Social media exploded with excitement as Bitcoin crossed the magical $20,000 level yesterday. Not only that it traded above, but it did not stop all the way to $22,600 at the time of writing this article.
The strength in Bitcoin comes as the U.S. dollar, the world’s reserve currency, continues its downside trend. The Federal Reserve of the United States, the last meeting of the year, sent the dollar even lower, fueling other assets’ strength.
Speaking of other assets, Bitcoin indeed is a different asset. Different than fiat currencies, different than gold, and definitely different than anything we have ever seen so far.
But is Bitcoin money?
The Value of Nothing
Money fulfills various functions in an economy, and Bitcoin fails to accomplish at least one of them. This is not to say that Bitcoin is overvalued at the current prices. In fact, it can rise even more because trading it or owning it is based on different assumptions.
If the assumption was that Bitcoin is an alternative form of money, then we should have seen so far at least one of the following. One is the fact that it lacks an underlying asset. Another is that it has no social or material value. Sure, people may argue here that it does have value – but material value is something different than the price of anything. Finally, the most important of them all is that Bitcoin is not a legal tender in any jurisdiction. Period.
If this is the case, what is it then that investors buy? Technology? That may be an explanation. If the price of this justifies it, then it can move even higher.
However, the three things listed above – no underlying asset, no social or material value, no legal tender – makes Bitcoin close to something else. More precisely – nothing.
I know how it sounds, and I want to make it clear I am neither long nor short in Bitcoin. I am just explaining things the way I see them.
Contrary to all opinions, “nothing” does have value, as long as people believe in it. So many examples exist in the financial history that I will not cover here. Instead, I will wrap up with one of the most important Bitcoin’s qualities – its scarcity.
Scarcity drives its price up, especially as more and more institutional investors join the party. When big money bids for scarce assets, the price goes up.
This may easily continue at the same pace or even more aggressively. And just that easy, it may stop.