Bitcoin shot past the $10,000 mark on November 28th, rising to $11,400 before dropping back to $9,000. ‘HODLrs’ have managed to bag 10X returns over 2017 highlighting the supernormal returns and speculative like nature of the industry as well as the growing adoption. Exciting announcements around Bitcoin futures from Nasdaq and CME have boosted the price recently. But let’s look at what has happened over 2017 that might explain these valuations.
The fundamentals behind the Bitcoin protocol have not changed this year but it has had increased media exposure, understanding, and reduced regulatory uncertainty. A few main driving forces behind the 2017 rally can be picked out as thus: regulation, Japan, scaling tension and forking. However, the overarching truth is that more media exposure equals more investors which in this case has led to a significant rise in value. It appears that for Bitcoin there is no such thing as bad news.
2017 got off to a bad start with the highly anticipated SEC statement on the Winklevoss twins BTC ETF was rejected on March 10th and three weeks later the SolidX ETF was denied for similar reasons. Chinese authorities started clamping down on the ‘big three’ exchanges and ordered a full audit. This led to the halting of withdrawals and the stopping of 0% fee trading. This caused the Bitcoin daily volume to drop from highs of over $10 billion to around $200 million/day or less (much of this was 0% fee wash trading). Those exchanges were subsequently closed in September and October.
Some of the trading has since been replaced by peer to peer trading via encrypted Whatsapp groups or Telegram. This has shown the community and the world that a truly decentralised cryptocurrency is incredibly hard to meaningfully ban, bolstering Bitcoin’s attractiveness to libertarians and anarchists alike. The WannaCry ransomware attacks on the NHS and other organisations brought the mainstream media spotlight to Bitcoin for the wrong reason in May. With many politicians demanding regulatory action taken on Bitcoin.
Japan legalised Bitcoin as a form of legal payment in early April, since then Coincheck a bitcoin payment processor, has onboarded over 260,000 merchants in Japan alone. The legislation has also emboldened investors as it has given Bitcoin more legitimacy. The demand from ‘Mrs.Watanabes’ (an economic term that describes the archetypal Japanese housewife, who actively invests to make a return on family savings, typically in FX) has been high throughout the year. One explanation is that this considerable reserve of wealth is currently threatened on two fronts. Firstly, yield is becoming harder to come by and with Low/ Negative interest rates in Japan, holding JPY is not seen as a suitable option. The practice of selling JPY for FX and carrying the higher interest rates back to Japan is becoming more obsolete with falling global interest rates and a general eking out of yield following the 2007 crash. This has been leading to Japanese investors looking to BTC as an asset that is uncorrelated to traditional assets. This has led to huge increases in JPY volume as well as significant premiums in comparison to the USD markets. In the months that followed the announcement to legalise Bitcoin the premiums in the JPY market reached 15%.
Scaling Tension –
The scaling and forking debates that have raged over the last year and peaked in Summer were focused on finding a way in which to improve Bitcoins scaling issues. The community was divided as how to do this with groups split into ‘big blockers’ and ‘SegWit’ (Segregated Witness) proponents. SegWit2x was a scaling agreement between many influential figures in the Bitcoin ecosystem. It received significant support: over 80% hash power, 58 companies in 22 countries and 20.5 million wallets. NYA was essentially a compromise between the mining community that wanted larger blocks and the Bitcoin Core developers that wanted to implement SegWit. All the Bitcoin core developers rejected the proposal and some even set their statuses to ‘LOL’. The positives were that SegWit2X implemented Segregated Witness (SegWit) on August 24th. It will allow the Bitcoin network to hold more transactions in 1 MB blocks as well as allow for other technical upgrades such as the lightning network which is an off-chain scaling solution and rootstock which will enable smart contracts.
Forking Fiesta –
After the Bitcoin Cash forking announcement the price rose from $2,000 to almost $5,000 in a month and a half. Investors realised that for every Bitcoin they held they received a free ‘airdropped’ Bitcoin Cash. The second-high profile Bitcoin fork was Bitcoin Gold and saw similar high demand due to the promise of free BTG. Diamond and Platinum are also in the works! The most controversial fork was the SegWit2X fork which was scheduled to take place mid-November however it was cancelled due to lack of support from the community.
Just like the price in crypto world the news moves exceptionally fast making it very hard to stay on top of what is going on. This year the topics have drawn in spectators from finance, politics, law, computer science, anthropologists and everything else in between. Bitcoin and cryptocurrencies are perhaps the most drastic departure from conventional currency the world has ever seen, and people are starting to talk about it.