Bitcoin’s market cap has surpassed $7 billion for the first time since September 2014. Many factors have contributed to bitcoin’s resurgence, but the hype over the $7 billion USD valuation fails to capture the whole picture. Bitcoin was worth about twice as much at the end of 2013, but it has been slow to recover since. There are some other factors that are not as obvious that must be taken into account in order to analyze the merits of that $7 billion USD mark.
There are mainly 2 ways in which bitcoin valuation can go up. Either demand for bitcoin is high relative to supply, therefore increasing the value of each coin, or more coins have come into circulation. A combination of both factors can bring even steeper market cap gains. Given that more bitcoin is constantly coming into the market – even if rewards are halved periodically – the price of bitcoin should be a stronger factor in determining market cap.
The Current Situation
With the next mining rewards halving in July, price should be going up, since overall supply of coins is set at 21 million and less of them should be coming online every time a halving happens. This means that bitcoin’s market cap is expected to rise further, due mainly to the system’s scarcity protocols. This means that even though there will be more coins are expected to come online until the year 2140, the rate at which they will come online is currently undershooting demand. This is supposed to keep prices rising overall in the short term.
Nevertheless, there are some medium to long term risks to bitcoin, that threaten to keep its market cap potential low relative to its almost $14 billion USD peak. More cryptocurrencies are coming online, with improved features. Apart from that, bitcoin is facing transaction challenges and other technical issues regarding block size that may affect its market cap in the future.
Bitcoin in Decline?
As much as the current increase in valuation is catching a lot of headlines, it is necessary to take the following into account:
- Valuation was much higher – almost twice as much – with less coins in circulation.
- The current bitcoin price of around $465 USD – at the time of publication – is less than half of what it got to at its peak, which was close to $1,200 USD.
- Bitcoin mining rewards are about to halve, but the cryptocurrency is not even close to its historic highs.
All this points to a decline. However, bitcoin has always been a high risk asset, with the capability of rising meteorically just to crash, slashing the value of the money bitcoin users hold. Arguably, if bitcoin finds some kind of stability that would indicate that there is enough maturity in the market to attract more investment. In the meantime analysts and investors that are looking at the bitcoin economy, should not only look at the increase in bitcoin price, but should also keep an eye on the context, including market cap and historic data.
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Major Events of Last Week
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There is no doubt that 2015 has been full of economic volatility. From the price of oil, to stocks, indices and the economic performance of key countries, it has been a year in which finding a safe haven was an almost impossible mission. From within all the volatility, is seems that one of the best performers was Bitcoin. However, it also dipped after a stark rise in October, but it seems to be picking up steam again towards the year’s end. Maybe it is a kind of ‘Santa Claus Rally’ for a strange mix of investors.
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