Mariela is a former investment banking analyst and has been a cryptocurrency writer with LeapRate and Asktraders for the past two years
By the end of 2019, Bitcoin and cryptocurrencies can again be considered very speculative investments. Even in the case of small developments, or government decisions, prices are impacted. While the present reality may be indicating volatility, the heights achieved in recent times spell optimism for this cryptocurrency. As it comes to Bitcoin, there are mixed predictions about its development and price performance. It was originally an alternative currency enabling banking for the unbanked. But experts and decision-making bodies now see bitcoin as a store of value and an asset rather than a transaction medium. The price of bitcoins is also impacted by its limited supply of 21 million BTCs. The following points need to be considered when trying to speculate about Bitcoin’s price next year:
In order to better understand the future performance of Bitcoin, it is important to look at the cryptocurrency’s history and the goal with which it was created.
On October 31st 2008, Satoshi Nakamoto published the white paper for Bitcoin. Bitcoin is considered the first digital currency and the largest one by market capitalization as of 2018, with market cap of $150 billion. Bitcoin came out as the very first decentralized digital currency, one that does not require a third party for regulation such as a bank or a financial intermediary. Instead, Bitcoin was developed as a peer-to-peer network, where each transaction is verified and recorded on a network node on the distributed ledger called blockchain.
In the summer of 2008, the creator of Bitcoin, Satoshi Nakamoto, registered the public domain bitcoin.org and posted the open source code on SourceForge in January 2009. The white paper of Bitcoin explained what it was and how it can serve society. The very first block on the blockchain of Bitcoin is known as the genesis (the first) block ever and it contained the following message:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
The message is considered by many as the explanation as to why Nakamoto created bitcoin in the first place. It is no coincidence that bitcoin came to life amidst the Global Financial Crisis of 2008. According to some sources and opinions, Nakamoto created bitcoin to allow the regular person, who was tired of traditional banking and its “fractures” to be able to transact on their own, without the need of a bank or another intermediary.
After the first block was mined, there were the first individuals to received bitcoin and who further developed the cryptocurrency. Those include Hal Finney, the creator of the Proof-of-Work mechanism, Wei Dal, Nick Szabo and Gavin Andresen. Satoshi Nakamoto mined the first 1 million bitcoins. Sometimes these first coins are referred to as the Satoshi Coins, in the name of their creator. Soon after Satoshi mined those, he transferred the project to Gavin Andresen, who, according to sources, wanted to decentralize bitcoin as much as possible.
Little is known about Satoshi Nakamoto and his identity. He left the bitcoin project soon after he handed it to Andresen. From then on, there have been multiple speculations as to Nakamoto’s identity and his motivation to create Bitcoin.
Except for posting in few tech forums on bitcoin, Nakamoto has not revealed his true identity. Many have been considered to be the true Satoshi Nakamoto. Some of the most famous allegations fall to Nick Szabo, Dorian Nakamoto, Hal Finney, Craig Steven Wright and even SpaceX founder, Elon Musk.
According to Wikipedia and latest news, Satoshi Nakamoto is a male Japanese, which was doubted as a news, considering Nakamoto’s fluent English and even posting patterns. One of the most famous Swiss coders, Stefan Thomas, analyzed all posts by Satoshi and the graph that came out showed that given the time he wrote and was active suggested that Satoshi was very unlikely to be residing in Japan.
Others claim that just because of the perfection of the entire code in bitcoin, the creator cannot be a single person. On the contrary, bitcoin may be created by a group of highly skilled mathematicians and coders.
In 2014, a man named Dorian Nakamoto was thought to be the real bitcoin creator. However, while Dorian’s birth name was Satoshi, he denied to have had anything to do with bitcoin and its creation.
Up until now, the only piece of information that has come from the real Nakamoto is that he resided in Japan and is of Japanese origin.
After Satoshi Nakamoto stepped down from developing the cryptocurrency, the bitcoin community came to life and so from then on, all changes made have resulted in soft and hard forks for Bitcoin.
