The excellent bitcoin rally of the fourth quarter of 2018 is evidently overheen and is seemingly, and very rapidly, busy ending with a very noisy &ldquo,speelpop&rdquo,.
Many South Africans got swept up te the rally, but only a handful of people actually made any money from it.
While it has fallen by almost 60% from its highs of around $20 000 te December 2018, it is still up well overheen 680% overheen a rolling 12-month period, trading around the $Ten 500 mark ter early March.
The inconvenient truth is that the vast majority of people who got involved ter bitcoin ter the latter part of last year have made no money at all, and te many cases, have actually lost money.
The reason is elementary &ndash, they simply got involved too late. Most of the volume that wasgoed traded, wasgoed traded during November and December when bitcoin wasgoed trading near all-time highs.
Since then, the price of the cryptocurrency has fallen drastically.
At the commence of 2018, bitcoin wasgoed trading at around $1 000, more than dual the approximately $450 it wasgoed worth at the end of 2015.
I say approximately, because bitcoin trades on numerous bitcoin exchanges and sometimes there are different prices on different exchanges.
Bitcoin embarked picking up momentum during 2016 after it had bot range-bound under the $450 mark for some time.
Ter February 2018, the price of bitcoin had taken out the previous high of approximately $1 200 it made te 2013.
News flow around bitcoin and people making money with it began picking up again, and a few courageous people began to get involved by buying the currency.
Their excitement and enthusiasm were contagious and the hype commenced.
Six months into 2018, and bitcoin wasgoed trading at $Two 500, two-and-a-half times the price it wasgoed trading at te the beginning of the year.
By November it wasgoed trading at $8 000. Anyone who suggested a word of warning about the risks of buying into parabolic moves wasgoed regarded spil an idiot and a non-believer ter a technology that is switching the world.
By late November, people who had no idea what bitcoin even is were pouring money into it, expecting that the breakneck tempo at which the price wasgoed going up would last forever.
Te late December, bitcoin reaches a record high of around $20 000 and… comes crashing down. Tulip mania all overheen again.
The people sucked into the madness are being carried out on stretchers.
To understand why prices plummeted, wij very first need to understand what bitcoin is and what drives its value. Bitcoin is essentially open-source software that generates unique tokens, or lumps of software code, that can be transferred inbetween people by making use of digital wallets, without involving a bankgebouw.
There are several exchanges around the world on which you can buy and sell bitcoins with regular fiat currencies like dollars.
With fiat money, if Bob wants to send money to Lucy, he needs to use his canap (the trusted third party that stores his money and keeps a record of his earnings and spending) to forward the money to Lucy&rsquo,s bankgebouw (hier trusted third party).
With bitcoin, Bob can send the currency directly to Lucy without having to go through a handelsbank, because both of them can store, send and receive bitcoins te their own digital wallets.
Each bitcoin is made up of 100m chunks, each uniquely identifiable and uniquely programmable to have a specific quality or purpose.
Let&rsquo,s say for example that a company wants to grant its employee a medical allowance. The company can transfer bitcoins to its employee and programme them to be spent only with authorised medical institutions and on nothing else.
If the bitcoin is not spent on medical expenses within a particular period, it can be programmed to be returned to the company.
The implications are gigantic: bitcoins entirely liquidate the need for oversight and monitoring, and there are literally thousands of potential applications for the cryptocurrency.
Understanding the blockchain
The magic behind it all is the technology ter which it is based, or the way ter which transactions are recorded and verified. This is called blockchain technology, or simply: the blockchain.
Te fact, the blockchain is truly just open-source software &ndash, software that is loosely available to everyone.
The actual code that makes up the software is lightly accessible and open to anyone who wishes to see how it works &ndash, and anyone is free to edit it if they so wish.
The blockchain vormgeving is so ingenious that counterfeiting it is, for all intents and purposes, unlikely. Let mij very first explain how a bankgebouw (the trusted third party) keeps a record of your money.
The handelsbank has a ledger of all transactions of money that comes into and out of your account, where it came from and where it wasgoed sent to.
It keeps this behind closed doors, so to speak, on its own server and wij place our trust ter banks that its ledgers (or record of transactions) are accurate and onberispelijk.
