Bitcoin: the best performing currency of 2016 (and a little on Mr. Robot!)

Bitcoin is now worth over $1000 USD, a three year high and it actually outperformed all real currencies over 20016, literally doubling in value. As a cryptocurrency, it could seem a little strange to some how a currency that doesn't actually exist outside of the digital world can perform better than currencies such as the Chinese yuan, the Russian ruble, although it might not be a surprise that it performed better than any currencies called the 'pound' in 2016 (think of the British and Egyptian pounds!).

Image source: Bit4coin

This excerpt from the WSJ explains bitcoin well,

"...it is a digital currency, maintained by a software program that is run on a decentralized network of computers by the so-called “miners” (for a variety of reasons, the largest miners today are all located in China). No one person or entity controls the currency. Every transaction is recorded in a publicly viewable ledger, although user accounts are encrypted. It was conceived as a digital equivalent of cash, and an alternative to the existing currency/banking system."

So why the recent success? Could it be the popularity of Mr. Robot and the increasing reliance on cryptocurrencies in the show? As society (in the show) becomes more dystopian with the people having less trust in the government and corporations, cryptocurrencies become the main medium of exchange with characters scanning QR codes to send cryptocurrency to pay for taxis and even to pay for the services of a dog cremation oven to destroy a body!

Whilst I am sure the show is not the reason for the boost in value, it is cutting edge and does have many parallels with the real world, such as the rise of 'Hacktivism', the breakdown of society and the growing distaste for the corporate world. It has been pretty good at predicting headlines and  even the writers think it's weird that things in the show keep coming true!

However, the most likely causes for the rising value of Bitcoin are:

1. The devaluation of the yuan
2. Global uncertainty in the political climate
3. A general rise in investors seeking to move into the asset class after the knock on effects in the world of politics and the impact on common financial assets like currencies, stocks, commodities etc. 
4. Finally, an effective reduction in the supply of Bitcoin through changes in the rewards for its 'mining' process will have provided upward pressure on its value.

In terms of the yuan's value falling (mostly intentionally), this this will be a double impact on Bitcoin... initially, the devaluation obviously reduces its value against Bitcoin, as well as the USD, but also speculators, mostly Chinese holders of yuan, will sell the yuan on news and it seems significant amounts of yuan were used to buy Bitcoin. This article explains this well.

The geopolitical climate has been shaken in 2016 with zero interest rates, Brexit and Trump's election. The uncertainty these events provided in stock markets led to more interest in alternative assets, which Bitcoin is of course...it seems those 'in the know' saw this a something likely to happen. All this, combined with the effective 'network effect' of increased volumes and participants means that the likelihood is that the value of Bitcoin will continue to rise.