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Caught in a speculative bubble?

How far will the best-known digital currency go? Since its creation in 2009, Bitcoin has been pronounced dead 174 times and counting. Given the exponential rise in the price of Bitcoin, investors are cautious. Fear of a speculative bubble is primarily based on the irrational level of year-to-date returns (400%) as the price has surged from €1,000 to almost €5,500. Some observers are convinced, however, that this is still only a taste of things to come, and that Bitcoin prices will continue to rise to even higher levels.

Why is there such heavy demand for Bitcoin? Firstly, there is an ongoing debate as to whether Bitcoin can represent a credible alternative to gold. Bitcoin possesses the primary characteristics of a currency, i.e. sustainability, it does not change over time and it is transferable, divisible and also possesses intrinsic value.

Scarcity alone does not determine price, however. Utility, which the digital currency has, is very important. Bitcoin allows value to be amassed. Opponents of BTC (the short code widely used by investors) refuse to grant Bitcoin full currency status, as supply remains limited. This is in contrast to fiduciary currencies, which are seeing their intrinsic value erode due to almost unlimited inflation, especially under the quantitative easing programmes adopted by the central banks.

However, Bitcoin has come under heavy fire, as its fundamentals - the factors driving its price - remain uncertain. However, it cannot be ruled out that Bitcoin will one day become a safe haven currency.

Bitcoin’s reputation will certainly be a problem in the future. Forks, the term used for protocol changes which lead to the duplication of the digital currency under other names, are beginning to multiply. A fork occurred in August and gave rise to Bitcoin Cash, followed by the arrival of Bitcoin Gold in October and lastly B2X during November. Without going into any technical details, it is clear that any inflation in the digital currency will certainly be caused by forks.

Another problem facing Bitcoin is that its technology is also “outdated” compared to other crypto-currencies such as Lite Coin or Ripple. Bitcoin transactions are often costly. Given the associated costs, broader use of the crypto-currency is unlikely for the time being. Furthermore, transactions can sometimes take more than an hour to be validated and confirmed. The current Bitcoin algorithm can handle approximately 7 transactions per second. Obviously, improvements in the validation algorithm could facilitate the acceptance of Bitcoin as a currency in its own right. This is certainly a probability.

The most important factor, however, is Bitcoin’s blockchain technology - a database that is entirely managed and preserved by its users. Bitcoin, which is ultimately simply an application of the blockchain principle, benefits from its status as the first crypto-currency.

There are currently 18 million Bitcoin in circulation, out of a maximum of 21 million. It is also worth noting that only 0.01% of the global population owns Bitcoin. If 1% of the global population decided to own Bitcoin, the price of the digital asset would certainly surge.

I believe that Bitcoin has a bright future, a view that is shared here at Swissquote. We believe that the doomsayers have not yet fully taken into account the technological revolution underway.

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