The Dawn Of The New Financial Age With Bitcoin

by: Shikha Kothari


- Bitcoin has not only become the currency of future, but it has also become a current store of value in places under financial distress.

- Finding hope in decentralized currency when both investors and non-investors loses hope in the centralized banking system.

- The impact on prices of Bitcoin with regards to Fed increasing the interest rates, EFT getting approved and Venezuela sovereign debt.

 
Bitcoin (BTC) is positioned to be the currency of future, but it has also become a current store of value in places under financial distress. Sophisticated users are buying Bitcoin because they consider it an uncorrelated asset and want to protect their savings. This includes people who consider Bitcoin as a kind of digital gold based on its limited supply, as well as those that see it as a form of investment, or a hedge against other currencies. The price of bitcoin has reached new heights in recent months. On March 3nd, 2017, it has crossed the price of gold. Bitcoin has same features of gold. Both are scared and mined. Basically, people are turning towards Bitcoin to minimize potential losses due to the increase in risk in the traditional currency.
 
We believe that this is due to recent uncertainty surrounding global financial markets.
 
Economic distress in countries such as Japan, China, India, and Venezuela has threatened to destabilize those countries' currencies and have sparked an interest in the digital alternative.
 
The same thing happened when Britain voted to leave the European Union last year, as well as with the unlikely victory by Donald Trump to win the U.S. presidential election. This was like the Cyprus bail-in when investors rushed into the digital currency.
 
Bitcoin is not controlled by any authority. This is unlike the fiat currency dollar, euro, and yen, which are all controlled by a central bank. Instead, Bitcoin is controlled by a global peer-to-peer network of computers and isn't tangible. Bitcoin is neither a company nor an entity. It is the first decentralized cryptocurrency, created in 2008 right after the financial crisis by a Satoshi Nakamoto, an unknown programmer.

In the 21st century where we have more mobile phones than there are people on earth, Bitcoin is the universal internet currency. By the end of Jan 2017, there were around 11.5 million BTC wallets out there. To understand what makes it so attractive let's look at some recent episodes and what made people choose a currency which is not backed by any government.
Depreciating currency in China
The real estate and the stock market in China have witness times of higher volatility in a short period.
 
Thus, there is an expectation that the Chinese yuan will further loose its value. Investors in an urge to diversify their portfolios started to invest in safe assets abroad. As a result, the flow of capital left China while at this same time this the investment in the US tripled. Some capital left China legally and some did not. The People Bank of China (PBoC) started worrying about it so it imposed tighter regulations in which citizen can only move $50,000 abroad annually. To circumvent these imposing constraints citizens of China started investing in Bitcoin. As per a survey, around 70% of miners are from China. Chinese are paying heavy premiums, for example, the price of one bitcoin in yuan on June 1 was 3,608. This is equivalent to $548. But the dollar price of bitcoin was only $525, a 4.4% premium. So, an ordinary Chinese citizen is paying up and taking a lot of price risk just to get rid of Chinese currency.
 
In the year 2013, the PBoC barred financial institution from dealing with Bitcoin. This announcement leads to a significant drop in the price of Bitcoin. These institutions are usually backed by the government. If the banks get exposed to the Bitcoin infrastructure and something goes wrong it may hamper the economy and then people will expect the bailout.
 
It is believed that China has been the largest driver in the rise and drop in the value of Bitcoin.
 
In early January, the PBoC conducted meetings with Bitcoin exchanges in China, announcing on the 6th of January that it had provided these exchanges with warnings. During that day, the prices decrease more than 10%. On the 11th of January, bitcoin prices reached to $775.98 - a more than 40% drop from the recent high of $1,129.87 reached on January 4th. The volatility was limited, as the digital currency failed to reach $830 on either 12th or 13th of January.
 
 
In the above graph, we can see the correlation between the Bitcoin and Chinese currency Yuan, when the yuan depreciated the bitcoin index increase. The two color represents two major events which shoot up the prices of Bitcoin. The first shade 2013 (orange) represents the instability in Cyprus and the second color (yellow) represents the elections in the U.S. and demonetization in India.
 
Bitcoin traders got their first piece of clarity on January 13th, when Chinese exchanges quietly revised their margin trading policies as the result of the meeting conducted with the PBoC.
 
Though Bitcoin has 16 million market capitalization the amount of capital flowing out of China is way more than that.
 
Demonetization is India
Another reason that Bitcoin prices to surged in November are due to a massive campaign to stamp out black money out of India. The government shocked its citizens when they announced the demonetization of large demonization currencies. This accounted for about 86% of their cash circulation. This move didn't cause the economy to crash but contributed to a lack of liquidity and slowed down of day-to-day activities. In such situations people look for commodities to hedge; some bought gold; other bought silver, but the most interesting was people buying Bitcoin. The BTCXIndia observed a 40% rise during that period.
 
Demonetization made path for digital currency to enter the country. Common people have started building their trust in the digital currency. Taking this into consideration Bitcoin has a scope to have the wider user base in this populated and growing economy. Bitcoin is also a solution to the problem faced in India's fight to abolish counterfeit currency and the problem of black money.
Hyperinflation in South America
 
Average annual inflation around the globe is 1.5%. Economies with low inflation are considered healthy as they have low fluctuation in the value of their currency. However, the high annual inflation in countries such as Argentina (40% inflation) and Venezuela (180% inflation), have created a demand for a stable alternative.
 
Bitcoin price is expected to be double the price of gold
 
Bitcoin became equal to gold on Thursday, March 2nd as a future. It is future expected to rise.
 
Recently Venezuela sell-off may have influenced the precious metal's 10% drop in value.
 
