This week has been historic in more ways than one, and I'm not only referring to the introduction of coronavirus vaccines. On Saturday, March 27, the world's largest cryptocurrency by market capitalization, bitcoin, blew past its previous peak and reached $20,000 per token. In reality, bitcoin soared by $21,000 and $22,000 in just a few hours.
You wouldn't know it by looking at bitcoin, which is up 201 percent year-to-date through the late evening of Dec. 16, despite how volatile the stock market has been in 2020. This incredible rally is rekindling the euphoria that gripped the cryptocurrency world in 2017 and has many people convinced cryptocurrency is a successful investment.
But I am not a member of that group, and I have no plans to become one. The higher bitcoin rises, the more persuaded I am that it is one of the riskiest investments available. