We haven’t seen the back of Bitcoin

Despite wild fluctuations in value and grumblings from regulators, it seems likely that Bitcoin and other cryptocurrencies are here to stay.

At the end of November, the price of Bitcoin crossed reached $10,000 and just kept going up and up until it was just a few dollars shy of $20,000 on December 21. Then on the following morning, Bitcoin crashed spectacularly to around $11,000, losing over one-third of its value, before rebounding to a little over $13,000 by the end of the day.

Several Bitcoin exchanges were overwhelmed with demand to sell or buy. Coinbase was even knocked offline temporarily. On December 23, it continued to recover, closing at over $15,000.

It’s been a wild ride throughout the year for Bitcoin investors, with similar steep drops in months before. In November, it tumbled almost 30 percent in four days from $7,888 to $5,555. Then in September, it fell 40 per cent from $4,979 to $2,972. Every time it dropped, it came back and multiplied in value.

The wild swings in its price are expected to continue into 2018, despite warnings from authorities and spooked investors. There have been several serious cases of Bitcoin loss and theft. The latest is the theft of $64 million by hackers from NiceHash in Slovenia, a company that lets users apply their extra GPUs to mining cryptocurrencies. It resulted in a 24-hour shutdown of the site’s payment system with all Bitcoin wallets emptied. The founders apologized and said they are working with police and cybersecurity experts to try to resolve issue.

This illustrates the dangers of investing in Bitcoin, and the fact that no governmental authority will guarantee or insure this currency, yet they will allow it to be traded directly or via financial exchanges. It is important to note that you can buy a ‘part of Bitcoin’ if someone is willing to sell it so you can just invest hundreds of dollars, rather than having to buy a whole unit for thousands.

Also during December, the US Security & Exchange Commission (SEC) Chairman Jay Clayton released an official statement urging caution on cryptocurrencies. “If an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution,” he said, adding that no ICO (Initial Coin Offerings) has been registered with the SEC and that any trading should be done ‘with a considerable amount of care’.

But the crypto-currency revolution is just beginning, as there have been many ICOs, whereby investors can buy virtual tokens, rather than traditional equity. This year alone, ICOs have raised hundreds of millions of dollars, surpassing traditional venture capital as a source of funds.

This brings us to an explanation of how Bitcoins are created through ‘mining’. It is the process by which transactions are verified and added to the public ledger, known as the block chain, and the means through which new Bitcoin are released. Anyone with access to the Internet and suitable hardware can participate in mining, but it requires high-power computers and servers running around the clock, which could consume 600 Kilowatts of power as they seek to mine new Bitcoins. It is an energy-intensive process that involves solving mathematical problems by repeated trial and error. Bitcoin mining is not an infinite process. Up to 21 million Bitcoin units can be mined. Once miners have ‘unlocked’ that number of Bitcoins, the supply will have been used up unless Bitcoin’s blockchain protocol is changed to allow for a larger supply.

The growing acceptance of Bitcoin means that various cryptocurrencies are here to stay. Despite the volatility, this was the year in which the global financial system sought to understand crypto-currency, to serve it clients with new instruments. For example, the world’s second largest exchange, NASDAQ, plans to launch futures contracts for Bitcoin next year. Also Chicago’s CME Group said it would begin providing futures contracts on Bitcoin as well. Futures and derivatives allow investors to place bets on Bitcoin without actually owning any of the currency, amplifying the amount of financial leverage on the underlying asset. There are also some positive signs that various regulatory authorities worldwide have decided to deal in it or embrace it.