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By Kitty Testa
The value of cryptocurrencies has skyrocketed in 2017. Ethereum’s cryptocurrency, Ether, which could be had for less than $8 per virtual coin in late December 2016, is selling for over $370 as of today—increasing its value 47-fold. A year ago you could have purchased Litecoin for a mere $4, while today they are selling for $44—11x value. On December 1, 2016, a Bitcoin would set you back just under $800. Bitcoin hit a high of $3,000 just recently, and have been trading for between $2,200 and $2,800 for the past several days.
What is responsible for the sudden rise in the values of cryptocurrencies? The number of crypto users is still relatively small, about 3 million, and while many online retailers accept Bitcoin (here is a complete list), Subway is pretty much the only common store where you can use Bitcoin to pay for purchases. Unlike stocks and bonds, there are no underlying financial metrics to value alternative currencies, so determining their long-term worth is difficult. Still, investors are certainly driving up the price of Bitcoin and its competing alt coins. Several factors make them particularly appealing.
Bitcoin has built-in scarcity. Unlike fiat currency—US dollars, Euros, Brazilian Reals, etc.—the total number of Bitcoins to be mined was set from its inception at 21 million. There can be no more. As of now, 16.4 million Bitcoins have been mined using powerful supercomputers. Even governments like China are getting involved in the mining operations. With 78% of the total number of coins already mined, and with another 7 million thought to be lost (as of 2015), the true rarity of Bitcoins is becoming a reality much sooner that its creator(s) had thought. Because the rewards of mining the currency decrease while the difficulty increases, some predict that large-scale Bitcoin mining may be abandoned within a year. If that is the case, the practical limit of Bitcoins mined may well be in the 18-19 million range, with the remaining coins mined slowly over the next decades or century, barely increasing the supply. Investors are looking at Bitcoin as a commodity, just like gold, something whose value is supported by its scarcity.
Bitcoin and other cryptocurrencies may also be attractive as a hedge against fluctuating fiat currencies. With international tensions on the rise and regional economic calamities occurring across the globe, Bitcoin may be a good place to park your cash so as to guard its value. Should that trend continue, it’s possible to imagine a future in which an alternative currency like Bitcoin is the global standard because it can’t be manipulated or diluted by governments. Even though the use of Bitcoin as a currency is still relatively slight compared to transactions in fiat currencies, this could increase dramatically over time, especially for international purchases which are affected day-to-day by normal fiat currency fluctuations.
Whether Bitcoin is a commodity or a currency is causing a possible rift in the Bitcoin universe called a Hard Fork. Bitcoin was designed to be a quick way to settle transactions—a digital currency to use like any other. It’s important to remember that Bitcoin is blockchain software, and the increase in Bitcoin activity has slowed the processing times, with some transactions taking hours to go through. There are two competing schools of thought regarding how to address the issue. One solution, proposed by Bitcoin Unlimited would enhance the existing blockchain ledger that records all Bitcoin transactions by allowing miners and nodes to vote to increase the size of blocks as needed to improve processing times. It would require consensus, but at the same time grants a centralized authority over the Bitcoin network. Yet Bitcoin was not designed to be subject to centralized authority. SegWit has offered a solution that would create a new ledger that is an offshoot from the existing blockchain, increasing the transaction processing times while preserving the digital currency in a decentralized state.
The creation of the offshoot ledger would essentially split Bitcoin by duplicating the coins in the new ledger. If you had 5 BTC before the hard fork, you’d then have 10 BTC that you control (5 in each ledger), but they would now actually be separate currencies.
Bitcoin is both a commodity and a currency, but until the Hard Fork occurs, its future is uncertain. Despite that uncertainty, Bitcoin, and other digital currencies are surging in 2017. Is it a fad or a great investment in the future? Only time will tell.