- Bitcoin hit $ 10,000 for the first time on Wednesday during a day of wild trading that say its value fluctuate thousands of dollars.
- Large financial institutions are starting to get on board with the cryptocurrency but some big risks still remain for mainstream adoption and a potential crash.
Historically speaking, few, if any, asset classes have outperformed the stock market over the long term. Including dividend reinvestment and inflation, the stock market has returned an average of 7% annually. It has run circles around other assets like gold, bonds, oil, and even home prices.
But 2017 has been a year like no other. It has introduced the world, loud and clear, to cryptocurrencies. When the year began, the aggregate market cap of all digital currencies combined equaled just $ 17.7 billion. Earlier this month, the aggregate value of these cryptocurrencies soared past $ 225 billion. This represents almost a 1,200% return in less than 11 months, which the broad-based S&P 500 has taken decades to accomplish.
Leading the charge is the most popular virtual currency, bitcoin. The original cryptocurrency began the year under $ 970 per coin, and Nov. 16 it topped the $ 8,000 mark. That’s a return of more than 700% year to date, pushing bitcoin’s market cap to an astonishing $ 133 billion. For added context, bitcoin’s market cap is now larger than several well-known companies in the Dow Jones Industrial Average.
Why bitcoin has been unstoppable in 2017
A number of factors have pushed bitcoin higher. At the top of the list is the potential of the blockchain technology that underlies most virtual currencies, including bitcoin. Blockchain is the digital and decentralized ledger that records transactions without the need for a financial intermediary, such as a bank. Because blockchain is usually open-source, it would be nearly impossible to change logged data without someone else noticing, which makes it highly secure. Some pundits suggest it has a bright future in the financial-services industry.
Other factors that have fueled bitcoin’s meteoric rise include a weaker U.S. dollar, a growing acceptance of bitcoin as legal tender, and retail investors who simply don’t want to miss the boat.
But this isn’t to say bitcoin is without risks. In a span of just five months, bitcoin has endured three bear-market-like crashes of 38%, 40%, and 29%, respectively. In no particular order, the following six risks could derail the most popular virtual currency in the world.
1. Bitcoin’s blockchain loses its appeal
The real value with cryptocurrencies lies with their blockchains. At the beginning of August, following a soft fork that saw bitcoin separate into two separate currencies (bitcoin and bitcoin cash), bitcoin’s blockchain was upgraded. This upgrade moved some information off of bitcoin’s blockchain in order to boost capacity and transaction settlement times, as well as reduce transaction fees, in an effort to attract enterprises.
But what if bitcoin’s blockchain fails to be a go-to option for businesses? Right now, more than 150 organizations are currently testing a version of Ethereum’s blockchain, which supports smart contracts. These are protocols that help facilitate, verify, and enforce the negotiation of a contract, and they provide marked distinction from bitcoin’s blockchain. If bitcoin’s blockchain fails to differentiate itself and attract enterprises, bitcoin’s price could suffer.
2. Brand-name businesses stop accepting bitcoin
Since 2014, a handful of brand-name businesses have accepted bitcoin as a form of payment, with smaller merchants latching on in recent years. Some investors view this growth in bitcoin’s payment platform as a good reason to buy.
However, it could also be a source of investor frustration. If bitcoin remains volatile (remember, it’s had three declines of at least 29% in a very short period of time over the past five months), there’s the real possibility that merchants could bow out of accepting the virtual currency. A potentially lengthy settlement period gives bitcoin time to move against the grain, which could mean converting bitcoin into a lot less cash than when a transaction was completed. If brand-name merchants bail on the virtual currency, bitcoin’s price could tumble.
3. A double-edged sword of regulation
In some ways the regulatory environment for bitcoin has been a positive in 2017. Japan began accepting the currency as legal tender earlier this year, and the CME Group — operator of the world’s biggest derivatives marketplace — recently announced that it would begin carrying bitcoin futures by the end of the year. These moves help to validate bitcoin as an investment and a form of tender.
Then again, the regulatory environment can also keep bitcoin out of lucrative markets. In September, both China and South Korea nixed initial coin offerings, with China going a step further and announcing the eventual closure of domestic cryptocurrency exchanges. Increased regulation could either help or hinder bitcoin.
See the rest of the story at Business Insider
