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Bitcoin almost touched $53K. So my prediction last month that bitcoin will go above $50K has finally come true. Everyone is now bullish on bitcoin. Some are even predicting bitcoin reaching $1M in the long run maybe in the next 20 years. JPMorgan is predicting bitcoin reaching $500K in the next 10 years. Who knows? This rally started when Elon Mask of Tesla fame announced on his twitter account that he has bought $1.5 Billion worth of bitcoin. This resulted in bitcoin suddenly making a big bullish candle and touching $50K.
In the long run bitcoin will replace gold and will become the global reserve currency. This is what analysts are now predicting. But there will be pitfalls along the way. In the last decade central banks have printed a lot of paper currency in order to keep the economies moving. This happened after the 2007-2008 stock market crash in US. Federal Reserve started Quantitative Easing (QE) followed suit by ECB and other central banks. QE is a fancy name for printing currency. So there was excess money in the pocket of people who wanted a safe place to keep the excess money. Many chose bitcoin as a safe place. This is what has happened according to market analysts.
Right now gold market cap is around $2.7 trillion. Bitcoin needs to be around $150K in order to surpass this market cap. Right now it is around $50K so it needs to now triple in value before it can beat gold as safe haven. Right now money is pouring into bitcoin as the economies around the world are closed and people are sitting at home and trading bitcoins. When then economies reopen and people go back to work, this flow of money may slow down and the rapid price rises we are witnessing in the bitcoins may vanish. We have to wait and see what happens.
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Elon Musk and Janet Yellen are now really concerned about the environmental impact of bitcoin mining. As I have been pointing out previously bitcoin mining is a highly energy intensive process. Bitcoin mining uses more energy than entire countries like Norway etc. Elon Musk said publicly that Tesla wont be using bitcoin for payment which send bitcoin price tumbling down.
Bitcoin is build on blockchain technology. Blockchain is highly decentralized. There are millions of computers around the world that have an copy of the bitcoin blockchain. In order to update the blockchain, you need to have specialized computers running all the time solving complex math problems. The first computer that solves the complex maths problem get rewarded with a bitcoin. Over time the complexity of the maths problems which is infact a complex hashing algorithm have increased and the number of bitcoins being rewarded have decreased. This whole process is known as Proof of Work.
So there is an incentive for bitcoin mining in the form of a number of bitcoins rewarded for each proof of work. As said above this is a highly energy intensive process and the whole concept has to be rethought and reworked to make it have a very low environmental impact. Otherwise bitcoin will have a difficult future as it requires ever increasing amount of energy of mining.
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Bitcoin crashed last week. Bitcoin price fell as low as $28K. It started with Elon Musk when he said he wont accept bitcoin as payment for Tesla due to its high energy consumption which has environmental impact. Then the Chinese government banned bitcoin as a payment in its financial system. A few months back, Ray Dalio billionaire hedge fund manager said that there is a strong possibility that governments are going to ban bitcoin as it competes with national currencies. Chinese government cracking down on bitcoin maybe called the first fulfillment of this prophecy.
Bitcoin just imploded and crashed from more than $50K to around $28K. Bitcoin is over hyped and right now it does not fulfill a useful purpose. Bitcoin mining is highly energy intensive. With more bitcoin transactions this energy use will increase tenfold. We cannot afford this as this will cause global warming. As long as we don't solve this problem of high energy use, to tell you the truth, bitcoin has no long term future. Bitcoin price can fall below $20K.
Bitcoin enthusiasts are calling it a great time to buy as they are predicting $500K bitcoin. If the governments start banning bitcoin in their countries, bitcoin bouncing back up and reaching $500K might become difficult. Ether founder Vitalik Buterin is saying cryptocurrencies are long past that stage and can survive government ban.
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Bitcoin rally did not take place at the end of this year. In the last few years end of year rally had made new highs for Bitcoin. Bitcoin hovered around $45K at the end of the year. As more and more bitcoins get mined more and more miners will see their profit margin get reduced. As bitcoin mining gets less profitable smart money will start leaving it and go to other green pastures. A total of 21 million bitcoins can be mined till 2040. Till todate 19 million bitcoins have been mined and only 2 million remain to be mined. Will only 2 million bitcoins remained to be mined, more miners will have to work hard to get the bitcoin.
Bitcoin does not represent anything. It is just an electronic token trying to act as a money.But it is money in the real sense. It cannot be used as a medium of exchange. For that it needs to be converted to some national currency like USD, GBP, JPY, EUR etc. Only then we can use it to buy or sell anything. It is also not a store of value as it has a lot of volatility. It can lose $10K in a matter of day. Governor Bank of England in the last few months warned the investors that they should know the risk of bitcoin price going to zero. It was the idea of John Maynard Keynes to create an international reserve currency that is not controlled by any government in the world. This proposal got rejected by US and instead USD was chosen as the international reserve currency in the Bretton Woods Accord that took place in 1944.
Bitcoin price is being driven by speculative money. Right now a lot of smart money is finding extra normal profit in bitcoins. As less and less bitcoin remain to be mined, it would become expensive for miners to mine them. Smart money will start looking for new places where it can find extra normal profits. This is what seems to be happening.