Bold on Bitcoin

Today, the total value of outstanding bitcoins exceeds that of Canadian dollars, defined to include banknotes and central bank reserves. Nevertheless, the dream of early believers that bitcoin might be replacing government money is a little far fetched. Bitcoin is only capable of processing fewer than ten transactions per second which makes it very inefficient to be of use for making payments. The aphorism of bitcoin’s inventor Satoshi Nakamoto of being ‘a decentralized cryptocurrency, free from governments and central banks’ has gained prominence since its invention in 2009. In contrary to his invention, Mr. Nakamoto has vanished from the public view ever since.

First, bitcoin gained widespread attention when its price climbed above $1,000 and it was still a financial curiosity in 2013. Second, a delirium of speculation in 2017 caused to price to spike just of $10,000 before it quickly plummeted again. Finally, in October 2020, it was only worth $10,600 before it started to climb and ascend to a new high at $36,000 on January 6th. The bitcoin mania is rooted in the idea that it is a more convenient and equally safe storage of value as gold since it is easier to maintain a digital wallet than a physical vault. Like gold, bitcoin doesn’t pay interest or dividends. True, gold has fundamental uses but it is the fluctuating demand from investors, not from jewellers and chipmakers, that drives the price. Therefore it is reasonable that bitcoin’s price might be sustainable this time. As its popularity grows, prices might soar higher than $100,000 within 5 years. Millennial Robinhood investors might give rise to such ascend in price.

Still, there is more than enough motivation to doubt bitcoin. Its price is very volatile as it moves with the stock market. The market is illiquid and cryptotrading is an analogy on the Wild West where fraud and theft is warp and weft. Not your typical safe haven for a facilitator of a pension fund or any solid part of Wall Street. People who like to thrive on dicey investments and tolerate a healthy dose of risk might find it more interesting. Bitcoin’s success screams for a clampdown of criminal activity, need for regulators and a possibility for liquid trading. Its anonimity is overstated but if the initial goal was to free itself from governments and institutions, bitcoin hinges on finding a more modest role!

See you next week,

Laurent