What really caused the value of bitcoin to skyrocket back in April, when the price per BTC shot up to a record high of $266? Was it really because of Cypriot banking controls, where a number of uninsured accounts were lost? Or was it simply the idea that the banking industry could wield so much control over the finances of people that caused bitcoin to go up? Could it be that a wealth transfer effect, where people move from a fiat currency into bitcoin was happening, and continues to do so?
A historical look at prices
Entering the first part of March 2013, the price of bitcoin held in the $30 range. But that didn’t last long: volume caused the price level to move quickly into the $40 range, and it wasn’t long before it was close to $50.
Keep in mind when looking at the following chart that it was 16th March 2013 when it was announced that Cyprus was getting a $10 billion bailout from the International Monetary Fund and the European Central Bank. That day was a Saturday, traditionally a slow-moving day for bitcoin exchanges, but you can see the price broke through the $50 barrier during the beginning of the next week.
During this time, Bloomberg Businessweek published an article titled “Fleeing the Euro for Bitcoins”. In it, the author suggested that bitcoin was like an app for avoiding the banking system. Many investors read this and likely considered the possibility of investing in bitcoins. Thus, a wealth transfer effect appeared to be taking place where money was being put into bitcoins.
In the time since, bitcoin has reached new levels of awareness. But that awareness has not been reflected in the price. In fact, the price of a bitcoin has stayed in a more stabilized price support level since the days of March and April.
That’s important to point out since it is volatility that many associate with bitcoin. The sentimental possibility that the price could rise and rise and then drop still exists in people’s minds, which generates a degree of skepticism for the currency in its long term outlook.
It’s entirely plausible that what we’re seeing is a slower version of a wealth transfer effect into bitcoins. The network has an interesting supply-side element to it, as there are early investors and miners who are frequently selling bitcoins.
And there are investors who believe in it more soundly as time goes by. Investor and entrepreneur Roger Ver shared this sentiment with CoinDesk at the Bitcoin 2013 conference in May. When asked about the possible risks in the technical stability of the Bitcoin network, he said that, as time goes by, the threat of such a scenario fades. “There is a risk of that,” Ver acknowledged. “But as every day goes by that there hasn’t been a major catastrophe, [the risks] are lower and lower.”