The value of the digital currency bitcoin made an unprecedented leap last year. At the peak level in mid-December, the currency was worth around $ 20,000. However, the currency is subject to considerable price fluctuations.
By comparison, at the beginning of 2017, the crypto-coin was worth about $ 1,000. It is, therefore, a considerable increase. In the last weeks of last year, however, the currency lost 40 percent of its value. And in February 2018 the price dropped again to the level of November 2017.
Why does the price of the bitcoin rise or fall so fast, what can you do with it and what are the risks?
What is bitcoin and how does it work?
The bitcoin is one of an ever-growing number of cryptocurrencies. Such currencies only exist digitally and are issued through a decentralized system called the blockchain.
In 2008, the bitcoin was invented by Satoshi Nakamoto, the pseudonym of a still unknown programmer. With his system, computers around the world carry out calculations to solve cryptographic puzzles.
If that succeeds, some bitcoins will be released. This process is called mining and is nowadays mainly done by specially built supercomputers. They now consume more energy than the whole of Ireland.
There is a limit to the number of bitcoins that can be generated. Currently, about 80 percent of the maximum number of coins has already been generated. The 'mining' of new bitcoins is becoming increasingly difficult, as a result of which the absolute maximum number of 21 million bitcoins is probably only achieved in the next century.
Bitcoins can be stored and traded via special wallets. The ingenious thing about the blockchain is that there is not one central place where the 'accounting' is stored. Instead, that information is distributed over the entire network of computers with the bitcoins software. That special system makes it difficult to cheat with bitcoins because if hackers focus on one part of the network, for example, that should in principle not matter.
The blockchain system is nowadays not only used for digital currencies, but also for other applications such as 'smart contracts' and decentralized cloud storage. However, cryptocurrencies such as bitcoin remain the best-known application.
All transactions made with bitcoin are kept public. A special bitcoin address can be seen during a transaction. As a result, the currencies are relatively privacy-friendly because normal personal details are not released.
What can you do with bitcoins?
Although bitcoins are a hype, they are not particularly useful as 'normal' currencies. There is a fairly limited number of (web) shops where you can pay with bitcoins.
Bitcoins (and increasingly other cryptocurrencies) form an important part of so-called dark markets, where, for example, drugs and other illegal goods are traded. Because cryptocurrencies are less easy to trace than digital money that runs through banks, they are attractive to criminals.
Due to the sudden popularity of bitcoin, it takes quite a while to process a transaction. Depending on the transaction costs paid, this can vary from dozens of minutes to many hours.
At the end of November 2017, about € 5 in transaction costs were paid for the average payment. These costs are calculated by the miners to guide a transaction with priority through the network. The costs for a bitcoin transaction are currently a lot higher than those for an iDeal or Paypal payment.
The transaction costs of bitcoins may eventually be reduced if changes are made to the structure of the network. In the bitcoin community, there is a lot of discussion about changes that could make this possible, and these discussions have already led to different divisions with names like Bitcoin Cash and Bitcoin Gold.
Why does the price sometimes rise so fast?
The price of the bitcoin has increased twentyfold within a year. At the beginning of 2017, the coin was still worth about $ 1,000. Especially in recent weeks, it went fast. In mid-November 2017, the threshold of 8,000 dollars was reached for the first time, two weeks later the currency was worth 9,000 for the first time.
After a short correction, it went straight up again. In December 2017 the 20,000 border was first demolished. At the beginning of February 2018, the price fell again to $ 9,400.
It is difficult to point the finger at the exact cause, but it is plausible that the increase at the end of 2017 was heightened by the widespread attention given to the currency. News about the spectacular rise in value encourages people to invest more money in bitcoins.
The fact that it is becoming increasingly technically easier for consumers to buy the crypto-coin and that more and more companies from the traditional financial sector are focusing on the bitcoin is contributing to the increase in value.
Together, all bitcoins are worth more than 180 billion dollars. It is not uncommon for that total valuation to move up or down by 10 billion dollars or more in a day.
Price fluctuations
Since the coins are not directly linked to the value of a company, investors observe considerable price fluctuations.
Price fluctuations are not unusual for the bitcoin, but before the end of last year, the price drop was exceptional, according to Bloomberg.
The coin lost 40 percent of the value after the highlight. Also, the coins such as ethereum, bitcoin cash, and litecoin all decreased by at least 25 percent.
A precise reason for the sharp drop in the price cannot be given. Bloomberg thinks that the advance of derivatives of the crypto-coin may have something to do with it. But it may also be that investors are making some profit because of the recent increases.
Sometimes the cause of these fluctuations lies with technology. At the beginning of 2014, the bitcoin, for example, made a sharp drop in the price due to a technical problem at the popular switch site Mt. Gox.
News on possible bans or regulation of the trade in cryptocurrencies may also cause the price to fall.
What are the risks?
Opponents warn that the coin is a bubble that can burst at any time. There is no tangible value behind it.
Cryptocurrency is a risky investment, the Netherlands Authority for the Financial Markets argued last year. The regulator is afraid that a so-called bubble will occur. De Nederlandsche Bank (DNB) also warned against the risks.
Earlier, US regulators also warned against the currency. It is possible that "vulnerabilities in the trading system around these currencies only come to light after they have been put into circulation in large quantities," the Financial Stability Oversight Council reported.
An additional risk is that bitcoin pouches are sometimes hacked. In the past, the equivalent of tens of millions of euros to bitcoins has been stolen by major hacks.
Many bitcoins owners, therefore, store their coins 'offline', where hackers cannot come. This can be done, for example, on a special USB stick or hard drive. That, however, is not without risk: whoever loses such a disk - or the password needed to access it - can no longer access his bitcoins.
Informers warn for a new bubble around bitcoins, and ethereum See also: When investing in cryptocurrency, the price can suddenly go down considerably
Will the bitcoin replace our banks or cash?
This is unlikely with the current value fluctuations. Central banks strive for stability in the financial system, and cryptocurrencies do not provide security with fluctuations of more than 10 percent.
Also, it is more difficult for central banks to intervene with the traditional instruments when people get into trouble because of a lower price.
A strongly fluctuating currency may also have a negative effect on the consumer. When salaries have to be paid out, or debt is contracted, a drastic change in value can have an adverse effect. Virtual currencies are therefore unsuitable as a replacement for regular currencies.