Background on the Bitcoin
As mentioned above, declaring Bitcoin dead because of short-term price fluctuations might be premature. Through the years, Bitcoin has survived some pretty hard hits. Let’s look at Bitcoin's history and how it has fluctuated in the last 14 years.
We can break Bitcoin's growth from 2009 to 2023 into distinct phases. Bitcoin held little market value in its early years (2009 - 2010) and was primarily exchanged among a small community of enthusiasts.
Price volatility became more pronounced from 2011 to 2013, with Bitcoin experiencing its first significant rally and subsequent crash. Many believed that after this crash, Bitcoin was dead. The rise of alternative cryptocurrencies, known as altcoins, also began to gain momentum, challenging Bitcoin's dominance.
The years 2014 to 2016 were marked by various challenges for Bitcoin, including the collapse of the Mt. Gox exchange and regulatory scrutiny. However, it was during this time that Bitcoin reached its price bottom of around $200.
The following years witnessed an unprecedented bull run for Bitcoin. In 2017, its price surged from around $1,000 to nearly $20,000, capturing global attention and attracting institutional and retail investors. The introduction of Bitcoin futures contracts further fueled the price rally. However, this was followed by a sharp correction and a prolonged bear market throughout 2018 and 2019.
Bitcoin's recovery and mainstream recognition began in 2019 as the price gradually regained momentum. Institutional investors, including companies like MicroStrategy and Square, started investing significantly in Bitcoin, and major financial institutions began offering cryptocurrency services.
The year 2021 saw Bitcoin's price skyrocketing again, reaching new all-time highs in lite of China banning the currency in their country. Increased institutional adoption, growing mainstream acceptance, and heightened interest from retail investors contributed to this increase. In the last two years, we have also seen some significant changes in Bitcoin that have led to certain critics believing it is dying out. Let’s take a look at what is happening in Bitcoin currently.
We are using data from June 2022 till now to analyze current Bitcoin affairs. Since June 2022, Bitcoin has fluctuated between $31 000 to $15 000. Within a year, Bitcoin had dropped just over 50%. However, it has climbed to around $26 000 and has sat there for the last week. The notion that Bitcoin is dead doesn’t only come from influential celebrities such as Elon Musk; it also comes from people watching Bitcoin transactions.
US Crackdown on Binance and Coinbase
One driving factor that we need to include, is the ongoing investigations into two of the world's largest cryptocurrency exchanges, Binance and Coinbase. On the 5th of June, the SEC ( US Securities and Exchange Commission dropped a bomb on the crypto world that will have long-lasting effects on US citizens and the crypto world at large. The SEC has accused Binance and its founder Changpeng Zhao of operating a "web of deception" and has charged them with multiple offenses.
The SEC's allegations against Binance revolve around the company's failure to separate its US operations from its global exchange. Binance.US, supposedly an independent trading platform for US investors, is accused of secretly allowing high-value US customers to continue trading on the main Binance.com platform. Additionally, the SEC claims that Binance.US offered illegal commodity derivatives to its customers, despite not being registered with the derivatives markets regulator.
While Binance has denied the allegations and has supposedly been cooperative with the SEC, the effects have still caused the exchange to lose a ton of money. It's reported that within a day of the lawsuits brought by the SEC, Binance crypto exchange stock declined in value by 11%. That is a significant drop. If this regulatory pressure continues we might see Binance drop even further and the state of Bitcoin along with it.
CoinBase has also been accused of operating its crypto asset trading program will being an unregistered national securities exchange and broker. While the investigation is ongoing, CoinBase is being compliant and there isn’t much evidence to say that they have lost tons of income. As we look at a country like the US cracking down on major cryptocurrency exchanges, we can assume that the ripple effect on currencies like Bitcoin will be vast, especially if these exchanges limit their involvement with US citizens. Remember, the US is the world's largest Bitcoin Miner currently, and these lawsuits have the potential to influence this in the future.
