It may be a piece of code but ‘pet rock’ Bitcoin has been going places.
The cryptocurrency’s price has traversed the distance from $16,866 to $23,823, a gain of slightly more than 41%, in less than twenty days. As of this writing, bitcoin is changing hands at $22,381.15, down 3.23% from its price a day earlier.
An Improbable Ride
Bitcoin price has achieved its latest feat despite prevailing fundamental and technical indicators.
The difficulty level for Bitcoin’s algorithm, a measure of how easy it is to mine new coins, has risen in the last month. Trading volumes at crypto exchanges are yet to reach the highs achieved earlier this month. Bitcoin’s hash rate or the amount of computing power devoted to mining the cryptocurrency still trails figures from Jan 6.
Over the weekend, Binance stated that it will stop processing international SWIFT transactions under $100,000 after Feb. 1, 2023. This means that there will be fewer retail investors – individuals who are supposed to have propelled Bitcoin’s price to stratospheric heights – at the world’s biggest exchange by trading volume. Binance also has highest trading volumes for Bitcoin. And its trading volumes have been trending downwards in the last month.
The crypto ecosystem is also in the throes of a great big unwinding that has taken down some of the biggest companies operating in its closed ecosystem. Genesis, crypto’s biggest lending firm, was the latest. It filed for bankruptcy last week and the firm’s problems may keel over into a possible liquidation of the world’s biggest publicly traded bitcoin vehicle.
Why Is Bitcoin Price Rising?
If investor enthusiasm for Bitcoin is real, what is its cause? Is it an ‘artificially induced last gasp’ before extinction? Or is it preparation for another years-long rally?
Investment firm Bitwise recently made a case for the latter. According to the firm, crypto’s bull runs occur in four-year cycles and coincide with technological innovations. “The conditions are ripe for breakthroughs in 2023 that could catalyze a new bull market,” the firm wrote in its latest investor newsletter last week. It also listed Layer 2 solutions, ZK-rollups, and privacy solutions as possible tech innovations to propel bitcoin forward in the next two years.
The problem with this argument is that the listed innovations do not increase the supposed value of cryptocurrencies. Rather, they are meant to enhance the technological capabilities of the underlying blockchains and make them a more effective medium to process transactions. For example, Layer 2 solutions are centralized systems that process transactions at a fraction of the cost and speed for public blockchains. They commit transactions to the latter after a certain period.
What Use Case?
In public markets, investors bid up prices of listed companies because innovations are markers for future revenues. But Bitcoin and Ethereum are supposed to be decentralized. And the road to any sort of revenue, much less meaningful figures, is a long slog for public blockchains.
They will first have to demonstrate a plausible use case. Private companies and entire countries are already using blockchains, the underlying tech for cryptocurrencies, to develop their own tokens and digital currencies. How useful will a bitcoin or ether be in such a competitive market?