The Unlikely Rise of Cryptocurrency

[This post was written by Chris Crisanti, an analyst at 3Points.]

At 3Points, we specialize in the fintech industry, and over the past several years, it’s been hard to ignore the increasing popularity of one of fintech’s more recent phenomenons: cryptocurrency. Cryptocurrency — and its most prominent example, bitcoin — is still a mystifying term for many, so I wanted to write a short primer articulating its potential and risks.

In December 2016, Saxo Bank predicted in its annual report that the value of bitcoin would hit a record high of $2,000 per share in 2017. Their predictions were regarded as “outrageous” and highly optimistic.

Fast forward to eight months later and that prediction has not only been proven possible, but has exceeded expectations, as bitcoin hit a record high of $4,800 per share on September 1st. What’s more, bitcoin competitor Ethereum went from hovering around $10 a share in January 2017 to trading at a record high of $400 a share in early September.

The emergence of cryptocurrency has perplexed and intrigued many investors, banks, and tech-savvy connoisseurs, both because of its high volatility and its potential to usher in a new digital currency, as cash is already becoming more underutilized in the 21st century economy.

Unlike the U.S. dollar, the value of cryptocurrency is not determined by the exchange rate, but by utility or adoption by merchants and other users. This means that its value will rely on people buying into the new concept — not only buying bitcoins, but mining (the process by which transactions are verified and cryptocurrency is created) them as well. For this reason, it took time for its value to rise over its last seven years of life.

Bitcoin’s seemingly gradual growth has yielded a rocky, yet highly notable, performance in 2017. At one point last year, a single bitcoin was valued at $570. In the beginning of 2017, bitcoin stocks hovered around $1,000 until clearing a record high of $2,000 in early June, before dipping back below the $2,000 mark and then hitting its record high towards the end of the summer. Some analysts are projecting that the currency will be valued at $7,500 next year and eventually rise to $100,000 in ten years.

The case is the same for Ethereum. At one point in July 2017, the cryptocurrency lost nearly $18 billion in market value in four weeks. Further, there was also a point where the stock briefly crashed from $319 to 10 cents a share in a matter of seconds. Now it’s surpassing valuation records itself.

Bitcoin’s growth in value since July

Source: MarketWatch

While current cryptocurrency stocks are operating at peak performance, the future value of such currencies remains highly uncertain. Some analysts are projecting growth, while others have asserted the currencies are doomed to crash. For example, MarketWatch recently reported on a high correlation between price fluctuation of bitcoin and the Google search activity for the term “bitcoin,” suggesting the possibility of a bubble.

One of the biggest concerns is the future utilization of such a currency and creation of a new monetary system. Like the U.S. dollar, the value of cryptocurrency will ultimately depend on people’s trust of and access to the currency. The value of currency, after all, lies in its utility.

The emergence of new, self-regulated blockchain technologies also presents many questions about government’s role in the monetary system. This notion perhaps led Jamie Dimon, CEO of JP Morgan Chase, to speculate that bitcoin is a “fraud,” because of the many questions cryptocurrencies elicit when it comes to state oversight and regulation.

Whatever cryptocurrency’s fate, the phenomenon will continue to remain in the public conversation. For example, Fortune recently announced the launch of their new franchise called The Ledger, which will cover fintech-related content. At the center of coverage are cryptocurrencies and blockchain technologies.

If you’re like us and interested in both finance and technology, cryptocurrency is very much worth keeping an eye on. While such currencies contain high volatility, with high risk also comes high reward. Upon researching the concept and blockchain potential, I took a risk by investing in one bitcoin when its value was roughly $2,600. So far, that risk seems to be paying off, yet I remain highly cautious, given that the concept of cryptocurrency could tank as quickly as its value has risen. Regardless, I’m excited to continue monitoring my investment and seeing where cryptocurrencies go next.

Interested in talking more about cryptocurrency and its place in the markets? Feel free to reach out at chris@3ptscomm.com.