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What to consider before buying bitcoin

Bitcoin hit a new high of over AU$13,000 in November 2017.

However, it's a notoriously volatile currency, and it’s difficult to know what bitcoin will be worth even a week from now, let alone a year from now. To have a shot at predicting the price you need to know how the cryptocurrency is bought and sold, and what factors affect the price of bitcoin.

However, there might be two factors to consider above all others.

First, only 21 million bitcoin will ever be created. Throughout 2017, the number of bitcoin in circulation increased from about 16 million to 17 million, but it will slow down as it gets closer to the 21 million limit. The final bitcoin isn't due to be mined until the year 2140.

This finite supply and its popularity increasing more quickly than its availability is thought to keep prices increasing.

Second, it's important to remember that bitcoin is now just one cryptocurrency among hundreds. Although it's the most valuable, bitcoin's overall cryptocurrency "market share" is declining. Competing cryptocurrencies can offer some features that bitcoin can't, and many people think another currency will eventually overtake bitcoin.

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Many bitcoin proponents speculate that its limited supply will only increase the value of the cryptocurrency in the long run and is its greatest strength. But critics say that this will be its undoing.

They point out that inherent scarcity is a useful way of controlling value, but might be too impractical for bitcoin to ever become the standard global currency.

To judge for yourself whether it's worth buying bitcoin, you may want to look at the history of its ups and downs to better understand the factors affecting its value.

Bitcoin volatility explained

Bitcoin value can change a lot very quickly and has a history of sharp ups and downs.

Here are a few things that could affect the price of bitcoin:

• Government regulation. Although bitcoin is a decentralised currency, it’s still affected by government regulation. For example, when the Chinese government barred financial entities from processing bitcoin transactions in late 2013, the price of bitcoin dropped hundreds of dollars within a few days.
• The headlines. The price of bitcoin tends to move with major world news and important bitcoin-related events (like security breaches). However, many people speculate that news doesn’t necessarily affect the price one way or another; instead, it simply focuses attention on bitcoin and may increase trading volume.
• Major buyers. Large organisations and speculators have a significant effect on the price of bitcoin, and some experts estimate that of bitcoin’s approximately $160 billion market, a majority of coins might be owned by relatively few organisations and individuals.

A short history of bitcoin prices

The very first bitcoin transaction took place on January 12, 2009, from creator Satoshi Nakamoto to developer Hal Finney. On October 5, online publication New Liberty Standard pegged the bitcoin exchange rate at 1 USD = 1,309.03 BTC — a calculation based on the cost of electricity for a computer to create bitcoin.

July 2010 saw the founding of Mt. Gox, a bitcoin exchange that would eventually grow into the largest player in the market. We’ll start our bitcoin price history in 2011, using figures from CoinDesk’s price index.

Note: Unless otherwise stated, all prices in this article refer to BTC:USD exchange rates.

2011: A false start for bitcoin

Early in the year, one bitcoin finally became worth as much as one US dollar. In just a few months, the price of bitcoin shot past the $10 mark.

But on June 19 Mt. Gox was hacked, causing customers to lose more than 4,000 BTC. Bitcoin’s value hovered around $30 for several days and began a slow descent to around $4 by the end of the year.

2012: Bitcoin rises steadily

Bitcoin experienced a recovery in 2012. The cryptocurrency didn’t hit the same heights it did the previous year, but it climbed back into the double digits by the end of the year.

June saw the founding of Coinbase, which is one of the largest bitcoin platforms today. In November, the publishing tool WordPress began accepting bitcoin as payment.

2013: Bitcoin shoots into the stratosphere

In February, bitcoin surpassed its previous all-time high and then abandoned the $30 range as it continued growing in value.

At the same time, Mt. Gox was failing as bitcoin transactions overwhelmed its servers. In the same month bitcoin broke the $200 mark. Less than a month after that, it shot past $1,000.

Chinese investment in bitcoin pushed the price of the cryptocurrency even higher. But December also saw the largest theft of bitcoin ever of 96,000 BTC from Sheep Marketplace. This was also the year that China banned its financial institutions from processing bitcoin transactions.

2014: A rough year

Bitcoin’s price euphoria came to an abrupt end, and the cryptocurrency steadily lost value over a year. Mt. Gox finally shuttered its doors. However, Microsoft and PayPal-owned Braintree started accepting bitcoin as payment.

2015: Bitcoin holds steady

In late January, Coinbase launched its bitcoin trading platform, while Mt. Gox’s CEO Mark Karpeles was arrested.

But the European Court of Justice ruled that bitcoin is currency, not property, and that the cryptocurrency would not be assessed a value-added tax in the European Union. Bitcoin’s price broke the $400 mark toward the end of the year.

2016: Back in form

The marketplace software OpenBazaar was released over the summer. It’s a peer-to-peer platform on which users can buy goods with bitcoin. Bitcoin’s price, in recovery mode at the beginning of the year, approached its former glory as it hovered around $1,000.

2017: A wild year

Bitcoin reached a new peak early in the year at over $1,100 on January 4, then promptly plummeted below $800 a week later. It would repeat this pattern throughout the year, including hitting multiple all-time highs on 1 September 2017 before dropping by an immense 20% in the next three days.

This sudden drop may have been the result of traders taking advantage of the peak to sell off their bitcoin.

A month later it broke US$5,000 in another all time high. And two months after that it had almost doubled to over AU$12,000.

Then on 29 November it broke US$10,000 (AU$13,200).

As you can see, a lot can happen in a very short time.