It was fun while it lasted. Following the People’s Bank of China’s warnings over the “legally unprotected” nature of Bitcoin, the Chinese government placed pressure on the country’s largest exchange, BTC China, and a third-party payment provider, to withdraw exchange services to new users, forcing individuals to trade entirely at their own risk.
Supporters say the government should see the growth of Bitcoin as a healthy dollar diversification, and appreciate the boost the currency’s rise has given to the purchasing power of its own people.
It is another important twist in a year when Bitcoin catapaulted from being a small and relatively unknown quirk on the margins of the financial system to being recognized, in some quarters at least, as a legitimate currency. In so doing it has become the first cryptocurrency to go mainstream.
But Bitcoin aficionados are used to extreme volatility in the currency and say they are not overly concerned that the latest setback has any serious long-term implications. "This is bad news, but it will recover," says Nicolas Genko, a Bitcoin consultant. "China has become the first market in terms of Bitcoin volume and this is why this news had such a great impact on the global price." Nevertheless, he remains confident the market will continue to grow inside China and out, citing India as the next market to watch for growing Bitcoin transactions.
“Most people will continue to use fiat currencies for face-to-face transactions but eventually digital transactions will be conducted almost exclusively with cryptocurrencies,” he adds. “It is just a matter of time before it overtakes PayPal.” According to Coinometrics, a provider of real-time Bitcoin data, the cryptocurrency has already surpassed Western Union in volume.
Johann Gevers, CEO at financial and legal transactions platform Monetas, says 2013 was a watershed for the currency. “In just three years, Bitcoin has risen an astonishing million times from its first published rate back on October 5 2010,” he says. “It now has a market capitalization of $14 billion.”
There are no official estimates for the number of people that have invested in or owned a Bitcoin, but unofficial estimates typically range from somewhere between 500,000 and 6 million. Even at the upper end of this range that is a very small number of users for a global currency, suggesting there is plenty more room for growth.
There are still plenty of doubters, including a number of analysts at investment banks, which have felt compelled to acknowledge the phenomenon because of its incredible growth, but in some cases predict it will prove transient.
Many detractors worry that Bitcoin is a bubble at best, if not a Ponzi scheme. But James D’Angelo, co-founder of The World Bitcoin Network, says such growth is found in successful pre-IPO companies, akin to the S Curve, the technology life cycle.
Charting the early stages of growth in both Twitter and Facebook, D’Angelo notes that both companies experienced steep growth of over 1,000% in the number of users several years after launching. But this growth levelled off to more sustainable levels of growth in the period before their IPOs.
Bitcoin’s growth might be slower than that of companies such as Twitter and Facebook, says D’Angelo, because Bitcoin is far more complicated than either of the social networking sites. Because it is not a company it does not have the same internal support designed to promote it to new users.
But unlike with Facebook or Twitter, which are free to join, participating in Bitcoin requires putting real money at risk, which is likely to mean uptake is a little slower, says Genko.
However, D’Angelo argues that Bitcoin has greater potential in the long term because it is considerably more useful than the social networking sites. Bitcoin has the potentialto take on gold, credit cards, micropayments and the estimated $500 billion to $1 trillion remittances industry, and to provide free banking, he says.
If Bitcoin succeeds in breaking into these businesses it is easy to imagine the currency achieving a market capitalization in excess of $1 trillion, he says, meaning Bitcoins would trade for more than $40,000 each.
The route to that number, if it ever gets there, will certainly be volatile, just as the pre-IPO value of Facebook and Twitter was volatile, ebbing and flowing according to the speed at which they grew and the legal hurdles they faced. But prices in the tens of dollars seen as recently as this autumn are unlikely to be seen again, says Genko. “Until Bitcoin has a more established place in the real economy it will continue to be volatile, but there are a lot of people on the sidelines with an interest in this market now, waiting for an entry point,” he says. “It is hard to see Bitcoin falling below $200 with the level of interest now out there.”
Short-term volatility aside, the price of Bitcoin will continue to trend up in 2014, says Genko, especially since governments such as Germany and Switzerland show a permissive attitude towards the currency. Both have indicated Bitcoin should be regulated in the same way as any other foreign currency, and if more markets follow suit, or at least provide greater regulatory clarity, it could trigger a new phase of even faster growth.
Gevers at Monetas believes Bitcoin’s most dramatic growth phase is now behind it. “Realistically, it won't replace all other forex reserves, including gold, in the near future, so its price probably will not rise more than a hundred times or so in the next few years,” he says.
“Nevertheless, the possibility of a hundredfold increase remains an excellent investment opportunity as part of a prudent diversification strategy into assets that will keep their value as traditional currencies decline.”