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Though bitcoin’s existence spans a relatively short 10-year period, it has gone through many stages of growth. The price of one bitcoin has skyrocketed and crashed several times, but the cycle of interest has always seen its trajectory rise upwards over time. This steady (and often volatile) trend has taken the seminal cryptocurrency to new heights, but its relationship with participants is always changing. This relationship is dominated by sentiment—the main driver behind bitcoin growth—but how anyone feels about bitcoin is always a product of some new development.
From its humble beginnings as a pet project of computer enthusiasts to its current precarious position on the cusp of institutional involvement, bitcoin has always given people a new milestone to look forward to. These milestones have increasingly entangled bitcoin in the traditional financial sector and the politics involved therein. Included on its list of achievements are fiat exchange integration, several hard forks, and soon, the institutional futures and options market. What’s emerged throughout this process is a strange dynamic, in which bitcoin’s purpose as a decentralized currency is eroded, even as it gains in value. At current all-time highs, the final, irreversible step into the institutional realm could also be a step off the cliff.
Buy the rumor, sell the news
Each of bitcoin’s major milestones both detract from its legitimacy as a truly democratic solution, yet increase the coin’s price as well. The first such event was bitcoin’s listing on fiat money exchanges, which occurred around 2013. Before this, the idea of bitcoin was still pure, totally decentralized, and unable to be influenced by individual actors (nor was there any real incentive to do so). People commonly bought things like pizza and other novelties with their bitcoin for fun, but as soon as it was worth real dollars, the point of the experiment changed forever.
Exchanges made speculation the name of the game and immediately put bitcoin’s other positive contributions to finance on the back burner. It also demolished the idea of decentralization or democracy because exchanges can exercise a strong influence over the market. Early adopters or miners with hundreds or thousands of bitcoins immediately gained the ability to manipulate price as well, throwing a monkey wrench into an otherwise free market economy.
The immense levels of speculation, fortunes lost (and made), and lofty prices cast bitcoin in a suspicious, risky light and kept people from regarding it as anything other than an investment asset. Bitcoin was meant to replace shoddy payment platforms and opaque banking practices, but from the moment it gained relative fiat value, these ambitions were squandered. Now, there are a plethora of alternative cryptocurrencies with a better chance at fulfilling bitcoin’s original goal, yet bitcoin’s “revolutionary” capabilities are still lauded as the reason for its high price.
Money by the fork-load
Bitcoin’s best competitors are those who share bitcoin’s architecture, allowing people to invest in the currency and yet use it to transact as well. The aging algorithms that guide bitcoin’s blockchain are largely recognized as obsolete, and so developers have introduced upgrades over time that keep it fast and inexpensive to use. However, these attempted upgrades were rejected by an insular core development team, and forced a hard fork event to split the two ideas apart. Such an event created bitcoin cash in early August 2017, a bitcoin clone with similar functionality but much faster operation times.
One would think that these events should destabilize bitcoin’s pedestal, and threaten its legitimacy, yet they only serve to reinforce its popularity. Because developers of new cryptocurrencies built on bitcoin’s chain credit holders with the same amount of its newly forked cousin, there is a real incentive to having bitcoin in one’s portfolio during a fork. Accordingly, these events drive hugely bullish volume in bitcoin, despite their detrimental effect on bitcoin’s image.
Over time, this money has stayed in bitcoin and its competitors like bitcoin cash, but no one knows how many forks the community will tolerate before the situation becomes untenable. When there are ten different “bitcoins”, each with more and better functionality than their predecessor, why is the oldest, slowest one worth the most? Market participants face this question with each passing fork, and will face it over and over with increasing unease as bitcoin continues to climb.
This strange dynamic has been misconstrued as manipulation in the past by institutional investors who initially rejected bitcoin for the same reason. However, whatever hesitations they once had are clearly no longer there.
Bitcoin’s next hurdle
Bitcoin’s increasing entanglement with traditional finance will soon bring it to the point of no return. Despite straying from its purpose, its multiple hard forks, and its risk, bitcoin’s market cap has reached over $200 billion in recent days. Institutional investors now ignore bitcoin at their own peril and have therefore decided to go full-scale integration.
If regulators hadn’t watched the dollar outflows with trepidation before, incoming futures and options contracts on bitcoin will demand their intervention. This final step towards legitimacy comes at a high cost to bitcoin, both in terms of price and functionality. To address the former claim, one must understand what will happen once large institutional investors begin shorting bitcoin. Short selling will increase downward pressure on the underlying asset, bitcoin, and commence a bearish new dynamic. It also completely handicaps bitcoin’s ability to remain decentralized, as stakeholders in the status quo inevitably find their fingers in bitcoin’s pie.
In combination with a run-up in prices, with bitcoin currently testing all-time highs once again, the introduction of futures could have catastrophic consequences, but it’s hard to know for certain. Regardless, during the journey to this point, the purpose of bitcoin has been entirely lost in translation, and it now risks becoming a boring old asset just like gold or silver. It has long since strayed from the true path, but thankfully, there are other cryptocurrencies ready to pick up where bitcoin left off.
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