Bitcoin has had a great year, but with every new all time high the collapse inches closer.
Over the last couple of months the price of Bitcoin has risen exponentially. In October the price was around $10 000 and it topped at around $40 000 a week ago. Meteoric rises without real changes in the fundamentals such as Bitcoin’s are a tell-tale sign of a bubble. In this week’s post I want to discuss Bitcoin’s value. I know that many Bitcoin enthusiasts will dispute my assertion that Bitcoin is a bubble, so I will begin by laying out the case against Bitcoin and countering some of the most common arguments for Bitcoin’s value as an investment.
Bitcoin is ostensibly a currency which should ostensibly be a possible alternative to standard fiat money for those who have lost faith in the normal financial system. Bitcoin was conceived during the Great Recession as a free currency that no central bank could meddle with. I’m personally partial to such sentiment, in fact I’ve written extensively on the blog about why I believe central bank asset purchasing and zero/negative interest rates creates serious problems. Bitcoin clearly isn’t a well-functioning currency, in economics there are three essential functions to money: being a medium of exchange, a store of value, and a unit of account. Bitcoin fills none of these functions. Bitcoin is far too volatile to be a good store of value, too pricey and volatile to be an effective unit of account, and no everyday shop takes Bitcoin so it is hardly a medium for exchange. So if Bitcoin isn’t money then what is it? It has no underlying value, its purpose is in theory to be a currency but it isn’t one in practise, which leaves it with no fundamental value.
Bitcoin enthusiasts often cite a couple of standard arguments as to why Bitcoin is a worthwhile investment or the future of money; including that there’s a maximum number of Bitcoins that can exist meaning that one’s wealth in Bitcoin cannot be inflated away, and that the dollar/euro/yen/pound is destined to collapse due to excessive printing from central banks meaning that Bitcoin is a good alternative to avoid the fiat money collapse. The first argument is self-evidently flawed, and the second one has a couple of issues too. The cap on the number of Bitcoins is a feature which could drive price, after all if supply is constant and unable to change then a high level of demand could drive the price to very high levels. The problem, of course, is as established that Bitcoin has no fundamental value, and a limited supply of something doesn’t generate inherent value. Similarly, even if we accept an imminent collapse in fiat money to be inevitable there are no reasons to choose Bitcoin over other assets with intrinsic value. For example, why wouldn’t you buy shares in a stable company or a precious metal if you feared a collapsing currency? Gold is a lot like Bitcoin, except that gold has actually been used as currency in a range of European countries for hundreds of years, and it has uses as a factor of production in electronics and jewellery.
If Bitcoin has no value but still sells for tens of thousands of dollars it has to be a speculative bubble. Speculating on when a bubble will burst can be incredibly profitable but I want to be clear with the fact that while I do believe Bitcoin has no value I would not recommend betting against it; predicting when bubbles burst is always a mug’s game. But the bubble will burst, just as the tulip mania bubble, the South Sea bubble, and the subprime mortgage bubble did.
If you liked this post you can read last week's post about my predictions for 2021 here, or the rest of my writings on cryptocurrencies here. It'd mean a lot to me if you recommended the blog to a friend or coworker. Check back next Monday for a new post!
Written by Karl Johansson
Cover Photo by Pixabay from Pexels, edited by Karl Johansson
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