The Evolution of Bitcoin: From P2P Cash to Investment Vehicle
Bitcoin has come a long way since its inception. From a simple peer-to-peer (P2P) electronic cash system, Bitcoin has transformed into a much more complex investment vehicle. This evolution has been driven by various factors, including the influx of 'stupid money' and the changing market dynamics. In this article, we will explore the journey of Bitcoin and how it has transitioned from a currency to an investment opportunity.
From Stupid Money to Investment
One of the newcomers to the Bitcoin ecosystem is the term 'stupid money.' This refers to individuals who have no knowledge of cryptocurrencies but have the means to invest. They join the market solely for the perceived profit potential. However, this influx of new investors has led to a significant shift in Bitcoin's primary use from a peer-to-peer medium of exchange to an investment asset.
The rise of 'stupid money' in the Bitcoin market has also caused increased volatility and market-driven value fluctuations. While this might be a short-term boon for some, it is not sustainable. Eventually, the market will correct itself, and only the true believers and knowledgeable investors will remain.
A Journey Through Time
Let's take a look at how Bitcoin evolved over time:
Spring of 2017
Before 2011, Bitcoin had some of the characteristics of a currency, but 2011 marked a significant turning point. This year saw the emergence of several websites that began accepting Bitcoin as a means of exchange, such as WikiLeaks, the Electronic Frontier Foundation (EFF), and Silk Road, a dark web marketplace.
In July 2010, Mt. Gox was established as a cross-currency exchange for Bitcoin, marking a new phase in its development. The following graph from Mt. Gox - Wikipedia, shows the USD price of Bitcoin on Mt. Gox from 2012 until the exchange closed in March 2014.
Bitcoin was also used as an electronic cash system when it was first used to purchase two Papa John pizzas. However, throughout 2011 to 2013, the dominant use of Bitcoin was for drug sales on Silk Road, which claimed around 70% of all Bitcoin transactions at one point. By 2015, Silk Road and its successors saw a significant drop in traffic on the dark web, and Evolution was shut down in 2015 due to a hacking incident.
Price and Trading Volume
The price and trading volume charts of Bitcoin show several periods of increased trading activity, particularly in November 2013 to February 2014, when Bitcoin and Mt. Gox saw a surge from 1100 to a crash. Another spike occurred in October-November 2015, when the price doubled from $200–$250 to $500 in three weeks, only to fall back to $300–$320 by November 15, 2015. Another significant spike was seen in June to August 3, 2016, when Bitcoin jumped from $580 to $770 before falling back below $600. Each of these spikes was accompanied by a surge in trading activity.
In late April 2017, the price of Bitcoin started climbing from $1200 to $16,000, and the market capitalization growth rate exceeded the value increase of nearly every other commodity. Bitcoin's role as a currency for the exchange of goods and services began to decline. For example, the quoted price for services in terms of Bitcoin has steadily decreased over the past six months, and now even vendors that previously quoted prices in Bitcoin are now offering significantly lower rates.
The trading volume for Bitcoin also exploded after May 1, 2017. Prior to January 1, 2017, there were few days with daily trading volumes exceeding $100 million. In January, there was a brief period of activity, leading to daily trading volumes of $400–$500 million. However, after May 1, 2017, there were only a handful of days with trading volumes below $500 million, and the latest trading volumes show $20 billion in exchange activity for December 8, 2017.
The Future of Bitcoin
Recently, CME and CBOE have announced plans to offer Bitcoin futures trading, which will allow institutional investors to participate in the cryptocurrency market for the first time. This development may have a significant impact on Bitcoin's value and acceptance as a mainstream investment class.
In conclusion, while Bitcoin started as a peer-to-peer electronic cash system, it has now transitioned into a more complex investment vehicle. As the market continues to evolve, it will be interesting to see how Bitcoin adapts to these changes and whether it will continue to be a viable investment opportunity for the long term.