“Bitcoin is the currency of the future.” “The first first ever fully decentralised payment network on the planet (and still the strongest), moving billions of dollars of value every day with no fees.” “There has never been anything like this before.” This is the rhetoric of Bitcoin evangelists. Is it true?
I remember hearing about “the new economy” and how internet companies would change the world and make investor rich (Dot com bubble). In the 1630’s, one tulip bulb in Holland became worth an entire years earning for a wealthy merchant. Human history is littered with obscene and unrealistic valuations for various currencies, commodities, or securities.
Money is a tool used to simplify a transaction between 2 or more parties. It is a recognized store of value. It can have intrinsic value such as Gold or silver, or it can be a fiat currency. Almost all currencies today are Fiat currency and are backed by a government that has a vested interest in the long term value of that currency. Bitcoin has none of this (read what Alan Greenspan thinks here).
Fiat currencies usually deflate in value over time, (causing inflation in the prices to purchase goods and services with those currencies). Slow, controlled, and consistent inflation over time has some economic advantages. However, sometimes currencies depreciate rapidly causing hyperinflation.
Hyperinflation is a very real risk of Fiat currencies. In Zimbabwe everyone was trillionaires. Although now those trillion dollar notes are worth nothing (except as a collector item). Zimbabwe no longer has its own currency, it uses U.S. Dollars. (Currencies that went to zero)
Bitcoin is a virtual fiat currency. There is a growing group of people who use it as money. Some vendors are even beginning to accept it as payment for goods and services. The value of a bitcoin has exploded over the last few months and seems to be growing at an accelerating rate.
Why is this happening?
Why do people feel the need to use this currency?
Markets are driven by 5 things: 3 are actual and 2 are perceived:
- Supply: how much of the product is available.
- Demand: How much people want of a product
- Price: impacts demand and how much is supplied
- Fear: people hate to lose what they have.
- Greed: People want to make money without having to invest something in return.
What is driving Bitcoin?
Bitcoin is being driven by fear and greed. The interesting thing is fear and greed are both driving the price up.
Some people buy Bitcoin because they fear their national currency (or several national currencies) will become worthless. Which is a valid fear based on the national debt loads of several western nations.
Is Bitcoin the right investment if you fear your national currency becoming worthless?
Some are buying it to make money because it is the wave of the future. Some believe the price will go up for a long time as everyone converts to it. They want to buy early and become a Bitcoin millionaire.
Why the bubble will burst?
It has no intrinsic value. You can’t eat it or use it to produce something. It is not regulated and backed by a government that regulates the creation of the currency.
When the factory workers and the school teachers start buying them; I could see the value of a Bitcoin reaching $50,000. Everyone will tell me how wrong I am.
Then… History will repeat itself. The Bitcoin will disappear except for case studies and history books. It will be of no value. But do not fear, in the day and age of the worldwide marketplace… another bubble shall take its place. That bubble will be driven by fear and greed too.
Are you buying Bitcoins?