Bitcoin trades near all-time highs as it broke and held above $18k last week. From here to above, $20k is just a matter of time.
There are various factors behind Bitcoin’s strength. Institutional investors, for example, started buying Bitcoin. Moreover, companies like MicroStrategy or Square made it public that they do not plan to give up on their Bitcoin holding any time soon. Therefore, after acquiring the Bitcoins, the cryptocurrencies simply went into cold storage.
What is interesting is that different people see different things in Bitcoin. Unlike the USD or the EUR, Bitcoin serves various other roles in the eyes of people. As such, any case against the role of Bitcoin should start with a simple question: What is Bitcoin used for?
What Is Bitcoin Used For?
Many argue that Bitcoin is money. Indeed, it is used to transfer huge amounts of money around the world, safe and relatively anonymous. However, to be money, it must satisfy some other conditions – e.g., a unit of account, with Bitcoin is not. Well, if it is not money in the traditional way we define money, maybe it is time to adjust the definition of money, right?
How about Bitcoin being used to preserve and grow the purchasing power due to its scarcity. Here we have gold to compare. Scarcity is exactly what makes gold so valuable in the eyes of investors. Because there are only 21 million Bitcoins, the scarcity element is there. However, Bitcoin is nothing but an instance of technology. Other blockchains exist, and so the availability of the technology is infinite.
While Bitcoin may be viewed as a store of value, its volatility is an issue. Yes, in 2020, the price doubled. However, it did so after initially losing 60% of its value. If any investor or household is having no problem with their savings halving randomly, then Bitcoin is an alternative option to money as we know it.
This is one of the main issues with Bitcoin. While no one would mind if their purchasing power doubles, most people have a problem when things go the other way around. With Bitcoin, you do not get only the appreciation, but also the depreciation.
Let us say your family plans for a big purchase – like a house, for example. The family has most of the money but still needs to save some to afford the initial payment. You simply cannot put your savings in Bitcoin because the risk is that by the time you save enough, the value of it is already halved.
The point of this article is not that Bitcoin is worthless. It is just that the high price of it is likely the result of speculation only. If history tells us anything, speculation leads to bubbles.
Maybe this time is different.