Why Do Critics Say “Bitcoin is Dead”
While Bitcoins prices might still increase, the steady transaction decline worries people. From 2009, Bitcoin transactions had a steady incline seeing their highest in 2018. From here, the Bitcoin price went up, but transactions went down. Between 2018 and 2021, Bitcoin transactions fluctuated constantly. However, as we entered 2022, we saw the transactions leveling at just under 1 million. A steady decline in transactions is a red flag for many.
Another red flag is the number of active addresses on the Bitcoin Network. In 2018 and 2021, we saw about 1.2 million active users on Bitcoin. Between 2013 to 2018, we saw constant growth in users. Then a drop in 2019, and growth again in 2021. To date, the number of active addresses on the Bitcoin Network is still sitting at around 1 million users. So why is the Bitcoin price still increasing, then?
The Bitcoin price increase is due to the capital exchanged by the current Bitcoin users mentioned above. If you look at Bitcoins On-Chain volumes, in 2022, the daily amount of capital in Bitcoin reached over 300 billion, while the number of active users didn't change much. This suggests that the currently active users are just adding more capital to Bitcoin and adding to its value.
If you look at the current Bitcoin wallets holding money, you can also see how it has stagnated over time. At the moment, the number of Bitcoin transactions is not increasing, and the number of active wallets is also not increasing, but those that are active are moving more money. We can also see that those who used to have active accounts buy Bitcoin and hold it, hoping it grows. This turns Bitcoin into a buy-and-hold investment instead of a traditional trading vehicle, as we’ve seen with other cryptocurrencies.
Does Bitcoin being stagnant mean it's dead? Not necessarily. While the transactions lessen and the number of users stays consistent, it sets us up for a good bull run later. As users continue to hold their capital, you shouldn’t have to worry too much. However, if this continues, we might see the liquidity get smaller and the price increase, making it more difficult for others to buy in. This could lead to Bitcoin crashing.
Exciting news for those still investing in Bitcoin: China might be joining the party again. In 2021, China banned Bitcoin usage. However, Hong Kong recently announced that they are allowing retail investors to start investing in Bitcoin again. We might see an overall increase in transactions and address over the next year or so as China reopens this market.
Bitcoin vs other Cryptocurrencies
As the leading cryptocurrency, Bitcoin holds a unique position compared to other top cryptocurrencies. With the largest market capitalization, Bitcoin dominates the crypto market. It is a decentralized digital currency, providing an alternative to traditional fiat currencies and payment systems. Bitcoin focuses on security, immutability, and decentralization, operating on a proof-of-work consensus mechanism with the SHA-256 algorithm. It is widely recognized as a store of value and a means of exchange, attracting adoption as a hedge against inflation and a portfolio diversification asset.
Ethereum, the second-largest cryptocurrency, introduced smart contracts, enabling the development of decentralized applications (DApps) and the creation of new digital assets. Ethereum is transitioning from a proof-of-work to a proof-of-stake consensus mechanism, supporting complex smart contracts and the ERC-20 token standard. It has been pivotal in fostering the growth of decentralized finance (DeFi), tokenized assets, and various DApps across industries.
Binance Coin, the native cryptocurrency of the Binance exchange, functions as a utility token within the Binance ecosystem. It offers benefits such as reduced trading fees and participation in token sales on the Binance Launchpad. Binance Coin operates on the Binance Chain and Binance Smart Chain, utilizing a combination of consensus mechanisms, including Byzantine Fault Tolerance (BFT). It primarily facilitates trading on the Binance exchange and accessing services within the Binance ecosystem.
Ripple's XRP focuses on efficient cross-border payments for financial institutions. It serves as a bridge currency on the RippleNet network, aiming to provide fast and low-cost international transactions. Ripple utilizes the Ripple Protocol Consensus Algorithm (RPCA) instead of traditional proof-of-work or proof-of-stake mechanisms. XRP has partnerships with numerous banks and financial institutions and seeks to improve the speed and cost-effectiveness of cross-border remittances.
Each cryptocurrency has its strengths, use cases, and risks. Market dominance, technology, adoption, and regulatory considerations influence their value and potential. Understanding these distinctions is crucial for informed decision-making regarding investing or utilizing different cryptocurrencies.