12, Nov
Is Bitcoin in a Dangerous Bubble?
There are two big issues with calling Bitcoin a bubble. First, there is the cyclical nature of Bitcoin's price. A traditional bubble pops, then disappears. A bubble doesn't just keep bubbling (2013 and 2017 have seen similar drastic price action, on arguably a more impressive scale). For a bubble to exist, a product has to be trading for vastly more than the value of the asset underneath. This is much more difficult to determine obviously for something like Bitcoin, but we can certainly try! What is Bitcoin's intrinsic value? Bitcoin is a digital currency. Currencies have value if they can be used as a store of value. If you can trust your money, whether paper or digital, to hold value against real-world assets then that currency has value. This used to be insured by backing currencies with precious metals, or even more directly in the case of coins that were made of metal worth the amount the coin represented. The so-called gold standard has been abandoned though in the 20th century, and now fiat currencies are backed mostly by the faith that individuals and groups have in it to store value. So, Bitcoin is not backed by a real-world asset such as gold, but most currencies aren't either. In that case, we can't blame Bitcoin for not having sufficient backing. We have to turn to the qualities that make a currency valuable to see if Bitcoin fits the bill and hold intrinsic value. The first important determination is scarcity. Here, Bitcoin simply outclasses the competition. Ever since its inception, there has been a limit number of Bitcoin that will ever be mined: 21 million. There is no possibility whatsoever to increase that number, and there is an ongoing debate over how much Bitcoin has been lost forever but most estimates point to as much as 20% of the total supply being lost forever (even though some feel-good stories do happen from time to time). Secondly, an asset must be a good medium of exchange. This is also a domain Bitcoin excels at, since the fees to transfer sums of money of any size are quite competitive compared to the traditional banking sector. Third, Bitcoin has to have utility to be worth something. While there was a time when very few accepted Bitcoin as a mean of payment, with the arrival of big players such as PayPal and Square, you can now use your Bitcoin to settle transactions with millions of shops around the world. Bitcoin is also hard to steal, impossible if stored properly. Due to blockchain technology, it is also impossible to counterfeit or destroy. Bitcoins belong to their holders, and while scams are still an important issue, they are not exclusive to the cryptocurrency space.
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