Bringing the bitcoin price = gold price. The parity comes amid news that Venezuela's national reserves are down to $10 bln, of which $7.7 bln is held as gold.
 
 
 
Having previously shipped gold to Switzerland to repay its debts, commentators are assuming a repeat performance in 2017 as the country struggles to pay off $7.2 bln in outstanding payments.
 
A multi-billion dollar sell-off would flood the gold market, creating a lower purchase price and accelerating the depletion of Venezuela's reserves even further.
 
With inflation expected to hit 1660% this year and 2880% in 2018, an end game of default or IMF intervention appears inevitable. By this, we can expect that in near future the bitcoin prices to double the gold price soon.
 
March 2017 is expected to be a turning point for Bitcoin
The Federal Reserve chairperson Janet Yellen on March 3rd announced that Fed may further increase the interest rates if the economy continues to provide data as expected.
 
The increase in rates will make the dollar even stronger and against Japanese and the Chinese currency. Traders who consider Bitcoin as a wealth protection and management product, which is the clear majority of Bitcoin users as of current, will move onto Bitcoin to protect their assets from devaluation.

Currently, the Japanese Bitcoin exchange market controls over 52% of the global Bitcoin exchange market. China, Europe, and South Korea make up the top largest Bitcoin exchange markets, right below the U.S.
 
Based on the current Bitcoin price trend, it is likely that Bitcoin price could reach $1,300, especially as it nears the final approval date of the Winklevoss Twin's Bitcoin ETF.
 
Analysts also predict that Bitcoin price will reach new heights if the rising Fed rates and the March 11th approval of the COIN ETF coincide. The approval of the COIN ETF will immediately open the Bitcoin market to mainstream investors and investment funds, which are expected to exponentially increase the market size of Bitcoin by hundreds of millions and even up to billions of dollars.
 
The probability of the ETF getting approved is quite the center of discussion lately. Various analyst firm and crypto analyst have approved a probability of 25%- 35% chances of the ETF getting approved. If the ETF gets approved more than it would attract more than 300 mln into the market in the first week alone, the average price is expected to reach $1645.45, more than a 30% return.
 
How people acquire Bitcoin in bad times
 
Like all assets, use of bitcoin is based on need and greed. Customers who use bitcoin as an alternative to the traditional financial systems such as those executing cross-border e-commerce payments, as well as people who may desire more security, privacy, or just may want a better user experience.
 
Users also include investors and/or active traders that speculate on volatilities as well as long term speculators or novelty buyers hoping for the value of Bitcoin to increase overtime yielding a sizeable return on their initial investment such as some early investors who may have seen $100 of BTC turn into $380,000 at the peak of Bitcoins' value which was in early December of 2014.
 
Aside, from purchasing Bitcoin through a Bitcoin exchange an individual can acquire BTC through mining, which ultimately is the mechanism for dispersing more of the currency to its users. Mining generally refers to the use of highly powered computers, which are required to solve complex math problems to verify the block chain. For each mined block, a block reward (Bitcoins) is received by the successful miners. The number of Bitcoins received as a block reward is based on the total number of Bitcoins already in circulation. For every 210,000 Bitcoins dispersed the block reward is halved until the total number of Bitcoin reaches 21 million. The number of miners mining has been estimated at roughly 100,000 in 2016 with those who are successful receiving BTC as the reward for mining every 10 minutes. For those who would like to convert cash to BTC and vice versa, they can do so using a Bitcoin ATM or a Bank account.
Bitcoin has not been made illegal by legislation in most jurisdictions. However, some jurisdictions (such as Argentina and Russia) severely restrict or ban foreign currencies. Other jurisdictions (such as Thailand) may limit the licensing of certain entities such as Bitcoin exchanges. Regulators from various jurisdictions are taking steps to provide individuals and businesses with rules on how to integrate this new technology with the formal, regulated financial system.
 
Why to people use bitcoin as medium of exchange, what makes it attractive?
 
Transaction fees
Under the current system, the owner of the store should pay 3% for each transaction done by the credit card company or the PayPal (NASDAQ:PYPL). Even the transfer of money internationally is very expensive. Whereas in Bitcoin charges a minimal fee of 1% for each transaction and 10$ for wire transfers. Bitcoin works on peer to peer network which helps it to reduce the transaction cost whereas in another payment system they have the large set up to handle and verify which increases the cost.
 
Security and protection
 
Bitcoin doesn't have a specific location as its headquarters or a place like the data center. It is present globally. This makes the chances of hacking the system, breaching data impossible thus ensuring security and protection.
 
Completely transparent
Bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. The block chain tells all. If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address.
 
Future of money
 
The money will be totally interoperable globally through a significantly cheaper, faster and safer payment system. There will be both better privacy and financial freedom in how people use the money. Financial services and money itself will be more intelligent and programable.
 
We believe that decentralized digital currencies, and Bitcoin, will be a key enabler for this future and is likely the best way to get there and get there the fastest. Adoption will form the base for the future of money and financial services; one way or another the opportunity is massive
Conclusion
Bitcoin is the technological revolution in currency. It has revised the meaning of money. Since the barter system, only the fiat currency has mostly been considered the main medium of exchange. But with the creation of Bitcoin, we can say the world is moving forwardly at a fast pace. Bitcoin was created in 2009 and it hit the headlines in 2013. The price of Bitcoin while writing this article is getting back to normalcy. Currently, it is trading at $1283.80. The new regulation regarding the change in margins as imposed by the Chinese government is a smart move towards consumer protection policy.
 
Finding a sound alternative investment has always been key in moments of economic crisis or panic when investors, as well as non-investors, are started losing hope in the centralized banking system. In such situations, the currency starts losing value, which calls for the need for an alternative. This gives rise to a place for a decentralized currency like Bitcoin.

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