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 Bitcoin is a web-based "cryptocurrency" used to move money around
quickly and anonymously with no need for a central authority. But
despite being championed by some as the digital money of the future,
it is often dismissed as a currency that is too volatile to invest
in.
The reason 2016 looks set to be different is that bitcoin's price is
likely to be driven in large part by similar factors to a
traditional fiat currency, following the age-old principles of
supply and demand.
Instead of being controlled by a central bank, bitcoin relies on
so-called "mining" computers that validate blocks of transactions by
competing to solve mathematical puzzles every 10 minutes. In return,
the first to solve the puzzle and thereby clear the transactions is
currently rewarded with 25 new bitcoins, worth around $11,000.
But when it was invented in 2008 by the mysterious "Satoshi Nakamoto",
who has yet to be identified, the bitcoin program was designed so
that the reward would be halved roughly every four years, in order
to keep a lid on inflation. The next time that is due to happen is
July 2016.
Bitcoin was also designed to emulate a commodity by having a finite
supply of 21 million bitcoins, which will be reached in around 125
years, up from around 15 million today. Hence, also, the use of the
term "mining".
Daniel Masters, co-founder of Jersey-based Global Advisors'
multi-million dollar bitcoin hedge fund, started his career as an
oil trader at Shell in the mid-1980s and spent 30 years trading
commodities before crossing over to bitcoin.
Now he reckons the price of bitcoin could test its 2013 highs of
above $1,100 next year and then pick up speed to rise to $4,400 by
the end of 2017.
That would be due to a number of factors, Masters said, including an
increased acceptance of payments in bitcoin by big companies and
authorities, rapidly growing interest and investment in the "blockchain"
technology that underpins bitcoin transactions, and also more demand
from China as its currency weakens and the economy slows.
But taken in isolation, the halving of the mining reward will
increase the price of bitcoin by around 50 percent from where it is
now, Masters reckons. That is despite the fact that the halving of
the reward has always been inevitable - a factor that would already
have been accounted for in pretty much every other market.
"If OPEC (Organization of the Petroleum Exporting Countries)came out
tomorrow and said, 'in six months' time we're going to halve oil
production', the oil price would instantaneously react. But the
bitcoin market is still in its infancy, and I don't think that
factor is discounted into the price fully," he said.
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DECENTRALIZED DIGITAL ASSET
Bitcoin's price has already almost doubled in the last three months,
putting it on track for its best quarter in two years. It hit $500
last month for the first time since August last year, with Chinese
demand for a pyramid scheme set up by a Russian fraudster cited as a
reason for the price surge.
But Bobby Lee, the chief executive of one of the leading bitcoin
exchanges in China, BTCC, reckons there is scope for the
cryptocurrency to go much further. He thinks the price could
increase by as much as eight times in the time up to the reward
halving, taking it as high as $3,500 by next summer.
"Today the worth of bitcoin is $1 per capita in the world
(population)," Lee said, referring to the value of all the bitcoins
in circulation, around $6.5 billion. "For such an innovative,
decentralized digital asset, I say 'boy, are we undervaluing it'.
But it takes a while for people to realize that."
The mining reward has already been halved once before, in November
2012, from 50 to 25 bitcoins. The stakes were much lower then, with
one bitcoin worth around $12, but nevertheless the price increased
by about 150 percent in the preceding seven months - roughly the
time left before the next halving.
"It (the halving) dampens supply so, all other things being equal,
that puts upwards pressure on price," said Jeremy Millar, partner at
London-based financial technology specialists Magister Advisors, who
expects demand to continue to increase.
"No one can argue with that fundamental economic principle."
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