The price of bitcoin has increased over 1000% this year to date, a statistic that most probably makes holders of bitcoin leap with joy and people who sold out in January weep. But ask any five people what the fundamental value of the currency is, and you are very likely to get five wildly different answers. Considering each new day brings us more headlines about rapid swings in bitcoin, it is worth looking at some of the most common ideas of the cryptocurrency’s value and assessing whether they make any sense.
Understanding Bitcoin’s Value
Firstly the most common, and coherent, argument behind understanding bitcoin’s value is the idea that is the modern store of value in the way gold has traditionally been seen for generations past. There are a large number of proponents of this understanding of why bitcoin has value from venture capitalists and executives on Wall Street.
Furthermore, there have been many real-world examples held up by proponents of this idea as key proofs of concept, such as the use of bitcoin in Venezuela to purchase necessary goods in the face of rampant inflation.
While, on the surface, this seems like a reasonably logical argument, there are some questions that arise when one starts to probe into its foundations.
The most important of these problems is the idea that assets that are stores of value do not have their value decay with time. For most assets that are thought of as stores of value, there tends to be some intrinsic demand for the asset be it industrial, social or even cultural.
Bitcoin simply does not have any proven inherent demand past that of people buying the asset as speculative purchases hoping for future price increases. Supporters of Bitcoin as a store of value point towards the limited supply of bitcoin and its potential as a currency but the first point is only valid if demand is maintained for bitcoin’s limited supply to have a meaning, and the second point is a potential value proposition for bitcoin itself.
A second value proposition for bitcoin, that has been on the rise in popularity recently, is that it will enhance the offshore money system and allow for companies and individuals to keep their assets safe and secure.
This argument stems from the idea that bitcoin is a safe store of value as an asset and builds upon it with the idea that its inherent anonymity will shield holders and traders from the prying eyes of regulators and government officials. At best, this is wishful thinking and at worst willful ignorance.
Regulators are already showing signs of coming to grips with the potential loss of control and, in some cases, tax revenues that cryptocurrencies have fostered. Indeed the recent moves by the IRS to acquire information on users of Coinbase have already shown the fragility of the veil of secrecy that surrounds bitcoin. Making the argument that bitcoin has value because it allows companies and individuals to circumvent governments does not seem to be entirely rational, especially since public anger at offshore banking and finance is already at high levels.
Will Its Price Skyrocket?
Now to the most common and least realistic value proposition for the currency; it will become a wholly functioning currency and skyrocket in value. If this sounds ridiculous, it most probably is. For all the talk surrounding its use as a method of transaction, it is doubtful this will ever occur in a meaningful way. There are fundamental reasons why bitcoin is unlikely to become a widespread global currency.
It is very volatile in price, making it difficult for business to accept bitcoin as a method of payment, even though the cost to transact bitcoin has significantly increased since 2016, with average fees going from $0.15 to $2.77 from 2016 to 2017. Even more fundamental than the issues of market dynamics is the fact that no functioning government is going to allow widespread use of currency within its borders that it does not control.
One of the fundamental reasons behind the abandoning of commodity backed currencies was to allow for greater financial flexibility on the part of governments and it is unlikely that this will be given up easily.
It remains to be seen how far Bitcoin and other cryptocurrencies will become part of the financial mainstream. For all the increasing awareness of the cryptocurrency in the commercial world, it is still very much unclear if it has a future and general financial tool and asset.
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