Bitcoin, the world’s most popular cryptocurrency, has made its way into the limelight in just a short period of time. An asset that was initially stamped as a swindle scheme and called the currency of criminals by many skeptics and cynics in the financial industry has soared to new horizons of popularity.
The flaming Bitcoin frenzy has, since then, engulfed many hardcore skeptics and is now even being viewed by supporters as the future of currency.
Bitcoin As A Currency
Bitcoin is fundamentally a string of code with limited application. It does not yield any revenue, unlike gold bars. But compared with the price of gold, the price of a single unit of Bitcoin is hugely volatile. And a single tweet can change people’s faith in it as a potential future currency.
Elon Musk, for example, has a lot to say about cryptocurrencies, especially on Twitter. And as a result of his tweets, the prices of cryptocurrencies usually spike or tank accordingly.
However, many seem to be cashing in on this highly volatile asset. The availability of trading platforms has aided many investors, seasoned or beginner, to trade successfully in the crypto space. These platforms use advanced technologies and specialized software along with powerful algorithms, allowing users to benefit from short-term crypto booms. In fact, the trading platform quantum-ai.io even offers an easier way for novice traders to ride news-driven crypto volatility and generate insane profits in the process.
As a result, its value fluctuates wildly as people buy and sell it. And unlike the dollar, there is no central bank or government to defend its value.
This volatility also makes Bitcoin significantly harder to use as a medium of exchange. So businesses may seem reluctant to accept it as a means of payment for their goods as the following day its price could vary dramatically. Bitcoin’s volatility can be realized just from the events of May 19, 2021, when the digital asset’s value tanked almost $8,000 in less than an hour.
However, the extreme volatility is not stopping El Salvador as the central American country has become the first to adopt bitcoin as legal tender.
Many view this decision as a major gamble while supporters believe it to be a major stepping stone towards Bitcoin one day finally replacing the dollar.
What Gives Bitcoin Value?
Since Bitcoin has yet to take its place in the financial world, many have been left wondering where it derives its value from.
Like shares and bonds, Bitcoin is also traded as an investment. And since it is highly volatile, its value tends to spike when people believe it’s more valuable. Teenagers have become millionaires as a result of this speculative mania. Many enthusiasts continue to view it as a get-rich-quick scheme.
However, investing in cryptocurrency is no longer restricted to early adopters and armchair investors. In fact, it is attracting attention from some of the world’s biggest banks. Earlier this year, the oldest bank in America, BNY Mellon, announced plans to dabble into Bitcoin. Morgan Stanley now also offers investors access to Bitcoin funds. Involvement by these financial institutions has helped Bitcoin gain the much-needed validation in order to be recognized in the financial industry. But even cautious buy-in from some financiers brings greater scrutiny.
Is It A Bubble?
Leading economists have warned that Bitcoin is a dangerous bubble destined to burst and join the graveyard of historically hyped-up investments like the tulip-mania of the 1630s or the dot-com boom. Tulipmania occurred during the Dutch Golden era when the prices of the tulip bulbs rose sharply before spectacularly crashing. The dot-com boom took place in the late 1990s.
In 2018, there was reason to believe that the skeptics might be right. The sharp surge and later plunge in the price of Bitcoin mimicked these historic bubbles; a pattern that continued into the first half of 2021. The price soared to over $60,000 only to plummet over the next few hours. However, the difference with Bitcoin has been that its value slowly but surely recovers to reach even higher values.
Supporters see Bitcoin or other cryptocurrencies for that matter as a burgeoning asset class with real value. More like gold than tulips.
But the jury is still out on whether the comparison is still accurate. Bitcoin might become relatively stable or a trusted asset class like gold. However, it’s too early to tell as Bitcoin, being just 12 years old, is relatively nascent.