It is true that cryptocurrencies have been gaining more acceptances all over the world. As a result, the rise of Bitcoin should have been no surprise had the rise been minimal. However, of late the value of a single Bitcoin has grown several-fold. It is now more valuable than several currencies in the world. The sudden and meteoric rise does raise some questions for the Bitcoin boom. In this article, we will understand the main reasons behind the sudden surge in the value of this cryptocurrency.
The Recognition by GovernmentsMost governments of the world have been in denial about the rise and popularity of cryptocurrencies. This is because cryptocurrencies take away power from the state. Right now the government has fiat powers, i.e., they can create as much money as they want. In case of cryptocurrencies like Bitcoin, the government will also have to earn money like everyone else. This puts them at a significant disadvantage.
However, the popularity of the Bitcoin has surged so much that even the governments cannot ignore it. The Japanese government was forced to recognize BitCoin. The recognition from the world’s 3rd largest economy and Asia’s largest economy has been very beneficial for the value of this currency. A large portion of the rise can be attributed to the rising demand in Asia which was a direct result of this formal recognition by the Japanese government.
The Surge in RansomwareThe entire world has been facing a ransomware epidemic as of late. Important date of several corporations has been hacked into, and payments have been demanded to release the data. The interesting that is that most of these payments have been demanded in cryptocurrencies like Bitcoin. The reason behind this is simple. It is impossible for the governments to keep track of these currencies. They can use forensic accounting and find a money trail for normal currencies. However, cryptocurrencies are immune to such investigations.
Also, cryptocurrencies like Bitcoin can be easily converted into cash from any exchange in the world. Hence, hackers can spread the money across several locations and further obscure the investigations being conducted by the government. The increase in the popularity of Bitcoin by hackers has provided bad PR to Bitcoin. However, it has raised the demand by leaps and bounds. Many corporations were forced to buy Bitcoin, and they have sent the market spiraling upward in the process.
Money TransfersSeveral people in different countries of the world have started using cryptocurrencies like Bitcoin as a means to transfer money. Traditional money transfer agencies such as the Western Union are very expensive. Bitcoin is considerably cheaper. The sender of the money converts it into Bitcoin which is then digitally sent to the receiver. The receiver then converts the amount into local currency at the prevailing rate for the Bitcoin. By doing this activity, several laws can be circumvented. These include the Western Union fee, the spread for conversion of currencies and even the income tax laws in the recipient country. Governments all over the world do not have the mechanism to track the inflow of Bitcoin and hold them accountable for tax purposes. Millions of people are taking advantage of these loopholes, and the popularity of Bitcoin is rising in the process.
Illegal tradeBitcoin has become the currency of choice for illegal businesses. Criminals dealing in arms and drugs have been using Bitcoin extensively. The reason is the same. Bitcoin cannot be easily tracked. It is easy to store, less liable to seizures or confiscation by the government. Drug dealers can therefore easily transfer the money from one nation to another and can circumvent the money laundering regulations that have been hampering their business. Once again, this is leading to negative publicity for Bitcoin. It has become the currency of criminals. As there are so many illegal activities happening all over the world, the demand for Bitcoin is going through the roof. As more and more anti-social elements are becoming aware of this, the demand for Bitcoin is rising.
Pitfalls of Using Bitcoin
* The Bitcoin market is not perfectly liquid. It has seen vast differences in the value of Bitcoin when different currencies are involved. For instance, the value of Bitcoin in United States dollars was more than the value of Bitcoin in Korean Won. In normal circumstances, traders join the market to make an arbitrage and bring the values to parity. However, that did not happen for a long time in this market. This signals the lack of liquidity which is dangerous since investors may not be able to move in and out of a Bitcoin investment when they wish to.
* Purely speculative purposes are driving the Bitcoin rally. As we can see from the article above, the surge in Bitcoin’s price is not because of its increased acceptance as a medium of exchange. Instead, it is because of Bitcoin’s use as a medium to circumvent the law. The cryptocurrency has seen similar rallies in 2011 and 2014. However, the demonstrations resulted in a crash immediately after the rally was over.
Hence it would be safe to say that the current Bitcoin boom is more of a bubble than a fundamental change. Investors would be safer if they stayed away from the bubble.
