When bitcoin was trading at the dizzying heights of almost US $ 20,000 (£ 15,360) in December 2017, it was the peak of the previous bull run in cryptocurrencies. It was a classic bubble, in keeping with the work on such phenomena by American financial economist Hyman Minsky, and arguably investors should have seen it coming. It wasn’t until late 2018 that Bitcoin finally bottomed out at just over $ 3,000, although for many the “crypto winter” lasted for much of 2019 as well.
After several ups and downs, the bull market seems to be back. Since the turn of the year, bitcoin has risen from just over $ 7,000 to a low of $ 10,000. Few asset classes can boast a rise of around 40% in six weeks, although bitcoin enthusiasts like to point out that bitcoin is the best performing asset of the last decade, however bumpy the road may be.
With that said, Bitcoin is certainly not the place where you would have made the most money if you had bought cryptocurrencies in early January. There have been even bigger price gains from major altcoins such as ethereum (+ 119%), ripple (+ 58%), bitcoin cash (+ 109%), and bitcoin SV (+ 222%). So what explains its superior performance?
These four altcoins are the largest cryptocurrencies on the market after bitcoin, representing an aggregate market capitalization of $ 51 billion (the value of each coin multiplied by the number of coins on the market). This is still quite small compared to Bitcoin’s $ 178 billion market cap, but clearly the gap has been narrowing.
Much of the popularity and security benefits of cryptocurrencies come from their innovative technological innovation.
Explanation of blockchain technology
Blockchain technology is the basis of Bitcoin and many other cryptocurrencies. It is based on a public ledger which is continually updated to record all transactions that take place. Blockchain is innovative because it allows transactions to be processed without a central authority, such as a bank, government or payment company. The buyer and seller interact directly with each other, eliminating the need for verification by a trusted third-party intermediary. In this way, it eliminates costly intermediaries and allows companies and services to be decentralized.
Another distinguishing feature of blockchain technology is its accessibility for the parties involved. It is similar to Google Docs, where multiple parties can access the ledger at the same time, in real time. Today, if you write a check to a friend, you and your friend pay off your respective checkbooks when it’s deposited. But things start to go wrong if your friend forgets to update her checkbook or if she doesn’t have enough in her bank account to cover the check (which the bank has no way of knowing in advance).
With blockchain, you and your friend would see the same transaction log. Neither controls the ledger, but it works by consensus, so both must approve and verify the transaction for it to be added to the chain. The chain is also protected with encryption and, significantly, no one can change the chain after the fact.