Bitcoin Jumps Above $1000 Then Plunges Down Again

Bitcoin was getting very popular as a cryptocurrency in China after the recent poor performance of Chinese Yuan (CNY). Fears of capital controls and Yuan devaluing more in the future were the driving force behind this recent rise in the price of Bitcoin. Last year Bitcoin price increased by 137%. Majority of this boost came after Donald Trump won the US Presidential Elections. Analysts are of the view though that this temporary jump above $1000 is of no consequence. If you are not sure how bitcoins work, you can read this post first.

This happened in the first week of January 2017. Just when bitcoin price jumped above $1000 once again after 3 years, Chinese Central Bank started cracking on Chinese exchanges trading in this cryptocurrency on an attempt to stop illegal flow of money out of China and stop money laundering. Bitcoin is now trading above $700. No matter how high bitcoin rises there are some structural flaws in the design of this cryptocurrency that need to be solved. But before we discuss the design flaws, it would be of interest for you to know who invented this cryptocurrency. Till today it is hotly been debated who is the real inventor of this cryptocurrency. Bitcoins were invented by an unknown Japanese Satoshi Nakamoto. He created the first blockchain ledger around 2008-2009. For many years nobody knew who this Satoshi Nakamoto was. He just vanished like James Bond 007 after minting the first bitcoins. People have tried to follow his trail. But no one could find him. No one knew who this person was.

Last year an Aussie computer scientists made a claim that he was the real inventor of Bitcoins. This started a major controversy in the financial media. There were a lot of articles written in the financial media that supported and disputed his claim. Most of the analysts were not convinced by the claim made by Aussie entrepreneur Dr. Craig Wright. The most important point was Satoshi Nakamoto is supposed to own 1 million bitcoin. Dr. Craig Wright failed to produce evidence that he owns 1 million bitcoins. If he owns 1 million bitcoins, it means his net worth should be around $1 billion if bitcoin price is $1000. Currently there are 15 million bitcoins in circulation in the market. The first fatal design flaw is only 21 million bitcoins can ever be minted. Right now almost more than 65% of the bitcoins have been minted and by 2025 we will have 21 million bitcoins in circulations.

Once you have a fixed quantity of bitcoins in circulations, it means people would use them for speculation more than for making payment. People will try to hoard bitcoins with the thinking that limited quantity of bitcoins will make them more valuable in the near future. So bitcoin is more of a speculative asset than a means of payment. This explains its high volatility. Bitcoins saw a meteoric rise in 2013. Bitcoin was trading at $13 in the start of 2013. Then it rose to almost $1,200 by November 2013 making a number of early enthusiasts rich big time. Just when Bitcoin reached  near $1200, a number of hacking scandals at Bitcoin Exchanges plunged it down. Its price fell down below $700. Then the price fell to around $400.

This did not stop  bitcoin making a place at World Economic Forum . However as said above, bitcoin is facing a number of structural problem that are hindering it growth. The most important is a fixed number of bitcoins can be minted. The second structural problem is that bitcoins can be easily hacked. Mt. Gox was one of the biggest online bitcoin exchanges with more than 70% of the market share. In February 2014, it announced that 850K bitcoins owned by the company and the clients have been stolen by hackers. This caused bitcoin prices to plunge. So if you own a large quantity of bitcoins, you should be very careful with the passwords. If someone steals the bitcoin wallet passwords, you will lose the ownership of the bitcoins. Another major structural flaw is that right now only 7 bitcoins can be transacted per second which is minuscule compared to the thousands of transactions that Visa can handle per second. This is one of the most major design flaws. It cannot be solved easily. The only solution is to increase the block size limit. This can only be done by redesigning the bitcoin protocols. But this is not easy.