The past few weeks, the bitcoin price has reached new highs not seen in years. Many media outlets have touted the “hot” price of bitcoins and compared them to the price of gold. While comparing the two is a bit like comparing the prices of wheat with that of gold, one would be hard pressed to make a case that the latter has more intrinsic value. However, this doesn’t stop people from investing in the digital currency, even if they are holding short positions on the asset.
The reason that investors have flocked to the cryptosystems like ether and bitcoins is the same reason that investors flock to other stocks, commodities and mutual funds – the intrinsic value. There is no way that anyone can really pinpoint an objective value for any of the currencies or commodities that are traded on the world wide web. However, it is possible to determine what drives the price of a particular piece of virtual real estate on the world wide web, especially in the context of how the marketplace operates presently.
One of the things that drives the valuation of the currencies and commodities that are traded on the internet is the number of traders that are involved in the market. The larger the number of traders, the higher the amount of demand and the greater the potential for profit. When the number of traders reduces, the number of traders who are looking to buy or sell coins will decrease, resulting in lower values. This is basically what happens to the value of bitcoins and ether when they decrease in price: traders will stop trading in the marketplace until there are fewer participants, and consequently there will be less demand.
In order to understand how the market works when one speaks of ether and bitcoin, it is first necessary to understand what the cryptographic currencies are. cryptography is a field that deals with the security of data and communications. Decryption occurs only after the data has been passed through various encryptions that are intended to render the information unreadable by others. This is how secure the decentralized system of cryptology is. There are several different protocols that are used to accomplish this, including BIPs (which stands for ‘bits of data’, ‘bits of code’, and ‘bitters’), SSLs (secure socket layer), and VPNs (virtual private network).
There are several distinct features that distinguish these currencies from one another, both in regard to how they work and in regard to how the market sees them. First, there is the problem of potential security breaches in the underlying infrastructure. While there has been some bad press regarding cyber thefts from certain bitcoin providers, the decentralized nature of the bitcoin network ensures that there is always a way to secure the backbone of the system: the bitcoin miners.
Second, the relative lack of government regulation gives bitcoins and other currencies an edge over traditional financial institutions. While governments all over the world have debated about how to get more control over digital currencies, the bitcoin system has remained largely free of governmental intervention throughout the years. There are no rules dictating how the new bitcoins should be minted and no rule preventing individuals from being able to withdraw their holdings from the network. Because no physical assets are involved, there is very little that an institution can do to get the average citizen to switch their bitcoins over to a traditional financial instrument.
Finally, the relative freedom that comes with having a decentralized network allows the average person to become a self-governing authority in his or her own virtual currency. Governments cannot force people to use their national currency, as well as corporations cannot jail individuals for using their coins. By having the ability to develop a new that they control, individuals are given a way to be self-employed, making them the ultimate rulers over their own chains of currency. There is not a central governing body that controls the bitcoin protocol, so there is no way that the government can come in and try to change the makeup of the chain.
All in all, the trend lines in the cloud represent a historic low in the number of traders that are currently involved in the cryptosphere. This means that investors will not have as much influence on the state of the marketplace as they would have during the height of the Internet bubble, or even during the period just prior to the bursting of the bubble. While it is still too soon to tell how the prices for the four most prominent currencies will evolve, it is clear that investors are diversifying their assets by choosing the most risk-resistant forms of investment. In the end, the rise of the cryptocurrency ethereal will continue to set the trends for future cloud computing, and the U.S. dollar will once again find itself relegated to playing the role of the world’s currency.