Shutterstock photo(RTTNews.com) - Bitcoin may be the wonderkid of the financial markets this year, with the price of the cryptocurrency, once dismissed as something reserved for the geeks, cryptography enthusiasts and the darknet, skyrocketing to unprecedented levels, alternating with several nosedives.
The digital currency world has dubbed it the face of the future and it is exactly such hubris that is making the bubble warnings from observers in the traditional finance grow louder each passing day.
While Bitcoin did return to the limelight in 2016 after a lull, it is only this year that it grabbed the entire world's attention as its price soared and there were some measures of acceptance into the mainstream asset market. A clone of the currency, named bitcoin cash, also emerged in August this year.
Amid repeated calls for caution, the price of Bitcoin plummeted nearly 15 percent on December 22 to below $13,000, just days after futures trading in the cryptocurrency began. And it is such wild swings that are raising the crash warnings.
Chicago exchanges CME Group and CBOE Global Markets launched futures trading in Bitcoin in December. The NYSE filed an application with the Securities and Exchange Commission on December 20 to list two exchange-traded funds, or ETFs, tracking Bitcoin futures.
Though such moves could add some legitimacy, analysts and observers are keeping their fingers crossed over the future of Bitcoin, thanks to the notorious volatility linked to the cryptocurrency. Welcoming cryptocurrencies into the mainstream could bring them under some regulatory supervision, they hope.
As the crypto-world goes gaga over the recent appreciation of Bitcoin and other crypocurrencies, voices of caution are growing. Some top bankers have called the Bitcoin boom a fraud and central banks have issued repeated warnings of an asset bubble waiting to burst.
Meanwhile, hackers are busy revealing vulnerabilities in the cryptocurrency protocols, challenging developers to come up with more secure solutions to fulfill the decentralized peer-to-peer network dreams.
It is mainly the freedom linked to Bitcoin that is attracting users to the cryptocurrency. The digital currency is not issued or controlled by any government or state-run authorities and hence, it is not regulated.
Another factor that is driving the Bitcoin price is the fact that its supply is limited.
The algorithm that governs Bitcoin generation prescribes that bitcoins will be created when a new block is added to the network, which will be the mining reward. There will be a finite supply of 21 million bitcoins in the currency's lifetime. The number of bitcoins is set to halve every 210,000 blocks, which is likely to occur once in roughly four years.
In July 2016, the Bitcoin mining reward was halved from 25 to 12.5 bitcoins. The next halving is expected to occur in 2020.
Some are also attracted to the intrigue linked to Bitcoin as its origin remains murky. And the perceived anonymity linked to Bitcoin transactions has also retained it as a darling of the darknet.
The real identity of its creator, who used the pseudonym Satoshi Nakamoto while proposing the digital currency in 2008, still remains a mystery, despite years of investigation by cryptocurrency enthusiasts, journalists, government authorities and so on. Several theories are prevalent and some contenders have also come forward.
Beyond the regulatory control, the relatively young decentralized digital currency Bitcoin and its rival crypocurrencies, still remain a high risk investment for investors. Their highly volatile price also adds to the risk factor.
And governments and regulators are yet to figure out how to approach cryptocurrencies, though they have begun to tax transactions involving bitcoins. In India, tax authorities have started probing Bitcoin transactions of high net-worth individuals.
Bitcoin had already found wider acceptance in the real economy with big companies such as Microsoft and Dell embracing it as a payment option for their digital services. Reports suggest the Bitcoin boom is largely led by Asian countries.
The digital currency is also finding use in physical stores and in crowd-funding initiatives. A Japanese company is also planning to pay part of its employee salaries in Bitcoin. In countries with troubled economies such as Venezuela and Zimbabwe, people have been using cryptocurrencies to bypass government controls.
The blockchain technology that is underlying bitcoin has found greater acceptance in fields beyond finance such as pharma, government services and even in distributing aid to refugees. The Dubai government has made a roadmap to embrace blockchain on a large scale to realize the dream of a paperless and cashless society by 2020. The city plans to launch its own crypocurrency emCash.
The future of the cryptocurrencies such as Bitcoin depends on how efficiently its developers can scale the size of the network and add more security to transactions so that they can gain greater acceptance and trust in the real world.
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