All these “brainchildren” that occur after there is a change in the blockchain of Bitcoin came to be known as altcoins, which basically meant alternative coins. The very first altcoin was called Namecoin, and it was created in 2010. Soon after that, in 2011, another altcoin emerged called Litecoin. Litecoin is also based on an open source code and is P2P network. As of today, Litecoin is one of the largest cryptocurrencies by market cap. The very essence of forks is to make the blockchain better, improve on it or just add new features. When there is no agreement in the community as to the changes that a fork will make, a split occurs and the result is a totally new currency.
Since 2011, the several hard forks of Bitcoin occurred such as Bitcoin Cash, Bitcoin Gold and Bitcoin Private.
Bitcoin’s transactions are all recorded on blockchain. Blockchain is a decentralized, distributed public digital ledger that records transactions so that the information cannot be changed retroactively without changing all blocks. Each “block” is verified and each transaction is verified across millions of computers, so that the “community” agrees on the transaction. This method of transacting is what eliminates the need for the verification by a third party. The whole database on the blockchain is managed through the peer-to-peer network and a distributed timestamping server. Once the data is verified and secured, the participants in the transaction feel much less insecure as to whether there is breach of privacy, inaccuracy or self-interest among members of the community. When each unit of any data is transferred only one time, double-spending, which is typical for digital assets, is eliminated. This is one of the major reasons why blockchain and bitcoin have been so successful thus far.
Each bitcoin has a specific bitcoin address on the blockchain. This is done through private keys, which allow each bitcoin to have a unique address along the chain. The issue with private keys and the address of bitcoin is that if the key is lost, there is no way to reassign ownership since all coins with the lost address are lost as well and cannot be retrieved. So, to prevent this, many users have backup so as not to lose valuable coins.
Bitcoins are mined. As quoted from The Economist, miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes. The mining of a bitcoin is just the keeping of the whole record contained so far on the blockchain, while adding the new transactions and making a whole, consistent and verifiable new block on the chain.
After being mined, each new block on the chain must be accepted and verified by the rest of the community. This is done through the help of the concept of Proof-of-Work (PoW). This process represents a complex mathematical computation that finds a number called nonce. The PoW concept is extremely important to bitcoin mining, just because since every block must be verified and accepted, it becomes very difficult for a hacker to break the chain. So, from a security perspective, the mining of bitcoin and the creation of new blocks is one of the greatest advantages that the technology has. All blocks go back to the original one, or the so-called genesis block, the one created by Satoshi himself.
When a block is successfully mined and integrated in the chain, the miner who mined it gets rewarded in the form of bitcoins.
One very interesting concept is the limited supply of bitcoin. Satoshi Nakamoto set the limited of bitcoins that can be mined to 21 million. After all these bitcoins are mined, they will all be in circulation. It is estimated that 2140, all 21 million bitcoins will be mined.
There have been many questions as to why 21 million bitcoins should be mined and not 28 million, for instance. There are several explanations. First, the cap is actually not a round number (21), but rather 20999999.9769. Some calculate the number of blocks that can be mined in a single year and then go on to calculate the precise supply set by Satoshi. Other people believe that Satoshi came up with this number just to make the cryptocurrency all the more special by setting a limited supply to it. While the currency is capped, the taxation imposed by the government will not change. What will change is how money is spent should be agreed by all parties: residents, institutions and so on. According to some opinions published in Quora, Satoshi created a deflationary monetary policy that is aimed at helping the regular people have more voice about how wealth is distributed and how taxes are spent. 
All transactions and funds that are done through bitcoin are anonymous and stored in bitcoin addresses. While that has been cited as one of the most debatable features of Bitcoin whether it is more advantageous or harmful to society, transacting with Bitcoin is transparent and secure, as every transaction is verified and recorded on the blockchain.