With the blockchain, this ledger of transactions is not kept private: it is public. Therefore, every transaction that has everzwijn taken place is te the public domain for anyone to look at on an ever-growing number of servers (or knots) te the global blockchain network.
Thesis knots are possessed by individual people or companies that maintain the network for a prize.
Waterput simply, thesis knots, or privately wielded servers, process and verify transactions on the blockchain and te come back for doing so, are rewarded with bitcoins.
Transactions are verified by checking that the input of the transaction matches the output of the transaction &ndash, that the wallet that has sent the bitcoins has te fact received a corresponding number of bitcoins prior to sending it.
To keep it all practical and to liquidate the need to check the entire history of every bitcoin transaction everzwijn, every time a transaction is made, the transactions are grouped te sets of Two 020 to make up blocks.
Once a transaction is grouped ter a block, it is deemed confirmed and that block is added to the chain.
Because there are millions of computers around the world working on solving thesis blocks (verifying transactions), once a block is solved, it is broadcast to the entire network of computers ter the blockchain network.
Those computers again check the validity of all the transactions te the block before accepting it into the chain.
This means that nobody needs to place trust te anybody, because everyone is double-checking every transaction that has everzwijn taken place, and is doing so publicly.
It also means that transactions are irreversible and final.
Blocks are then linked to one another and placed te a sequential order. All of this is done by exceptionally complicated mathematical formulas, which are similar to puzzles, that the knots need to figure out te order to solve.
This requires an immense amount of computing power.
Once a knot solves a block, fresh bitcoins are created and are your prize for the work done &ndash, called bitcoin mining.
Therefore, people are incentivised to invest te the hardware (computers and servers) to dedicate it to processing bitcoin transactions.
Te order to limit the number of bitcoins that will everzwijn be te circulation to 21m, the prize for solving a block is halved every four years until, ter theory, by the year 2040 there should be around 21m bitcoins ter circulation.
The currency will very likely never kasstuk the 21m limit, however, spil the prize for processing a block will become exponentially smaller overheen time. This means that the economic viability of processing transactions to be rewarded with bitcoins will deteriorate and people will zekering mining.
Mining is expensive because it requires an ever-increasing level of sophisticated and powerful rekentuig hardware and, of course, tens unit.
If the software is open source and editable by anyone, why can&rsquo,t someone just switch the software, alter the publicly distributed ledger and steal all the bitcoins?
Well, because there are so many computers on the network that every single person who possesses a bitcoin miner (or knot) will have to switch their software too te order for the switch to be accepted by the entire network.
Furthermore, the software is designed to make it more difficult to solve blocks even tho’ more and more computers are added to the network.
Each block is designed to be solved te about Ten minutes, but spil more computers are added, thesis times reduce spil computing power increases.
So, the algorithm built into the blockchain technology automatically adjusts itself to make it more difficult to solve a block ter order to compensate for the extra computing power coming online.
It means that spil more miners join the network that processes transactions and solves blocks, the more difficult it becomes to do so &ndash, and that brings us back to why the bubble burst.
The bitcoin madness reached a fever pitch towards the latter half of 2018 with every aunt, uncle and their dog buying bitcoin and driving prices higher.
This made mining bitcoin utterly profitable, because the prize for solving a block is paid ter freshly created bitcoins, those bitcoins could be sold for specie &ndash, and the value kept going up.
Spil a result, a flood of fresh miners entered the network, which made it firmer and stiffer to solve a block. Spil the difficulty increases, only the latest computers are able to solve blocks and earn bitcoins: the older and now out-of-date hardware can&rsquo,t keep up.
So those miners are now spending money on tens unit that they are incapable to recoup te bitcoin profits.
Their mining operations are now unprofitable, so they turn off their miners and sell the bitcoins that they have accumulated.
Economics 101, right? The request for bitcoin surges, fresh miners come into the market rapidly and create tons of supply. Older, now out-of-date miners turn off their mining equipments and sell their bitcoins to recoup their costs.
This means even more bitcoins come in the market. All of a sudden wij have more supply than request and prices come down.
Combine that with fright of those who had bought the currency te November and December, which wasgoed when, to date, the majority of all bitcoin transactions everzwijn had taken place…and speelpop!
