Making Sense of Bitcoin: a Beacon or a Bubble for Investors?

Business

Michael D’Angelo, Staff

ABC7

Bitcoin’s meteoric rise coupled with uncertainty around where its value derives from as an asset has some analysts referring to it as a “faith-based” asset.

Bitcoin has maintained a strong presence in recent financial headlines. Some popular headlines mention an individual who lost his password to access millions of dollars’ worth of the cryptocurrency, bitcoin surging to an all-time high past $35,000 or financial pundits declaring bitcoin as the “next gold.” Certainly, if you are a retail or an institutional investor, the asset’s massive gains have certainly caught your attention.  

Bitcoin is a cryptocurrency which currently has the highest market value of any alternative coins. Bitcoin has an increasingly volatile trading history since its original inception and Bitcoin was created in 2008 by a mysterious figure known as Satoshi Nakamoto. Bitcoin operates as a cryptocurrency and the original goal was for individuals to make online purchases without a paper trail, much like if one uses physical cash in the real world to purchase something. Nakamoto designed the idea of bitcoin as a decentralized digital currency that anyone in the world can store on their computer with a public ledger of transactions. 

In the beginning, bitcoin was utilized for people to make illegal transactions online via the dark web. As the price gradually increased and then declined over the years, many speculators have jumped on the coin. Many bitcoin bulls view the coin as an alternative to gold and the coin serves as a hedge against inflation. 

The first Bitcoin transaction occurred in 2009 and Bitcoin was used shortly in 2010 for a real-world transaction when an individual utilized 10,000 Bitcoins to buy two pizzas in the state of Florida. Bitcoin’s price has fluctuated widely and since its inception the coin has grown over 8,500 percent. Bitcoin experienced a major bubble burst in 2017. Many professionals attribute this burst to an insurgence of billions of alternate coins flooding the cryptocurrency market. These new coins, known as the Initial Coin Offerings (ICOs), shaked the market. As of recent, many institutional investors entered the market. Square and MicroStrategy purchased Bitcoin while Fidelity and PayPal allowed the consumer to buy cryptocurrency on their websites. 

In addition to Bitcoin’s appeal to various investors, American financial regulators have taken an interest in the coin. Joe Biden’s Treasury nominee, Janet Yellen, stated on Tuesday that cryptocurrency transactions were used mainly for illicit financing. She is highly concerned with the relationship of Bitcoin and terrorism financing. 

As more and more people jump into Bitcoin and institutional investors dive in as well, they are only fueling a potential bubble just waiting to burst. Bitcoin is a classic example of the greater fool theory at play. The greater fool theory states that it is possible to make money by purchasing an asset then selling at a later date to another individual known as a “greater fool.” Retail investors are just diving into bitcoin to not miss the price increase. As the price grows, many do not want to be left out from the gains achieved in the past.

The current value of Bitcoin has no intrinsic value. Bitcoin is backed by nothing. In comparison to the American dollar, the dollar is backed by the full faith and credit of the American government. Bitcoin can also be debated on the grounds of inflation. Many will argue that the American dollar is becoming weaker and the Fed has allowed “too much money-printing.” This argument has been around for close to three decades and is not based in any factual evidence. Inflation is not a true primary concern amongst economists. For example, the Consumer Price Index (CPI), which is an average of a basket of prices for consumer goods and services, has not exceeded more than 5.6 percent since 2000 for all items. Since 2010, the CPI has not exceeded 4 percent for all items

As the price of Bitcoin will only increase, investors with all types of financial assets need to take a back seat and question the future of cryptocurrency and the potential of a bubble just waiting to burst. After all, they do say history repeats itself.

dangelom2@lasalle.edu

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