The major issue with bitcoin in the past few years was its high transaction fees and time taken to create a new block. Since bitcoin is often used as a payment method, the community realized the importance of having a faster, more cost-efficient currency to represent than what they previously had. For example, when Satoshi created the block with size limit of 32 megabytes per block. However, in August 2017, a major breakthrough at block 481,824 occurred when Segregated Witness changed the limit size of each block and introduced a new transaction format called “the witness”. The new format helped the block size increased and new proportions and metrics were introduced.
While in 2009 it was virtually impossible to buy Bitcoin, let alone to transact with it, now, in 2018, bitcoin is already accepted as a payment method in many countries around the world such as Japan, Sweden, Estonia etc. According to International Business Times report in 2015, there were 100,000 merchants in the world accepting bitcoin as official payment method. While acceptance by merchants has fallen slightly in 2017 due to scalability and cost issues, many industries are now turning to bitcoin as a payment method. For example, one of the oldest law firms in New York is now accepting Bitcoin in exchange for legal services. In addition, the real estate market is more than open to accepting Bitcoin, especially after the first home was sold for Bitcoin in 2017 in the United Kingdom. Another benefit of Bitcoin as a payment method is the low fee that it charges to merchants when compared to credit cards. Merchants who accept bitcoin usually pay anywhere between 0% – 2%, while those working with credit cards – 2% – 3%.
Some countries have viewed Bitcoin as an investment rather than a currency. Resident in countries in South Africa and South America (Argentina) have often bought bitcoin to shield their savings from rising inflation, political turmoil and unrest. Consequently, the price of bitcoin in such countries is exorbitantly high, which is explained by the “store of value” concept. Bitcoin has also been compared to gold when it comes to its store-of-value.
Banks and financial institutions have all had mixed feelings when it comes to Bitcoin. In the summer of 2017, the CEO of JP Morgan, Jamie Dimon, called Bitcoin a “fraud”. Warren Buffet, one of the greatest investors of all times and chairman of Berkshire Hathaway, recently said that bitcoin is not producing anything and is not backed by anything, so it really has no value. Other major banks, such as Goldman Sachs, has been working on developing a cryptocurrency trading desk and has been rumored to support altcoins. One thing, however, is probably agreed upon by almost all major financial institutions: Bitcoin can pose serious threats to traditional currencies and how people transact in the future. And while most banks and financial institutions have supported blockchain as a top technology that is worth investing in, most of them have feared the power of bitcoin. Thus, there has been a lot of space to be filled by more non-traditional “financial institutions”. Robinhood, for example, one of the most successful trading apps in the USA, has already launched a cryptocurrency trading platform and plans to expand its range of altcoins in the upcoming months. So, bitcoin has changed the level-playing field for banks, financial institutions and start-ups.
The upcoming year is an important one for Bitcoin. One of the long-awaited events is the bitcoin block halving event that is expected to take place in May, 2020. The community expects that the halving will have an immediate effect of the price of Bitcoin.
Some investors purchased bitcoin 5 years back at USD 100 and sold it in 2017 for USD 10,000 to 20,000. Bitcoin’s price reached its highest point in December 2017, hitting USD 19,598.63. Soon after Bitcoin reached its all-time high, it crashed. Bitcoin has been historically associated with extreme price crashes. In 2011, the price crashed by 93% within a span of five months. Between November 2014 and January 2015, Bitcoin’s value dropped by 50%. When investors received news about laws and regulations and news that China may ban the cryptocurrency, prices crashed yet again. The important issue at hand now is to predict the range of values that Bitcoin may take in 2020 – 2022.
The primary concern right now is that regulatory bodies will go all over Bitcoin and suffocate its growing potential. As soon as negative news about the currency come about, the price immediately reflects the sentiment. Economic powers such as the United States and China are looking to create a stable regulatory framework that will establish rules for every investor holding Bitcoin. But price predictions vary greatly. For example, John McAfee, a renowned Bitcoin supporter, predicts that Bitcoin’s value can go up to $50,000 and even 100,000. He even predicted Bitcoin’s price to hit $1,000,000 in 2020. Other more conservative experts believe that Bitcoin’s value may rise, but not to such heights. The overall agreement is that Bitcoin will continue to experience huge price fluctuations. There are other more negative opinions on how Bitcoin will develop, however. Warren Buffet, for example, states that according to him, Bitcoin will hit $0 at some point, just because there is no underlying value vouching for the success of the coin. It does not generate anything and is not backed by anything except the mercy of investors in the form of demand that drives up the price.
