Why Are Cryptocurrency Users Flocking to Bitcoin?

The first digital currency, bitcoin, was invented in 2009 and released as open source software. According to blockchain.info the total number of “minted” bitcoins is 16,359,725. The current market price a bitcoin as of 5/30/17 is $2,287.99. That brings the bitcoin market cap to $37,430,887,202.75. Since the advent of bitcoin there have been more than seven hundred imitations. However, only a few dozen have market caps of more than $10,000,000. Meanwhile bitcoin is surging. Part of that is consolidation of the cryptocurrency market as users of other online currencies are flocking to bitcoin. Bloomberg discusses users leaving riskier digital currencies.

Bitcoin’s dramatic surge may be more than just a speculative frenzy. The recent rally is being driven partially by enthusiasts rotating out of riskier digital assets and into the more established cryptocurrency, according to industry executives.

“A lot of the volume into bitcoin right now is actually not dollar or yen or euro into bitcoin, but is rather alt digital assets,” said Peter Smith, co-founder and CEO of digital asset software platform Blockchain, at an industry conference Tuesday that brought in 2,700 people on the first day. “People do view a lot of these newer assets as more risky, and so when they make big gains there, they’re selling down those gains and rotating into bitcoin.”

Numerous alternative cryptocurrencies, or “altcoins” such as ripple, have emerged since bitcoin broke into public consciousness in 2013. Companies can sell new tokens through initial coin offerings, or ICOs. While the cost of one bitcoin has skyrocketed to more than $2,000 from just 8 cents in 2010, you can buy one litecoin for about $30.

And why else are people flocking to bitcoin? The Chinese stock market is no longer on an upward tear and many who made money speculating in the Shanghai and Shenzhen stock markets are looking to make a killing in bitcoin. Unfortunately, what goes up can come down. In that sense people may be smart to be getting out of more risky and volatile digital currencies but bitcoin itself is volatile. Fortune discusses how bitcoin just dropped 30%.

Since hitting a record high of over $2700 on Thursday, the digital currency Bitcoin has gone into a sharp correction, losing nearly 30% of its value in just two days, according to numbers from CoinMarketCap. A broad range of cryptocurrencies, including Ethereum, Ripple, Litecoin, Dash, and Monero also declined, in most cases dropping even more steeply.

Some analysts have described this as profit-taking, which would suggest the declines will level off. But technical analysts speaking to CNBC say the losses could go as deep as 46.5%, pushing Bitcoin down to $1,470.

How bad could it get for those holding bitcoins? The 2013 rise and 2014 fall of the bitcoin are reminiscent of the periodic rise and fall of gold bullion. In late 2013 bitcoins went from $130 each to $1,100 each in just two months. Then the price declined over the next year to $200 each. We compare bitcoins to gold in this instance because latecomers buy into the argument that normal currencies will become worthless. Then their speculation drives bitcoins (or gold) to excessive prices. At that point those who have traded for years see the opportunity for profits and cash out. Cryptocurrency users in riskier currencies were right to more assets into bitcoins. Unfortunately they should have moved one more time into a safe haven currency such as the yen, Swiss franc or US dollar. For more thoughts on the subject of bitcoins read our articles about how high speed traders conquer the bitcoin market and how not to lose your money to a bitcoin scammer.