You don’t have to understand bitcoin to realize that banks, businesses, the bold, and the brash are cashing in on crypto currency. In 2016, the price of a bitcoin was $710.09. On Feb. 21, 2019, the exchange rate for a single bitcoin was $3,890. It doesn’t take an economics degree to know that the folks who invested in bitcoin a few years ago are now patting themselves on the back—but the good news is, it’s not too late to get in the game.
Why are people buying bitcoin and cryptocurrency? One may think that bitcoin is just a bubble that has no value at all, and other cryptocurrencies are just scams. This accusation may be correct in some way, but do not forget that it is human who determines the value of a good or service. For example, people think that a $2,000 Louis Vuitton bag is justifiable because they think the design or quality is superior.
Same goes to Bitcoin. People believe it’s unique offering worth $9,000 per bitcoin (as of this writing). Bitcoin is immensely useful and has never been seen before in a way. Regardless, here goes the three factors for investing in Bitcoin: utility, scarcity, and demand.
You might hear some critics say that it has no fundamental value, no real utility, and it’s just a Ponzi scheme. These are not actually true. Bitcoin has immense utility as a censorship-resistant store of value. No bank, government, and company can control your wealth and how to transact with it. People do not realize how limited the conventional financial system is. If you try to wire transfer to certain countries, say to Madagascar, it is practically impossible. You can also have your bank accounts closed at any time for whatever reason. Banks have every right in the will to close an account if they see fit.
Essentially Bitcoin offers a way to store your money that it is yours only, not in the bank and get used by them however they want (remember Lehman Brothers that went bankrupt in 2008?). As long as you take security precautions, the money you have in cryptocurrency is yours.
Bitcoin is considered as digital gold, so let us talk about gold here. Gold is immune to inflation and good as a store of value, but you can not send a chunk of gold from here to somewhere like Canada. Bitcoin is the first-ever way that is immune to inflation that can also be utilized as digital cash. With the scaling solutions like Lightning Network, Bitcoin could be the first-ever store of value that is immune to inflation and also services a true peer-to-peer digital cash. It will allow very cheap and instantaneous transactions.
I have not even mentioned other cryptocurrencies like Etheurem and Zcash that are committed to providing utilities in their cases. This is a whole other topic, and we will discuss the utility of other cryptocurrencies in the upcoming weeks.
Bitcoin is one of the most provably and reliably scarce commodities ever to be discovered or created in human history. It has a 21 million hard cap into the code itself. Unlike the traditional fiat currencies, Bitcoin will be a deflationary currency meaning there will never be more than 21 million bitcoins ever. Currently, Bitcoin is a disinflationary currency because all the Bitcoins haven’t been mined yet. Disinflationary currency means that there is an inflation rate and an issuance rate. Right now, Bitcoin has an insurance rate of around 3.8 percent, which means every ten minutes a block is created which releases 12.5 bitcoins. Every four years the issuance reduces by 50% until all the Bitcoins are mined, which is estimated to be around 2140. The reason why this is significant is that this leads bitcoins to have excellent stock to flow ratio. What this means is that you have a very low issuance or low creation of a new inventory of bitcoin relative to the existing supply. Stock to flow ratio is partly the reason why gold historically has been a fantastic store of value with about 2 percent of new creation every year. Low stock to flow ratio makes gold an excellent investment, but unlike Bitcoin, there is actually a pile of gold waiting to be released. For Bitcoin, the issuance amount is hardwired into the code. There will never be more bitcoin created outside of the current issuance rate, and this inelastic supply of Bitcoin makes it potentially an incredible investment. You can see why this potential for the price and the value of Bitcoin to skyrocket.
You may think that the demand for bitcoin is not there yet, which partly caused its price to reduce for more than 80 percent in December 2017. Aside from utility and scarcity that could boost the demand for Bitcoin, many countries suffer from economic distress and rapid inflation. For instance, in Argentina, the nation’s sovereign currency is losing considerable value, and the purchasing power is getting diluted. Due to this factor, people usually switch to more stable foreign currencies to hedge against rapid inflation. Bitcoin represents an opt-out. The price of bitcoin (BTC) in Argentina has even spiked considerably, even surpassing the all-time high in 2017.
We also have the world debt problem. Governments around the world are racking up enormous national debts. Even the major of economies like the USA, UK, and Japan have substantial national debts.
Currently, there is no feasible way to be paid off without breaking the economy. Central banks are reluctant to raise interest rates because they know if they were to raise interest rates, the economy would implode. The government could print more money to reduce the debt by inflating and diluting those debts but could lead to hyperinflation. Japan’s high debt to GDP ratio is caused by many reasons like quantitative easing and such, but the aging population is another factor for the major deficit. There is no way to pay for all of the elderly people who aren’t working anymore. To some extent, Bitcoin is immune to all those national debts and is one of the ways to prevent your wealth to get affected by this issue.
Another significant potential demand, which ties with the utility of Bitcoin, is to open up the world of finance to billions of people around the world who do not own a bank account. Many people in this world do not have access to a bank and own a bank account. Bitcoin could be the answer. As long as there are internet and a smart device like a smartphone, people can get hold of a crypto wallet. Moreover, people can send money from country to another directly, without the need to do money exchange. In the current system, intermediaries charge hefty fees to exchange the money or wire the fund. Heading into the future, we could even travel around the world with just bitcoin.
As I already mentioned, I am not a financial advisor; all of these are NOT meant to be financial advises. Please judge for yourself the case to invest in Bitcoin and cryptocurrency, and take responsibility for it.
It may seem hard to believe that a digital currency could be worth thousands of dollars. After all, unlike physical currency, like precious metals or printed money, bitcoin is just lines of code. So what makes bitcoin so valuable?