A desktop PC could have been used to create blocks once. Now, if a single block is to be created, it has a reference to earlier blocks and miners would have to join mining pools, linking the personal computer with other computers or purchasing specialized and costly mining rigs.
The number of bitcoins awarded for solving a block is cut roughly by half in a period of 4 years. Until the close of November 2012, 50 bitcoins were awarded per block. In 2016, the number of bitcoins awarded for creating a block dropped to 12.5. Fast forward to 2021, the amount will be halved again and bitcoin miners will be awarded 6.25 bitcoins.
Satoshi Nakamoto, by creating the special mechanism through which Bitcoin will be entering the market, has created the framework of “increasing value over time”.
This is among the biggest criticisms of regular currencies with expanding supply and falling value. An investor can think of money as a pie. When more of a currency is issued, more slices are created, though the size of the pie remains the same. As slices are created over time, the size of the slices becomes smaller. As the government prints more money, the value of GBP or other currencies decreases. If an investor considers the value of bitcoin, it has trended upwards across time. At the close of 2013, bitcoin peaked at USD 1,000 and declined thereafter. Then, in December 2017, it reached 20,000. Now, at the time of this writing, Bitcoin is trading at around $8,000. Prices become artificially inflated and eventually, a crash occurs. The question is – for how long and how bad?
An important consideration is that the stock market has become extremely turbulent in recent times. Should a stock market suffer a decline, Bitcoin could be the ‘safe-haven currency’ investors are looking for. When stock markets are hit, investors end up mistrusting national currencies. Some believe that this was the initial motivation for Satoshi Nakamoto to create Bitcoin – to create a tool for the regular person to fight big banks. It is no coincidence that Bitcoin was created in 2008 – during the Financial Crisis.
Market corrections are typical for Bitcoin, but those should be considered by investors. Steady gains are the result of a mature market and prices moving at rates quicker than the markets and the stocks. On the flip-side, bitcoin remains a hot favourite that is prone to course corrections too. Similar trends were noticed in the housing mortgage loan crisis in the US in 2008, and the Japanese real estate market in the early 90s or in China the previous summer. Bitcoin was overvalued in 2013 and market corrections were due. So, in the short-term investors need to be careful, regardless of the asset type that they are investing.
One question that has been on the minds of the Bitcoin community and investors is whether institutional parties be allowed to offer bitcoin. There hasn’t been much development in this field, but institutional parties are not to be blamed for that. Currently, there is increased interest from Asian financial markets and Wall Street to start trading cryptocurrencies and bitcoin derivative products.
The main problem in the United States is none other but the SEC and the ability to obtain a BitLicense – a license that every firm has to obtain in order to trade Bitcoin. This permit is granted by the New York State Department of Financial Services. On the other hand, the million-dollar question is: Will the SEC grant any financial institution to issue a Bitcoin ETF, as many have submitted applications but were either rejected or delayed? Now, as 2019 draws to an end, the SEC has stricter deadlines to decide on a few Bitcoin ETF applications. Many analysts believe that once a Bitcoin ETF is created, this will signal that the market is evolving and maturing.
In the short term, most investors and analysts hold that bitcoin faces a rocky future with 50% price corrections. As a non-government backed asset, Bitcoin has become the currency of choice for those looking to escape traditional and limited financial markets or the issues of arbitrary government policies. In case instability strikes the international economy or geo-polity, Bitcoin could turn out to be a very good alternative asset. Bitcoin is durable, portable, scarce and divisible – all the right ingredients for becoming a prized asset such as gold.
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