Since the introduction of Bitcoin in 2009, the cryptocurrency market has grown significantly, with more and more new currencies entering the scene. Although cryptocurrency is often represented as an increasingly mainstream part of the payments world, it’s primarily used for speculation and investment purposes, despite warnings from the likes of economists about risks associated with their price fluctuations. Bitcoin is a case in point.
The price of a single bitcoin has fluctuated wildly over time. In 2017 it reached a high of nearly 20,000 US Dollars, but over the next three months it fell to less than 7,000 US Dollars. Three years later, in 2020, Bitcoin doubled in price again, reaching almost 30,000 US Dollars. By March 2021, it reached 60,000 US Dollars and its total market value has now surpassed 1 trillion US Dollars.
In 2020, much of Bitcoin’s gain was fueled by institutional and large investors, unlike Bitcoin’s early days when investment was driven by retail investors, who hoped they could make profits with cryptocurrency, following optimism and excitement in the media.
Some institutional investors point to the role of stronger regulations as well as the continued development, application and adoption of blockchain technology, which represents a structure that stores transactional records, in contributing to Bitcoin’s recent price growth. Security, which is of primary concern when it comes to digital currencies, has improved, while the potential of applications of blockchain technology goes far beyond cryptocurrencies, with the technology becoming increasingly popular in the healthcare sector and real estate industry, among others. However, Bitcoin’s recent surge is better explained by an increasing number of well-known firms announcing their plans to adopt cryptocurrency as a method of payment, or investing in it.
In October 2020, PayPal announced that its customers would be able to buy and sell Bitcoin and other cryptocurrencies via their PayPal accounts. Mastercard also announced that it would start accepting certain cryptocurrencies as a form of payment. More recently, Visa announced that it would accept the USD coin (USDC), a stablecoin backed by the US Dollar, to settle transactions. These actions increased the credibility of Bitcoin and led to a surge in institutional investor interest which has continued into 2021. However, there are more notorious developments which have driven Bitcoin’s price up.
Elon Musk's announcement that his electric car company, Tesla, had bought $1.5bn worth of Bitcoins and would accept digital currency in the future led to an explosion of interest in cryptocurrency from those who follow him. Moreover, the world's largest asset manager, BlackRock, is looking into investing in Bitcoin derivatives.
All of this has been buttressed by the impact of Covid-19 which has encouraged an increasing number of people to move into alternative investments in an attempt to offset losses from falling share prices in stock markets, along with improved accessibility of cryptocurrency markets and increased awareness of alternative cryptocurrencies (altcoins) among retail investors, with cryptocurrencies becoming a mainstream asset held by an increasing number of individuals.
Yet, cryptocurrencies remain extremely volatile as their prices can fall as sharply as they rise. Due to Bitcoin’s lack of intrinsic value – which refers to the true value of an asset – and track record of abrupt price swings, cryptocurrencies remain controversial as a store of value. In the UK, the Financial Conduct Authority (FCA) has recently warned cryptocurrency users that “they should be prepared to lose all their money”.
Concerning reports have arisen about whether cryptocurrencies are subject to market manipulation, illegal activity and hacks, which could undermine confidence in their value. A study previously found that about a quarter of Bitcoin users and half of Bitcoin transactions are related to illegal activities, which reach up to a value of 72 billion US Dollars per year, which is close to the scale of the U.S. and European markets for illegal drugs.
Over the last decade, there have been several hacking incidents in cryptocurrency exchanges and, as cryptocurrencies become increasingly popular, hackers will become more incentivised to attack. This has been compounded by concerns about the energy footprint of cryptocurrencies given that Bitcoin mining, the process of creating new Bitcoins by solving a computational puzzle, is an energy-intensive process. Recently, it has been estimated that Bitcoin's annualised total energy consumption is 137.20 terawatt hours (TWh), surpassing that of, e.g., Sweden.
As cryptocurrency markets evolve, the future of cryptocurrencies still remains far from certain.