How can a single Bitcoin, which was trading at only a few hundred dollars two years ago, now be trading at over $6,400? Is there a big Bitcoin bubble? Are skeptics from Russian President Vladimir Putin to JP Morgan Chase CEO Jamie Dimon correct that Bitcoin is a fraud and or pyramid scheme?
Those are important queries, but the biggest boost to Bitcoin actually derives from something not discussed, and a rather unlikely source: its competition — other digital currencies and their related Initial Coin Offering (ICOs).
Hundreds of digital currencies have raised funds through ICOs. Like their regulated IPO (Initial Public Offering) cousins, ICOs seek to raise money to build a digital token and the ecosystem surrounding it.
Through the first three quarters of this year alone, in excess of $1.2 billion has been raised for over 100 ICOs. When the funds are actually invested in the ICOs, the currency used is — by and large — Bitcoin. Therefore, Bitcoin serves as the predominant liquid asset behind all these ICOs. And of all the cryptocurrencies out there, Bitcoin is the most widely traded and can easily be converted into cash. As a result, the price of Bitcoin has continued to grow exponentially. A similar, but less pronounced phenomena, has occurred with Ether, the second most traded digital currency after Bitcoin. (Ether itself, raised $18 million for their ICO in 2014, much of it in Bitcoin.)
Not only are most ICOs funded using Bitcoin, they continue to use Bitcoin and the “Digital Lake of Liquidity” in their transactions once actual digital currencies or coins are up and running. Don’t get me wrong, the rubber has not hit the road for many of these ICOs, and the majority of actual currencies have not entered circulation. Unfortunately for investors, they may never do so and there are scant regulations to protect investors from such a circumstance. That said, for those ICOs that do have an actual digital currency in circulation (and there are over 100 of them) they also use the “Digital Lake of Liquidity” to accept funds and to perform payout services. When they do so, they primarily use Bitcoin.
These other currencies trade their denominations with Bitcoin not only because Bitcoins are so widely held by so many investors, but because of the volume of trading on digital currency exchanges. Such large volume is part and parcel to the “Digital Lake of Liquidity,” which when trading affords traders the best-executed prices (since there is so much competition within the marketplace). There are currently more than 1,100 other currencies. Not all of them participate in trade.
The bottom line is that as the digital currency universe continues to expand to accommodate new currencies, Bitcoin (and to a lesser extent Ether) prices will likely continue to increase.
It is difficult, if not impossible, to break down and quantify this liquidity phenomena. In large part, the difficulty is due to the lack of regulation over ICOs and digital currencies in the U.S. and abroad. There is little reporting or transparency to inform investors of what is taking place.
Bitcoin and the digital currency ecosystem have been fast forwarding at incredible speeds. A week of watching what’s taking place might seems equal to several months in other markets.
I don’t think any of the developers of these current currencies or the related exchange trading platforms have it quite right. That said, the digital ecosystem isn’t going away. The extent of its continued rapid growth is ultimately tied to greater innovation coupled with the adoption of basic rudimentary regulations for investor protections.
To date, amid all the incredible innovations, there are no existing digital white knights. At some point, however, some will get it right.