A Case of Bitcoin Price Volatility: Adoption, Smart Custody and Payment Technology
Bitcoin has struggled to maintain its gains and keep upward momentum over the last few months. Since the coin’s all-time high of $20,000 in December 2017, people have been expecting a bull market to happen at any moment now. Despite this market optimism, there are a few few reasons for why bitcoin’s price may not reach these levels in the next few years.
A case of bitcoin’s volatility
Bitcoin is known for its volatility and wild price swings. The coin vastly increasing in price and then sharply dropping off was common for bitcoin, and it’s still common today.
Bitcoin reached a peak of $20,000 when its was near the end of 2017, and it started to come back down to normal levels. The price decreased after that before reaching a point of $4,000.
Price returns to $10,000
Since reaching the $4,000 bottom, bitcoin started ascending back up to retrace some of its lost ground. The coin moved up from $7,000 to $11,000 for most of 2019. For being people’s favorite cryptocurrency, there is a large amount of skepticism that surrounds it which may inhibit its growth for the future.
There has been a lot of speculation regarding large-scale (institutional) investors entering the space of bitcoin and blockchain, which would give it some much-needed security and legitimize it as a form of payment.
The bad new, however, is that they have been on the fence for years, although that appears to be slowing changing with things such as bitcoin futures contracts derivatives that has opened crypto up to mainstream investors. Not all projects were successful, such as the Bakkt platform that was due to attract more investors than it actually did.
There are two reasons for why institutions remain on the sidelines. First, bitcoin has only been around for ten years, and its technology is still misunderstood from most. This uncertainty means that nobody can predict the future of bitcoin. The second reason is that the market could disappear, which would lead to bitcoin being one of history’s many failed experiments.
The other problem that large-scale investors have with bitcoin is the issue of custody, or the legal framework that determines if a platform is legally entitled to hold customers funds. In the current landscape, assets are insured and backed by either governments or banks and large firms. These firms often have insurance and are assured that their assets are protected from hacks and thefts. These protections are not afforded to cryptocurrencies.
Individual investors and large investors have vastly different security needs. For instance, an individual might be content with a hardware wallet and backups, but this is not adequate for a large institution overseeing millions of dollars in cryptocurrencies. Different measures are needed to ensure that those assets are protected.
Due to the need for large-scale security solutions, services such as Coinbase custody have opened their doors that have caught on by many other businesses. Coinbase was successful in holding millions of dollars worth of customer funds each week, but there is still a problem for custody for large-scale investors.
Layer Two Technology
Bitcoin is impeded by its confidence in layer two technologies to scale the network. Layer two technologies include things like the Lightning Network and the Blockstream Liquid network. These things happen off-chain, and therefore give the primary blockchain more room the breathe. The downside to these inventions is that they simply haven’t caught on since their inception eighteen months ago.
The lightning network, for instance, has stagnated in growth. Its number of nodes have barely increased since April this year, sitting at just under six thousand nodes.
There are other metrics for bitcoin that also paint a negative picture for the cryptocurrency. For example, the number of channels for the network have dropped since april. Since it reached an ATH of 1,000 BTC, the network then dropped down to 818 BTC, which is where the currency rests today.
Without addressing the issue of scale for the network it’s therefore unlikely that bitcoin will ever be a viable competitor to the likes of Visa and other credit card companies.