by Alex Lightman and David Lightman. February 19, 2018
Let’s talk first about the mothership – the invention that created the whole crypto space and the Internet of Tokens – Bitcoin. After a brief six-month period in 2013 where it shot up from $50 to $1200 in a few weeks and got a huge spike of public interest – Mt. Gox, the major exchange, was shut down disappearing with 100s of millions of dollars’ worth of their customer’s money. The Bitcoin price then proceeded to crash for a year or two. Most of the public felt Bitcoin had died, and even diehards started to lose faith when Bitcoin slowly dropped down to a low of around $200 and went nowhere.
The silver lining of this crash was that the building political will to make Bitcoin illegal – which was certainly still a concern in 2013, with Charlie Shrem’s arrest and Bitcoin’s association with the Silk Road, faded away with Bitcoin’s apparent death.
This time period was also greatly needed for Bitcoin to grow out of amateur hour,and start to have serious well-funded companies like Coinbase providing some much needed safety and reliability.
Then an amazing thing happened. Banks fell in love with “blockchain”. The core feature of blockchain is for a group of participants to form a shared write-only agreement of “truth” among themselves, with no need for a single central party to maintain the records. For banks this meant eliminating an annoying hierarchy of middlemen that dramatically slowed processes like sending funds overseas.
So we had a situation where Bitcoin was thought dead – but banks were pouring millions into projects experimenting with Bitcoin’s technology.
The idea of a shared agreement or truth is incredibly powerful and has nearly unlimited applications.
Here’s one example: Imagine an energy grid where energy producers – even the solar panels on your roof – announce to the world that they will have 10 kwh of excess energy available for a 5 minute period – and an instantaneous auction occurs among other power consumers who need the power, automatically agreeing on a price and sending the power, through a chain of power exchangers, all of whom make a tiny profit on the exchange. All done with micropayments and renegotiated every few minutes. This would form a completely decentralized and automatically load balancing grid. IOTA is the first crypto-currency that seriously addresses this kind of potential application and it’s skyrocketing.
But back to Bitcoin’s history.
In 2015 the price of Bitcoin was starting to creep back up but, was heavily weighed down by sales from mining. The nature of mining is that most of the coins minded daily must be sold for national currency (dollars, euros, etc) simply to pay for the electricity used. At the time this meant that several million dollars’ worth of coins were sold on the exchanges every single day. The demand from new users buying in for the first time was simply too small to counteract this regular dumping of bitcoins depressing the price so it tread water for many months.
However in July 2016 Bitcoin had its second “halving”. This is where the reward for mining drops in half, in this case from 25 bitcoins every 10 minutes to 12.5 bitcoins. This reduction in the downward pressure on the price had the effect of allowing demand to exceed mining again as the coin rapidly started climbing from about 450. Since investment interest in Bitcoin is greatly increased as the price rises, we saw a buildup in momentum through the rest of 2016, to where Bitcoin hit 1000 around January 1st – setting the stage for an incredible year.
In March it beat its all-time-high of $1200 from back in 2013 and the public began waking up to the fact that Bitcoin was still alive and kicking after all these years. This began a series of seemingly non-stop record breaking breaching 2000, 3000,4000, 5000 and so on. Each time a thousand-dollar record was hit it resulted in an ever larger wave of media attention with the mystified and clueless pundits mostly proclaiming it was a dangerous bubble – somewhere between beanie babies and tulip mania.
But bubble or not – lots of folks wanted to get some exposure to what appeared to be the greatest investment opportunity of our lifetimes – by far. While in the stock market folks are happy if they make a 15% or 20% annual return – bitcoin would typically exceed those returns in a month. The alt-coins were even more spectacular, with some of them up 10,000% in a few months.