Bitcoin1 remains the most prominent form of cryptocurrency. Many market observers remember its meteoric rise in December 2017, when the value of bitcoin surged to an all-time high of nearly $20,000 just a month after it had been trading at $5,674.2
Of course, like most assets that experience a run-up like this, the surge was not sustainable and bitcoin eventually experienced a precipitous decline over the next 12 months. That said, it has since rebounded by about 20 percent, climbing back to $5,689 as of May 6, 2019.2
Such volatility raises valid questions about the true value and utility of bitcoin, especially since it is presumably to be used as a store of value. Unlike traditional investments such as stocks, bonds or real estate that generate cash flows, the price of bitcoin is based solely on supply and demand, similar to other stores of value like currency, gold, jewelry and artwork. This can make it more difficult to determine a fair price for these assets.
Let’s look at some factors on both the supply and demand side driving the price of bitcoin today.
From a supply standpoint, bitcoin looks attractive. Since inception, it was determined that only 21 million units of the cryptocurrency would ever be mined, and we are approaching that number today.3 All things being equal, a constrained supply should positively impact an asset’s value.4 Most currencies are minted at the discretion of their respective governments and central banks, meaning the supply could and often does increase at any time. Bitcoin’s unique, fixed supply should help stabilize its value moving forward.
That brings us to the real unknown – the demand. Bitcoin may be most appealing to potential buyers who don’t trust their own national currencies. For example, currencies in Turkey5 and Venezuela6 have seen their value plummet and have hindered their citizenry’s ability to maintain wealth. In circumstances like this, bitcoin could offer a much better store of value for citizens.
However, the situation is different in the U.S. as investors generally aren’t so concerned about the devaluation of the dollar. For the U.S. citizen, demand to date has been generally driven by speculation. That speculation assumes that at some point in the future citizens will begin using bitcoin more and more as a store of value and to facilitate purchases and sales.
Bitcoin’s usage in overall purchases and sales though remains very minor. It must be held through digital wallets that operate separately from other common methods of currency storage.7 This makes bitcoin a lot less functional for everyday transactions than more integrated options like cash and credit/debit cards.
From an investment perspective, the market is also lacking a convenient way for everyday investors to access bitcoin. There have been talks of launching bitcoin ETFs8 and incorporating bitcoin into traditional brokerage accounts9, but neither of these ideas have come to fruition yet. Until they do, investor demand will be limited to avid cryptocurrency investors willing to put in the work to hold these assets separately.
There’s no doubt that bitcoin is a pioneering technology and one of the most prominent currency innovations to come along in decades. The blockchain technology it is built upon has many potential applications outside of bitcoin.10
It is certainly justified to keep a close eye on this asset and see how its usage and demand may change in the future. However, until some of the kinks are worked out on the demand side, we think it is fair to say that bitcoin is more of a speculative asset than what it was designed for – to be a store of value.
Sources:
1. Bitcoin.org – Frequently asked questions
2. CoinDesk – Bitcoin price
3. Investopedia – What happens to bitcoin after all 21 million are mined?
4. Investopedia – How does the law of supply and demand affect prices?
5. The Guardian – Turkish lira crash ripples through global currency markets
6. Forbes – Venezuela’s hyperinflation hits 80,000% per year in 2018
7. CoinDesk – How to store your bitcoin
8. CoinDesk – SEC postpones decision on Bitwise, VanEck bitcoin ETF proposals
9. Bloomberg – Fidelity is said to plan March launch of bitcoin custody service
10. CoinDesk – What is blockchain technology?
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