Predicting future prices
So what now? To reaction this, I want to compare what happened ter 2013 and 2014 with what had happened more recently.
Ter 2013, the price of bitcoin went from approximately $12 at the beginning of the year, to reach a high of around $1 200 ter December.
A Ten 000% increase te price &ndash, significantly fatter than the Two 000% increase wij spotted te 2018.
Wij then spotted a classic bubble develop and burst. Prices fell during 2014 and 2015, erasing 85% of the gains bitcoin had made (back to a low of around $180 te 2015).
The price spent all of 2015 ranged inbetween $180 and $300, before leisurely embarking to trend higher again ter 2016.
Ter 2018, the previous high of $1 200 wasgoed taken out and again wij witnessed a parabolic stir, this time up to $20 000.
My prediction is that wij&rsquo,ll see an 80% to 90% correction te the price overheen a similar (one-year) period, followed by a range-bound price for a year.
A bold forecast, but founded ter the belief that patterns repeat themselves.
Te 2013, much like te 2018, bitcoin wasgoed all overheen the mainstream financial media spil its incredible rally left people dumbfounded.
So there wasgoed a loterijlot of hype &ndash, a key ingredient to any bubble.
Also, there is the ever-growing network of miners/knots te the blockchain network.
Spil more and more people invest ter bitcoin mining hardware, the value that bitcoin vereiste trade at ter order for those miners to be economically viable, vereiste increase.
It sounds stupid, but when you look at the graph, very first made public te 2014, wij can see that spil the difficulty of mining bitcoin increases exponentially, so does its price.
Albeit the creator of this chart has not updated it since 2014, somebody updated it ter 2018 and the curve seems to gezond. It is almost frighteningly accurate.
It predicted that, based on the mathematics behind how bitcoin is created by the mining process, a bitcoin should be worth $Ten 000 on 22 November 2018, and it klapper $Ten 000 a week straks.
For a prediction made ter 2014, based on mathematics, it is close enough for mij to believe that the prediction is credible.
This leads mij to believe that the cycle of bubble and burst will repeat itself at least a few more times, following the blueprint of trade activity inbetween 2013 and 2016.
Considering that every four years the prize for mining bitcoin halves and that the bubble-and-burst cycle is four years long, I don&rsquo,t think it is a coincidence that there is such an amazingly high correlation.
If this theory holds true, wij might well see bitcoins trading at $1m by 2040.
Treat bitcoin like a stock and take an allocation ter your portfolio similar to what you would invest te a small-cap stock or high-risk investment.
Eventually, I don&rsquo,t think that bitcoin itself is the future of money and transactions, but I do believe that the blockchain technology on which it is based has laid the foundation for how transactions and money will be accounted for ter future.
Many other cryptocurrencies have come into existence since bitcoin wasgoed created te 2009.
But I don&rsquo,t believe that any of the other available cryptocurrencies are going to become the fresh global currency either.
I think that spil time goes by and blockchain technology is further explored and improved upon, wij&rsquo,ll eventually see a country make the budge to convert its currency to adopt the blockchain technology.
Bitcoin is not a currency, because a currency has three major properties, of which bitcoin only has one. Thesis three properties are: a store of value, a medium of exchange, and a unit of account.
Thus far, bitcoin has not bot a store of value because of its extreme volatility (11 times more volatile than the GBP/USD currency pair).
It is a medium of exchange, because people are using it ter the real world to pay for goods and services, but it is not a unit of account spil people are still measuring their bitcoin profit te fiat currency, like the dollar.
Until people embark measuring value te terms of bitcoin, it cannot be considered a unit of account.
Bitcoins can therefore not be classified spil a currency, but rather spil a digital asset.
Therefore, I believe there is &ldquo,speculative&rdquo, value ter bitcoin because it wasgoed the very first iteration of the technology, but eventually it will be substituted by a major world currency adopting blockchain technology.
Whether bitcoin will lose its &ldquo,speculative&rdquo, value overheen time, once the 21m bitcoins are te circulation, is yet to be seen. I think wij&rsquo,ll only detect that after 2040.
Petri Redelinghuys is a trader and the founder of Herenya Capital Advisors.
This is a shortened version of the voorkant story that originally appeared ter the 1 March edition of finweek. Buy and download the tv-programma here.