CaptainTreeYak29
CASE 4 BLOCKCHAIN AND BITCOIN Bitcoin has been in the…
CASE 4
BLOCKCHAIN AND BITCOIN
Bitcoin has been in the headlines for a few years now. Depending on your perspective, it may
appear to be the symbol of a brave new world, rewarding the bold who embrace innovation. Or
maybe you perceive Bitcoin as a classic bubble that rivals some of the greatest boom and busts in
history, such as the “Tulip Mania.” Never heard of it? About 400 years ago, a speculative bubble
swept through the Netherlands when tulip bulbs became a highly sought-after commodity. In
1636, they were being sold on stock exchanges with people trading fortunes to acquire rare tulip
bulbs. Seems silly, right? How can a flower be worth as much as a house? Well, ask yourself, if
the Bitcoin bubble truly bursts, what exactly do you own? According to economist and Nobel
laureate Eric Maskin: “Bitcoin has a fundamental value of $0.” At least you can hold a flower
and enjoy its appearance and smell. All kidding aside, that tulip bubble ended in 1637. When
those prices collapsed, realization quickly set in, and the panic to sell those once-valued tulips
took over. As a result, some cashed out early and made fortunes, but many others lost everything.
The vehicle is different today and comes with the promise of technology backed by a revolution
called blockchain, but human nature has not changed. How will this story end?
Some people have already made great gains, whereas others have lost heavily, but the question
remains: What is the future of these cryptocurrencies? Do they represent a revolutionary change,
or are they just a simple footnote in history? Regardless of where you stand on this debate, one
thin is clear: Bitcoin and other cryptocurrencies are very speculative, high-risk, and high-reward
trading options (at least for now). Let’s look at the cryptocurrency boom. We will start by trying
to understand the technology (blockchain) that makes it possible. We will also evaluate the
trading history of bitcoin to help determine where we might go from here.
What is Blockchain?
The technology behind Bitcoin may be far more valuable than the cryptocurrencies that were
born form it. According to a definition by the BDC, “Blockchain is a continuously updated
digital record of who holds what. Information about transactions (time, date, amount,
participants) is held and encrypted into a “block” linked to other blocks to form a chain.” Wired
magazine refers to blockchain as a “super-secure, hard-to-understand, tamperproof database.” In
the Bitcoin example, blockchain is a decentralized ledger where identical entries are stored
simultaneously on more than 200,000 computers. Therefore, every node in the network records
each crypto transaction instantly.
All participants have access to encrypted information, which increases transparency and permits
constant reconciliation. The fact that this capability exists on many computers around the world
means that there is no centralized computer that hackers can break into. Blockchain is not solely
for currencies. A wide variety of companies, such as Unilever, the World Wildlife Fund,
Volkswagon, and Maersk (the shipping company), are already investing heavily in its
development for their own applications. In short, blockchain is a vehicle enabling efficient
decentralized transactions, verification, and tracking.
Bitcoin
The Bitcoin ride would rival any roller coaster; it is full of twists and turns. It has seen
tremendous highs followed quickly by deep lows. By tracking the monthly highs for Bitcoin over
a three-year period (during the month of December), we see that it peaked at US $467.71 in
2015, at US $982.57 in 2016, and at US $19,870.62 in 2017. It points to nothing but success. IN
fact, it stood at $64,829.14 in mid-April 2021. In isolation, this trend is totally unbelievable.
Anyone who invested early and sold out on that peak day made a fortune! But that does not tell
the full story. Any investment that sees such tremendous quick growth inevitably has an equal
amount of volatility. Those quick increases have equivalent stories of losses. For example,
anyone who purchased in the April 2021 peak had lost half their investment by June 8th, 2021,
when the price stood at $33,638. Just as those who invested in Bitcoin as its 2019 peak (in
December of that year) lost two-thirds of their money by July 5th, 2018, when it stood at
$6,691.32. In other words, for every dollar invested, they were left with about 34 cents.
However, those who stuck it out and did not sell were richly rewards, and they were also trained
to expect that pattern to always repeat itself over and over. As of 2021, they were right, but
history shows us dangerous results from having blind faith based on previous recent reinforcing
patterns.
Social Media, Ransomware, and Government
There are major external threats to the entire category that cannot be ignored. Social media has
been a huge part of the rise of the currency. One of the biggest promoters is Elon Musk of
SpaceX and Tesla fame. Normally a currency moves when the head of the Bank of Canada or
another national central bank figure speaks (and they are very careful to speak in measured terms
to avoid panic). But we saw two recent examples of how Bitcoin and crypto value can be severly
damaged by the words of an entrepreneur that has a vested interest (conflict, one might say).
When Elon Musk called Dogecoin (another cryptocurrency) “a hustle” while appearing on
Saturday Night Life, the currency lost 36% of its pre-show value within hours! Also in 2021, in a
moment of sudden revelation, Elon Musk tweeted his newfound concerns about the
environmental impact of Bitcoin and said Tesla would no longer accept it as payment. The
result? You guessed it! Bitcoin’s value dropped by $365.85 billion in just a few hours. Was this
manipulation for personal gain? Or was it a sudden realization? Either way, it is a warning sign
of the level of risk if one man can do so much damage so quickly.
In 2021, the real dark side of cryptocurrencies was also in the spotlight. The anonymous nature
of Bitcoin is one of its appeals. However, it is also ideal for criminals, drug dealers, terrorist
organizations, and ransomware computer hackers. In 2021, hackers broke into Colonial Pipeline
Co. systems and held the company ransom. This attack led to major gas supply shortages in the
United States, and the company eventually paid a ransom to these hackers. What was interesting
is that the U.S. Department of Justice managed to track and get back most of the Bitcoin from
these criminals. This hurt the image of Bitcoin as anonymous and untraceable. The market
reaction was also interesting. Rather than praise the recovery of funds form the criminals, the
price of Bitcoin dropped sharply!
Hackers and criminals aside, there are growing pressures to do something about either further
legitimizing the crypto world or finding a way to control it in some manner. These hacker cases
were putting more pressure on governments to act.
Conclusion
El Salvador made news in June 2021 by officially accepting Bitcoin as legal tender (thus adding
some legitimacy). However, at the same time China was arresting 1,000 people for using profits
from crimes to buy cryptocurrencies. A month earlier Bitcoin fell by 30% when China warned its
financial institutions against crypto-related services. In Europe, the Basel Committee (an
international financial organization) was suggesting harsh measures to stop European banks from
getting involved in crypto. Yet simultaneously many central banks were flirting with their own
digital currencies.
As you can see, this is a very complex issue! Of course, there are no guarantees of the future
direction of Bitcoin prices. There are lessons and warnings from the past that we can look at or
choose to ignore. Bitcoin bulls continue to pump up the market and are predicting an endless
meteoric rise. Critics point to a collapse on the horizon. Many finance experts are predicting the
demise of Bitcoin as a modern-day reminder of the tulip mania. Regardless of which side is right,
this is one of the most volatile investments in the modern age, so it is up to every investor to
beware!
QUESTIONS
1) What is the current price of Bitcoin? How volatile has the price been? How does the future
look for Bitcoin now?
2) Evaluating any potential investment required an understanding of the risk-reward relationship.
Do you believe that the average investor in Bitcoin fully understands both ends of this
relationship? Explain your answer.
3) “People who invest in Bitcoin are simply investing in momentum and nothing else; therefore,
this is bubble that will burst once and for all.” Agree or disagree?
Note: The answer should not be more than 250 words for each question.
