The Resurgence of Cryptocurrencies in 2019

The price of Bitcoin in 2019 has soared from around $3,800 at the beginning of January to a high of over $13,800 in June. While the price of Bitcoin has fallen since the end of June, as of the writing of this article, the value of Bitcoin is still worth three times as much as what is was worth at the beginning of the year. This jump in price is not limited to just Bitcoin, with many household names in the cryptocurrency market (such as Ethereum and Litecoin) seeing increases in value as well.

While there are a myriad of cryptocurrencies on the market in 2019, Bitcoin continues to remain at the forefront of the cultural zeitgeist. The dominant cryptocurrency for as long as it has existed, has a market capitalization of $175 billion which is nine times higher than second large cryptocurrency by market capitalization, Ethereum. During the 2019 bull market for cryptocurrencies, Bitcoin’s dominance rate (an indicator that tracks the percent of the total cryptocurrency market capitalization contributed by the leading cryptocurrency) was above 50%; practically speaking, this means that Bitcoin was valued higher than every other cryptocurrency in the world combined. Bitcoin has been mentioned in many popular television shows including The Good Wife, The Simpsons, Jeopardy, Almost Human, House of Cards, Parks and Recreation, and HBO’s Silicon Valley. Bitcoin is not always a precise bellwether of the overall cryptocurrency market (for example, the price of Ripple is now lower than it was at the beginning of the year); however, the price of Bitcoin and the general cryptocurrency market tend to follow a similar trend. Furthermore, it is undeniable that in the mind of the general public, Bitcoin, blockchain, and other cryptocurrencies are linked together.

Global Economic Uncertainty

One possible explanation for the rise of Bitcoin this year is the proliferation of unstable economic conditions worldwide. Bitcoin is viewed by many of its supporters as a hedge against economic uncertainty and liquidity concerns globally. It is often described as a safe-haven asset by its backers since it is relatively easy to store and transfer, even across borders. If your Bitcoin wallet is online and you have your private key than you can access and sell your Bitcoin from anywhere in the world, offering a crucial hedge against currency controls imposed by financial institutions and governments in crisis. Undoubtedly, a piece of paper (or USB device) with a code is much easier and safer to carry on your person than a sack full of gold – a historical hedge for those in geographies in economic turmoil. 2019 has certainly had no shortage of political and economic uncertainty. The United States and China, the world’s two largest economies and military superpowers, have been engaged in a trade war for about the past year that has been escalating throughout the first half of 2019. A trade war between the two largest economies in the world has huge implications for the economy of any nation in the world. This is especially true in the modern world as a result of globalization and the increasing interconnectedness between disparate nations and societies. The largest rally in the price of Bitcoin happened in June just before the G20 summit. China and the United States agreed to a de-escalation of their trade war during the summit and the price of Bitcoin plummeted soon afterwards. However, the trade war has been heating up again in August and the price of Bitcoin has risen as well.

Economic and geopolitical instability extend to developing regions of the world as well, as evidenced by deteriorating conditions in Venezuela that have sent shockwaves throughout Latin America. In January 2019, Juan Guaidó declared himself President of Venezuela despite Maduro still serving as the acting President of Venezuela. Bitcoin trading has increased in Venezuela during 2019 as a result of hyperinflation that has made the Bolivar virtually worthless, as well as the Venezuelan government’s imposition of an embargo on foreign currencies. Given the characteristics of Bitcoin, it can often be used to avoid the seizure of an individual’s assets by a government or financial institution.

A Little More Acceptance… Maybe

Another theory regarding the 2019 Bitcoin rally is that as cryptocurrencies gain more acceptance and widespread use, then their prices will increase – given Bitcoin’s dominance in the cultural zeitgeist it makes sense that it would stand to benefit from this trend more than some lesser known cryptocurrencies. An example of such a trend can be seen in the aftermath of Facebook’s June announcement of its own cryptocurrency and blockchain, Libra. Libra is designed to function as a stablecoin with the intended purpose of serving as a truly global currency that services individuals in the developing and developed world that continue to be unbanked. According to Libra’s whitepaper, 1.7 billion adults globally remain outside of the conventional financial system with no access to a traditional bank; however, it is estimated that one billion of those same individuals have a mobile phone and nearly half a billion have internet access. Libra is intended to be fully backed by a reserve of real assets in an effort to assuage the concerns of the platform’s users. A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created in an effort to build trust in its intrinsic value. Facebook has partnered with many big names in both the payment technology and blockchain space in an effort to make Libra a reality including MasterCard, PayPal, Mercado, Stripe, Visa, and Coinbase. With such large and influential firms supporting the project, it is no surprise that cryptocurrencies have gained more mainstream media attention as of late, which may also be contributing to price increases observed towards the end of the first half of 2019.

Halvening

A more specific reason behind Bitcoin’s price increases this year may be an event known as the Halvening that is looming on the horizon; the Halvening is when the rewards to Bitcoin miners are reduced by half even though there may not be a comparable reduction in the effort required to mine a given block. Bitcoin relies on miners that leverage specialized computers to solve complex math problems to validate the addition of blocks onto the Bitcoin blockchain (these blocks are the ledger mechanism by which transactions are recorded to the blockchain). For any given new block on the blockchain, the miner that validates the cryptographic hash first is rewarded the Bitcoin associated with the mining of said block. As of early August, Bitcoin miners received 12.5 Bitcoins each time they successfully mined a block. By the end of May 2020, this reward will be cut in half – meaning miners will only earn 6.25 Bitcoins for each successful block. As the reward from mining gets smaller and smaller, miners will have to increasingly rely on fees as a means to reward them for validating transactions. Traders see the potential for upside with such a series of events, as it is expected that supply will become increasingly restricted while demand is likely to remain flat or accelerate – therefore possibly increasing the price of each Bitcoin already in existence. While this particular theory only applies to Bitcoin, one could extrapolate that upward price pressure for Bitcoin could lead to a surge in other cryptocurrencies and Altcoins as some individuals feel priced out of participating with Bitcoin specifically.

Overall Thoughts

Based on the information we have reviewed we believe that the increase in Bitcoin’s price in 2019 is predominantly attributable to unstable economic conditions worldwide. The Bitcoin market seems to react to news that affects the global economy and geopolitical order such as escalations in the United States and China’s trade war. However, it is possible the other two factors provide a general upward pressure on Bitcoin’s price as well. As more institutional investors invest in Bitcoin, the more it seems like a safe alternative to traditional financial investments. Furthermore, the Halvening might be reducing the supply for Bitcoin transactions while demand has not decreased, also leading to a rise in prices.

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Teknos Associates provides valuation and advisory services for emerging growth companies and their venture capital backers. We have extensive experience working with high-profile companies specializing in the blockchain and digital currency industries and bring a unique understanding of the key valuation issues these firms face on a daily basis. Our vast experience includes providing analyses related to tax, financial reporting, and strategic planning. To learn more, contact Teknos Associates at info@teknosassociates.com .