Bitcoin, a word that has become synonymous with Reddit, Tesla, Rockets to the moon, and a deep dark underground. But what is it? What started as a way of taking over the financial system is now one of the fastest-growing investment vehicles in the market. So, is it a currency? An investment? A fun and expensive new form of gambling?
As a Currency
What is the purpose of a currency? The essential requirement is that it must act as a Store of Value. That means that it must hold value, and we all must know and accept that value. If I go to the grocery store, I need to be confident that they will take my money and that my money will be worth what I think it is by the time I check out.
Does Bitcoin meet that purpose/requirement? Like the dollar, Bitcoin is a Fiat Currency. Neither is attached to any real-world asset. They both simply have value because we all say they do. Their value is based solely on our perception.
Unlike the dollar, our perception of a Bitcoin’s value can change wildly on any given day. Between April 1st and April 5th, Bitcoin had a high of $59,814 and a low of $56,985. That is a -4.96% difference. Putting that into context would mean that you could afford your rent on Monday, but by Friday, you would be short because the value of the currency you use has shifted. Sorry landlord, I know you were expecting $1,000 this month, but my bitcoins are only worth $995.
That is different than the dollar in several ways. The first and most important is that the dollar has rarely decreased in value. The second is that to see this kind of variation in the dollar, you would need to look over a period of years, not days. That is because while the dollar may not be back by any real-world asset, it is backed by the U.S. government who exercises great care in ensuring its value is relatively the same year-to-year (increase by an average of 2% annually).
“Crypto assets are highly volatile – see bitcoin – and therefore not really useful as a store of value.”-Jerome Powell
As an Investment
Bitcoin’s secondary use has been as an investment. The same volatility that makes it untenable as a currency makes it an excellent option for speculation. In 2020, Bitcoin’s value increased over 200% from $7,000 at the beginning of the year to almost $30,000 at the end. Today, a single bitcoin is worth $57,665.
What I find interesting is that the price of Bitcoins trendline matches closely with Tesla’s stock. I imagine that is because they attract a similar kind of investor. Someone optimistic about technology who loves a good story and does not mind taking on a risk-based more on faith than fundamentals.
Compared to more traditional investments such as stocks, gold, or commodities, Bitcoin has performed spectacularly.
As the economy picks up and people start to spend again, there is more money than ever floating around the economy. When there’s extra money, people do not mind risking it if there is a large enough payoff. We can see this in the newfound popularity of SPACs, the rise of bitcoin, and in Gamestops still-thriving stock(Which stock closed at $184.50 on April 6th).
One positive outcome from Bitcoin’s rise in popularity is that it may have inspired a government-based digital currency. While China is taking the lead on developing a digital Yuen, this could push the U.S. to build its own. That could help millions of Americans who are unbanked or underbanked today. While that may be a few years off, Bitcoin has at least opened the door to the possibility.
Short of an international disaster or the fall of the U.S. government, Bitcoin will likely never become a currency. Bitcoin’s success as an investment largely depends on whether it can get more institutional buy-in and how long Robinhood investors decide to stick around. But who knows! Maybe one day, we will all be telling our grandchildren that back in our day, you could buy a Bitcoin for a measly $50,000 after it hits the $1,000,000 milestone in 2060.
You know what kind of investment is attached to a real-world asset? Real Estate! My team and I help people buy, sell, and invest in real estate every day. Whether you are looking for single-family homes, multi-family properties, or an entire apartment building, we can help! Please email me at [email protected] for more information.
Ben Wick, “Bitcoin won’t replace the dollar because it’s too volatile, Fed’s Powell says” (2021)
Larry Baker “The origins of Bitcoin: Satoshi’s Vision” (2019)
Daniel Kurt, “How Currency Works” (2020)
Inflation Calculator Graph
Felix Salmon, “Bitcoin Vs. Tesla, battle of the bubble” (2021)
Alexandra Pankratyeva “Gold Vs. Bitcoin, Complete Comparison” (2021)
- Jeff Cox, “China leaps into a central digital bank currency, but similar progress eludes the U.S.” (2021)