25/02/2021

The unprecedented rise of Bitcoin


Bitcoin's future as part of the financial sector has now been cemented through institutional investors' actions. The question is, why does the value of Bitcoin continue to rise? And what does this value represent?

Relative to its price at this time last year, Bitcoin’s price has more than quintupled. Although to most, the reasons for this are seemingly arbitrary, it is clear that Bitcoin has some intrinsic value as it continues to break record highs. In fact, the price of Bitcoin had recently surpassed the price of one kilogram of gold.

Bitcoin's market cap is just a tad over the one trillion-dollar mark, whilst gold somewhere in the ballpark of sixteen trillion dollars. As Bitcoin is noted as "Digital Gold', we can assume that this means that bitcoin still has a long way to go.

It is a widely held belief that due to this finite number of Bitcoins, the currency is much like 'digital gold'. Since the supply remains constant, the coin is intrinsically valuable. It should also be noted that once the remaining currency has been released, analysts predict that its value will skyrocket.

Bitcoin is simply a way to store digital value. Much like the ones and zeros in your bank account, the value of Bitcoin is only determined by what you can exchange for one Bitcoin. For example, I would have to trade – at the time of writing – approximately sixty-five-thousand dollars to purchase one Bitcoin. How much chewing gum does one Bitcoin buy you vs one US dollar? Since both are figments of the human imagination, both are equally arbitrary measures of value.

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Image source: © promesaartstudio via Adobe Stock

Although both seem to be arbitrary measures of value, they enable us to transcend the primordial practice of trading a goat for an axe. Nowadays, if you need an axe, you go to your local hardware store and purchase the axe by moving some ones-and-zeros from your account to the store owner's account. Bitcoin is much the same but solves many of the problems that are inextricably linked with central banking.

The reason Bitcoin can solve these problems is that it operates on the premise of a decentralised ledger. A decentralised ledger is 'borderless' in the sense that you can send funds wherever you want, whenever you want, and these can be transferred instantaneously. These pillars remain consistent, irrespective of how much money is being moved from one place to another.

The same is not true for 'fiat' – regular money. If you tried to transferer someone one billion dollars overseas at 1 AM on a Sunday, it is improbable that you would facilitate this through a bank since they have opening and closing times. But for a fair comparison, let's say you can transfer funds at this time. The next question is how long the funds would be in flight? For an international transfer, at least hours and perhaps days, and that's not to mention that your bank wouldn't have enough reserves to facilitate this translation. You would be bombarded with ludicrous commissions and early access penalties to these kinds of funds even they did. With Bitcoin, you can facilitate this transaction in minutes and pay fees equivalent to the loose change in your pocket.

Although this doesn't seem like a big deal to the layman, this is a big deal for institutional investors. Indeed, it is reflected in the asset's price, as Tesla's acquisition of 1.5 Billion dollars of the currency drove the price through the roof. So, even though this type of capability doesn't seem useful to the 'average Joe', it is evident that large multinational companies need this sort of purchasing power, especially with the ludicrous inflation of the US dollar. The fact is that companies need a benchmark currency on which they can rely for instantaneous, highly liquid and internationally accepted payment. This both serves as a hedge against traditional cash-based assets and a convenient way to facilitate large transactions.

The future is here; all there is to consider now is whether you want to be a part of it.

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