Bitcoin About To Make Record Highs

The price of Bitcoin has rallied to above $900 as it closes in on the record highs it made in 2013. For those who compared Bitcoin to the tulip bubble, this is tough to understand because it should be at zero by now if it was a fad. Fads don’t recover their losses and they certainly don’t last 8 years. Bitcoin is skyrocketing while gold is falling. I think this is because Bitcoin is taking some market share as a means of storing wealth. Bitcoin is the biggest leap in technology since the internet. I’ve always advised caution when buying it. I think it should not be bought with the anticipation of selling it at a later date. It should be bought with the intention of storing your wealth or using it to spend as a currency. The price is too volatile to try to trade it; the risk is too high.

The total market cap of Bitcoin is only around $15 billion, so you cannot read into the price of Bitcoin and make an assertion that faith is being lost in the dollar. This is far from occurring. The first step for Bitcoin would be a developing country’s people adopting it. However, the problem with this is people in developing countries are given propaganda by the government and media about Bitcoin and they don’t have access to good information; this is particularly a problem in India. With that being said, I will go over the reasons for Bitcoin’s recent rally. The two main reasons I can find are economic problems in India and China.

The first reason why Bitcoin may be rallying is because Prime Minister Modi of India demonetized the 500 and 1,000 rupee notes. This is 86% of the currency and is worth $224 billion. This is a disaster for the poor as there’s less than 200,000 ATMs in the country and 87% of business is done in cash. Business people are reporting 80% of their sales are down.

Modi claimed this new policy was aimed to get rid of corruption, terrorism, counterfeiting, and bribes. It’s ironic that the prime minister would say this because these issues are all caused by the government. Governments always like to use these types of excuses to take citizens’ liberty. It sounds like arguments against the use of the internet. Someone could only look at the negatives of the internet and say it’s used for illegal activity as well. Any great product can be used wrongly, but it doesn’t tarnish the value of it. The Indian Times isn’t helping the situation by describing Bitcoin in what I would describe propaganda terms. The magazine made the following statement: “virtual money notoriously used by money-launderers and criminals for extortion, drugs and even supari killings.”

The government also aimed to make money from the situation because the notes which weren’t returned by December 30th could be pocketed by the government since they’d became worthless. This didn’t happen because 82.5% of the recalled currency was returned.

Bitcoin could flourish in India because the country has a cultural connection to gold. The people need to put two and two together to realize, the government can destroy their wealth in an instant, so it’s better to be safe and own Bitcoin. A Bitcoin exchange called BTXIndia said since the demonetization, its volumes have increased 10-fold. Hopefully, this continues and the Indian people avoid listening to the government or the Indian Times.

The second reason Bitcoin is rallying is because of the devaluation of the Yuan. Bitcoin is probably getting a sliver of the money that is fleeing China. The Financial Times reported $530 billion has fled the country in the first 10 months of the year as the Yuan is headed for its biggest decline in 20 years. The Chinese economy is over-levered, as I explained in a previous article as credit growth is rising at 20% per year. When this inevitable deleveraging occurs, the Yuan could depreciate further.

yuan

While there are fundamental reasons for the Chinese to get involved with Bitcoin, it could be speculation that’s driving the price up. The Chinese people love to speculate as shown by the bubbles created in the stock market, property market, and commodities. Macau, one of the biggest gambling areas in the world, is an autonomous region on the south coast of China. Any asset which looks like it’s going up, will get their attention. The Chinese government classifies Bitcoin as a commodity. Since the country is communist, it could easily try to squash investment in it, if it feels threatened. This wouldn’t happen until Bitcoin started generating much more attention.

The Chinese aren’t alone in their excitement about Bitcoin as other traders also are looking at the chart and buying it. That’s how many justify buying stocks at these high valuations. China is also not alone in its government’s ability to crack down on Bitcoin. Any government, including the U.S. can try to crack down on it. The great thing about Bitcoin is the government cannot shut it down. Bitcoin’s main vulnerability is a 51% attack. This is if one organization controlled 51% of the mining hashrate of Bitcoin, the organization could prevent transactions from occurring and reverse transactions. It’s confusing why someone would want to do this because the value of Bitcoin would plummet. The organization would spend so much money to get computing power which would hurt the system. Currently governments don’t even have the computing power to mount a 51% attack. Think about it. If a government could shut down Bitcoin, it would have done so already.

My recommendation for Bitcoin is to buy a secure digital wallet like Trezor which can store your Bitcoin. You don’t want to keep your Bitcoin on a hot wallet which is connected to the internet because it can be hacked. The Bitcoin you put in cold storage is the Bitcoin you use for value storage. It’s much cheaper than storing physical gold. The Bitcoin you want to use to spend, you can keep in hot wallets. It makes sense to use Bitcoin to spend money if you want to support the system which insures your savings continue to be worth money. Obviously, you can’t pay most bills in Bitcoin, so this aspect is going to be very limited.

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1 Comment

  • Denver Eldridge

    December 25, 2016

    The first time I used bitcoin it lost 10% of it's value the next day. I had purchased an exact amount that I needed to make a purchase. So to continue making my purchase I first had to buy more bitcoin. Besides that each time I purchased bitcoin it took about 5 days for each transaction to be processed. Needless to say it was not a pleasant experience. But I learned from it and I know now to have my purchase ready to go, then buy my bitcoin and make the transaction immediately. I do like to use it occasionally when I don't want transactions to be easily traced. Also, I have seen how fast the value can go up or down and I don't believe I would ever trust it for an investment.