What Is Driving Bitcoin’s Growth
Probably everyone and their mom is asking you about Bitcoin now. How many headlines have you seen this week about Bitcoin alone? I bet it’s a few dozen!
Bitcoin’s a hot commodity right now. But it’s okay to wonder: What’s making it so big?
Bitcoin: A brief history.
But what is Bitcoin, exactly? And why is it suddenly so desirable?
Bitcoin is one form of cryptocurrency, a form of payment that is centered around secrecy and protection against counterfeit. This money is virtual and tied completely to electronics.
Interestingly, this means that Bitcoin is not a currency that belongs to any particular country. This is an important reason to use cryptocurrency for some—after decades of inflation within different currencies in countries such as Venezuela and Iran, many people take comfort in the idea that money can have value without being tied to a government.
Cryptocurrency is also popular in countries like Argentina, countries that have had past difficulty achieving access to American currency. If you can’t always do business with one of the world’s most accepted currencies, what do you do? Use a currency that isn’t tied to anywhere at all!
Practically speaking, there are millions of people around the world who routinely need to send money to people in other countries. Those people benefit from using Bitcoin because it reduces the fees and makes it possible to transfer the money faster.
But cryptocurrency’s reputation has also been seen seedy at times. Increased secrecy and privacy around transactions lead some to believe that these currencies will be the preferred way to transfer money between criminals.
Bitcoin, in particular, was invented in 2008 by Satoshi Nakamoto, which may or may not be a pseudonym or a few different people working as a unit. It became popular among cryptography circles and then spread out to the general public.
Big money used to be on the sidelines of Bitcoin—but not anymore.
Understandably, lots of companies were nervous at first to invest in Bitcoin. How do you invest in something you can’t see and isn’t overseen by anything that historically watches transactions?
However, times are changing.
Mark Cuban of Shark Tank invested in Bitcoin last year, and will even be offering it up as a way to pay for tickets to Dallas Mavericks games!
Plenty of individuals in the financial world also investing in Bitcoin. Among them are Blythe Masters, who used to be an executive of J.P. Morgan Chase. Masters is now the CEO of Digital Assets Holdings, a company that builds blockchain technology for regulated financial institutions.
It should be noted that 4 out of the 5 top Bitcoin investors have also built businesses around cryptocurrency. Those investors include the Winklevoss twins (Cameron and Tyler Winklevoss, two American twins who won the men’s rowing competition in the 2008 Beijing Olympics and who are now Bitcoin billionaires), Barry Silbert (the founder and CEO of Digital Currency Group), Tim Draper (a venture capitalist who purchased seized bitcoins from the silk road marketplace website that were auctioned off in 2014 at the US Marshals Service) and Tony Gallippi (CEO of BitPay).
Charlie Shrem was once one of the biggest investors in Bitcoin but wound up going to jail. In college, he co-founded a company called BitInstant, which helps people exchange dollars for bitcoins. One of his customers was buying bitcoins and reselling them on the Silk Road Marketplace, where people used the bitcoins to buy drugs and other illegal things. Shrem didn’t report what his customer was doing and so he was arrested for money laundering, went to prison for a year, lost all of his money and got a job washing dishes for $8 an hour. When Bitcoin reached $19,000 at the end of 2017, he sold his and bought real estate.
Stories of people making millions and billions off of Bitcoin (even if they ended up serving time) drive Bitcoin’s growth simply because Bitcoin’s worth is completely speculative and dependent on the faith of the investors.
The Peter Thiel Effect.
Peter Thiel is a venture capitalist whose efforts have been tied to the creation of PayPal and the earliest investments in Facebook. He’s also interested in projects around futurism (including building settlements out in the ocean!).
Most recently, Thiel was launched into the spotlight after suing Gawker and sending them on the path to bankruptcy. The outlet outed his sexual orientation without his permission. Thiel also helped to fund the court case brought by Hulk Hogan against the publication.
Here’s why it’s important that Thiel invested in Bitcoin: When he spends money, people pay attention and follow his example.
Yes, Thiel is interested in building ocean cities. But he also has a very good track record for investing in companies that do well over time.
PayPal probably sounded just as crazy to us as back in 1999 as Bitcoin does to us now. But it grew and became part of the daily lives of many of us today. Same with Facebook, Lyft, SpaceX, and (for the more entrepreneurial among us) Y Combinator. All of these are ventures Peter Thiel has invested in during his career.
Hedge funds are coming in slowly
Understandably, financial firms have been hesitant to invest in Bitcoin. There’s a very real risk of the currency not having any worth down the line. The worth of the currency has fluctuated regularly and people are afraid that they will lose their investment.
Individual investors have taken the leap over to Bitcoin in droves. It plays to the rebellious, just-the-facts reputation that Bitcoin has always carried. It’s just money—no monitoring factors or overseers other than the people that truly understand it. Adam Grimsley and Michael Wong, formerly of BlackRock, established a firm that deals exclusively in cryptocurrencies in 2018. They cited the lack of diversification and straight-up returns attitude of cryptocurrency as being key reasons why they wanted to switch financial fields.
But finally, hedge funds are starting to follow the individuals.
It should be noted that once again, many investors in Bitcoin are centered around Bitcoin as part of their overall investment strategy. The prominent list of hedge funds investing in Bitcoin contains many, many firms centered around cryptocurrency. They’re already fans!
The true tests indicators of mainstream acceptance of Bitcoin is people like Brian Kelly, founder of BK Capital Management. He’s has sung the praises of Bitcoin in recent interviews. He was quick to talk about the recent uncertainty around Bitcoin in South Korea and recent talk of greater enforcement against anonymity in the country. But he’s optimistic and tells people not to invest too much when exploring Bitcoin initially.
So what’s next for Bitcoin?
We’re watching and waiting! The stock is still largely in flux, with Peter Thiel’s actions certainly making things interesting.
As more hedge funds purchase Bitcoins, this may lead to a trend of cryptocurrency becoming safer for ordinary people. Emma Channing of the Argon Group pointed out to Investor Place that hedge funds’ demands for disclosure may actually force things to improve over time. If the best cryptocurrencies are earning more investments, maybe only the safest and best-constructed companies will make it.
Hedge funds also represent a more healthy, diversified way of investing in Bitcoin. Not everyone who belongs to and invests in a typical hedge fund is going to be a cryptocurrency geek. If companies are being funded by a group of people instead of one person with a lot of Bitcoin to spare, that will act as another force of improvement. More people will be holding them accountable!
If you’re at all interested in purchasing Bitcoin, we recommend that you read up about Bitcoin and cryptocurrency in general. The Unchained and a16z podcasts are particularly great, and deal with a variety of subjects within cryptocurrency. Talk to your broker or other financial experts before investing in a new segment of your portfolio.
It is always the responsibility of the investor to research the nature of a new market upon entering. Cryptocurrency is a relatively new financial field. There will be many companies that do not make the five-year mark or hit the $20,000 mark ever again.
But don’t fret! Bitcoin is making the cryptocurrency field more exciting all the time. If investors like Peter Thiel stay involved, it’s only going to get more interesting.