Teddy Yerdon, Wake Forest University School of Business When it was first introduced in 2009 the concept of a decentralized cryptocurrency was completely foreign to much of the investing world. But since then, the term Bitcoin has become ubiquitous in the markets, especially among future-focused investors. The truth is, however, other than this finite and specialized group of people, there aren’t many people at all that actually understand much about Bitcoin.
In a basic sense, Bitcoin is a recently introduced digital currency that doesn’t rely on “coercive centralization”¹ by a central bank for regulation. Because it is not recognized by the central government of the US as a currency, it is taxed by the government as property. To guarantee user integrity and security, Bitcoin relies on a shared public ledger called the Blockchain which verifies trades using complex algorithms and proofs which prevent double spending—making it an extremely secure way to transfer information. The Blockchain technology itself is a production of cryptography—defined as a branch of mathematical programming “that lets Bitcoin create mathematical proofs that provide high levels of security”². To learn more about Bitcoin, the following link provides good information https://bitcoin.org/en/vocabulary#cryptography.
As credence in the Blockchain continues to rise, the world will continue to experiment with the future of decentralized cryptocurrencies—digital money that is not regulated by a central bank or national governments. While the idea of a decentralized currency may sound appealing for various reasons including the security that Bitcoin offers and its differing taxation policies, there are still many questions to be answered about the future of the currency.
Bitcoin’s growth over the past several months is definitely something to take into consideration, and, if you still doubt the relevance of this up-and-coming cryptocurrency, maybe the fact that it briefly surpassed Twitter in terms of market value several times this month will make you think again. Twitter, Inc which has a current market value around 11.3 billion USD was surpassed by Bitcoin on several occasions this month, which reached monthly highs of 12 billion USD. These recent highs can partially be attributed to the responsiveness of Bitcoin to high market tension surrounding the Brexit decision—supporting the idea that Bitcoin is now viewed by the markets as a safe-haven asset.
In the midst of all the speculation over the Brexit decision, the price of Bitcoin continued to appreciate against the USD. The impending threat of a Brexit continued to push investors towards safe haven financial assets like US government bonds, and subsequently Bitcoin experienced a large upward movement of its own: jumping from around $430 for one Bitcoin at the beginning of 2016 to recent highs of roughly $760. To see these movements, all you have to do is view price fluctuation graphs for US Treasury Yields and Bitcoin from the week of June 13th. As seen in these graphs, tension over Brexit continued to grow throughout the earlier part of the week, enticing people to purchase US Treasury Bonds (sending the yields down). Similarly, during the beginning of this week people continued to purchase Bitcoin as a safe-haven asset pushing its price up.
By Friday June 17th, however, after the global publication of the previous day’s assassination of British politician Jo Cox provided a boost to the Bremain supporters (British proponents of remaining in the EU), people began to re-invest in riskier assets and sell their safer ones—sending US Treasury Yields back up and the price of Bitcoin down. From that moment on June 17th, confidence in a probable Bremain decision prompted investors to take a more risk-on stance, sending the price of Bitcoin down 25 percent in the 6 days, from around 750 USD for one Bitcoin to 550 USD. To explain this movement, as confidence grew that the UK would remain in the EU, investors began looking to buy riskier assets and sell safer ones.
After the final votes for a Brexit in the UK came in, however, many people were taken back by what they saw. Although market sentiment just days before the decision reflected confidence that the UK would remain in the EU, the popular vote (as you likely already know) was surprisingly in favor of a Brexit. Since this decision, Bitcoin has since rallied from its recent low of around $550 on Thursday, June 23rd to over $650 the next day, Friday the 24th—further solidifying the argument that people view Bitcoin as a safe-haven asset.