When it was launched by Satoshi Nakamoto in 2008, Bitcoin was nothing but an obscure cryptocurrency meant to facilitate transactions among early adopters without intermediary intervention. Its value back then was only a few hundred dollars. However, due to growing popularity, the value of Bitcoin was to peak at $10,000 in just a few years. This caused a great interest from the skeptical masses and many invested in it in the hope that they could make a kill from the cryptocurrency market.
Over time, Bitcoin and other cryptocurrencies have become highly speculative. Unlike fiat currencies, they cannot be used to store value. Rather, they are handled the same way as commodities such as gold, which must be sold for one to make money. Before it is sold Bitcoin has no value. Investors speculate on Bitcoin by buying it at a low price and selling it to make money.
How Disruptive Is Bitcoin?
To many, Bitcoin and other cryptocurrencies are revolutionary. That's thanks to the disruptive technology behind it. In fact, blockchain technology has been hailed as having the ability to change the way the way financial markets work. Like other cryptocurrencies, Bitcoin is based on blockchain technology. The Financial Times defines Bitcoin as a series of computer codes created by computer systems by solving complex algorithms. Thus, anyone who can engage in cryptocurrency mining can create Bitcoins.
Bitcoin transactions largely take place without the help of an intermediary. Every transaction involving Bitcoin is usually recorded in terms of blocks that act as ledgers. As soon as one block is filled, another one is created and connected to existing ones using hashtags. When these blocks are aligned in chronological form, they are referred to as a blockchain. Transactions involving cryptocurrencies have the highest level of security, given that everything done on the blockchain is recorded digitally.
The anonymity of cryptocurrency emanates from the fact that transactions are recorded without capturing information about the parties involved. It is only when converted into cash can that the money is tracked to individuals. As such, blockchain is thought to have the potential to change how transactions are done in the banking industry.
But that’s hardly the reason Bitcoin is feared in financial markets. The fact that it operates outside the regulatory ambits of central banks makes Bitcoin a potential risk to investors. Unlike fiat currencies, Bitcoin isn't sold through the banks. It operates independent of the existing financial system and is not regulated by the central bank. This makes it highly volatile and a potential risk to investors.
Bitcoin Speculation: Potential Crisis That Could Shake Financial Markets
It is the hope of each and every Bitcoin investor that its price will keep rising. However, that’s cannot be guaranteed. Whenever its price rises to unbelievably high levels, there are always fears of an imminent flash crash. Here are ways through which Bitcoin speculation could shake the financial markets:
1. Bitcoin Bubble Crashing Investor Confidence
Cryptocurrency experts have long held the view that the value of Bitcoin tends to rise in tandem with improvement in the economy. A good example is the rise of Bitcoin which began as soon as the US economy began to accelerate in the third quarter of 2017. That shows that investor confidence in the economy usually results in a rise in the value of Bitcoin.
So how would collapsing Bitcoin prices affect the stock market? Although it doesn’t have a direct impact on the prices of equities, it could negatively affect investor psychology and set a domino effect leading to the collapse of stock prices. When people are shaken by falling Bitcoin prices, demand for equities will go down leading to the possible crash of the stock market.
2. Regulatory Risk
One of the biggest challenges facing Bitcoin is the lack of a proper regulatory framework. While that’s how the cryptocurrency was designed, there is a huge risk to investors, especially if authorities decide to outlaw it. For instance, the outlawing of Bitcoin exchanges in China in 2017, led to a crash in the prices of the cryptocurrency.
Despite the claim that Bitcoin has global acceptance, over 58 percent of Bitcoin mining takes place in China. If Bitcoin mining was to be declared illegal in mainland China, its price will certainly plunge to near nothingness.
In places such as Russia and India, the future of Bitcoin is not guaranteed. In Russia, for instance, the central bank has warned investors against putting their money in cryptocurrencies. In India, trading in cryptocurrencies is banned since it violates the rules of foreign exchange.
Where people are allowed to trade Bitcoin and other cryptocurrencies, there is always the danger of falling prey to pyramid schemes. In some countries, such as Nigeria, cryptocurrencies have been used as money laundering schemes. All these have a negative effect on the financial markets since it introduces money into the market through the back door thus disrupting exchange rates.
3. Bitcoin Volatility Leading to Huge Losses
The volatile nature of Bitcoin means its value could rise quickly and fall as fast. What that means is that investors can make huge gains when prices increase or incur unimaginable losses when prices go south. As such, you have to be an investor with a high appetite for risk to put your money in Bitcoin. Bitcoin investors are likely to keep putting their money on the cryptocurrency until its value comes tumbling down. Depending on how much money is lost, this could have a negative impact on the financial markets.
Cryptocurrencies have only been around for less than 10 years. That makes Bitcoin and the altcoins less understood by investors. Yet many people keep falling prey to Bitcoin advertisements that promise quick riches. Undoubtedly, early investors in Bitcoin have made or are likely to make a lot of money. But the risks involved are too high. As an investor, you need to realize that losing your money is one of the possible outcomes of betting on Bitcoin. That's why you should always research to know where to put your money. Steer clear from anything that promises extremely high returns for a small investment. If it is too good to be true, it probably is.