoin is a global currency, it doesn’t really matter what a single government says about it, because even if a few (or half) governments don’t like it, the others do. Some countries have cracked down viciously on Bitcoin (China and Russia are notable examples), and some don’t want to interfere with the emerging technologies, and are being very neutral about regulations. Some countries are encouraging (Vanuatu) Bitcoin and are allowing you purchase government documents (like citizenship) with Bitcoin. This means that if Bitcoin were to be banned, it would require almost all countries to come together to agree to ban it at the same time.
There are a few technical problems that could spell the downfall to the Bitcoin network, but as time goes on they become less and less likely.
The most realistic risk is that a different cryptocurrency becomes better than Bitcoin, and takes over as the top contender. This is difficult (but not impossible) because one of the biggest thing that determines the validity of a currency is the size of a network. A currency is only useful if people use it, and by far Bitcoin has the biggest user base over any other cryptocurrency. However, there are still some technical problems with the Bitcoin network that another coin may solve, and overtake Bitcoin as the biggest.
That all being said, the thing to keep in mind is only invest what you can afford to lose. There are huge gains to be made, but huge losses as well. Invest with caution.
After covering all the bad news, time for some good news. In the past 9 years, Bitcoin has gone from a worthless internet money to a massive international commodity. It has risen over 1 000 000x its initial value, there has never been an asset in history that showed this kind of growth. There have been some isolated spikes (5 as of mid 2018) where bitcoin shown insane growth (upwards of 10x) in a short period (month or two) and then crashed to below half its value. With the frequency of how often this has happened, it is now a free opportunity to trade. There is money to be made if you are patient and can ride out the waves.
GRAPHS OF EACH HUGE SPIKE, found here https://www.coindesk.com/price/
As you can see in the graphs, the price of Bitcoin has followed a predictable pattern since 2009.
It starts with a (fairly) constant price, because it has a solid user base. Something happens, which causes the user base to grow (might be a new regulation, or some news), which means lots of new people are trying to get involved. This causes the price to slowly climb. As the price climbs, it attracts the attention of more people, who want to get in on the rise. As it climbs faster and faster, even more people get involved for fear of missing out (FOMO).
This drives it to insane spikes (usually 10-20x of whatever the stable price was). Of course, this huge spike is not sustainable, so once it peaks, people start to sell their coins so they can make some money. As people sell, the price starts to drop, as people see it drop, they sell faster, which drops the price faster. This causes a crazy plummet, sometimes at low as 20% of whatever the spike was. After this huge drop, people see “Wow, the price is so low, it used to be so high! I better get in now!” This causes the price to swing up again. As it goes up, people who missed out on the sale before the crash might start to sell again, which knocks it down… This causes the price to rebound up and down for a bit (usually between 30-60% of whatever the spike was) until it settles around a new base price (around ~50% of the spike). This new base sustains for awhile, until there is another bit of news to set off the next spike.
The “base price” is steadily going up, because more people are getting involved and holding coins, and the spikes are getting bigger and bigger because more people jump in on the action. Both because they see “Wow, I missed the spike last time, its spiking again, I have to get in!” and also because the word of bitcoin is spreading, so the user base continues to grow.
Read more about the behind the scenes of coin making in our next article !