When we talk about Bitcoins, the focus immediately shifts to its price rather than the concept and significance of Bitcoin. To put in simple terms, Bitcoin is an alternate currency. The only difference is that it is a Crypto Currency. That means the creation of the currency is governed by a set of programs and protocols and the entire currency is electronic. Bitcoin was first brought into the market around the global economic crisis of 2008 and has been gradually growing in value. The year 2017 alone saw the Bitcoin appreciating by nearly 19 times from $1000 to $19,000; making it the best performing asset class anywhere in the world. Bitcoins are also important because it has no central bank deciding how much currency to print. By limiting the quantum of currency, Bitcoin can be more valuable and effective as compared to other currencies like Dollar and Euro that have no limits to printing by the central bank. But the best way to understand the Bitcoin story is by looking at the price chart of Bitcoin.
Firstly, Bitcoins have never given comfort to the central banks of the world considering that it literally created money without central bank intervention. For example, in India RBI is quite cautious about Bitcoins, as are many other central banks. If the demand for Bitcoins continues to soar, one can expect central banks and governments intervening more strongly.
Secondly, the essential value for Bitcoins came because central banks were gung-ho on liquidity. That has changed as most central banks are likely to taper their bond purchases in the next year. That may not be good news for the value of Bitcoins.
Thirdly, the value of Bitcoins stems from its limited supply. If the price goes up higher then it could become a Catch-22 situation. Higher prices will mean reduced interest. However, more supply will depress prices further. How this dilemma is handled will be the key in 2018.
Fourthly, Bitcoins are based on programs and these programs are subject to hacks and currency losses. In fact, that has already happened at Bitcoin exchange, Bitfinex. That will continue to be a potent risk for Bitcoins.
Volatility could be the bane of Bitcoins. If you look at the value of Bitcoins in the last one year there have been at least 4-5 sharp corrections of 20-30% each. In the midst of a broader rally, this kind of volatility does not inspire confidence.
Lastly, the recently introduced Bitcoin futures on the CME could be a big risk for Bitcoins. Wall Street could get an opportunity to short sell Bitcoins. Even existing holders will get an opportunity to sell futures against their Bitcoin holdings. And, Bitcoin trading will attract margins in case of the CME and that could add to the volatility and sharp price movements.
Whichever way we look at it, Bitcoins has some merits and a few key risks. As an alternative currency, it could be an exciting concept to watch out for.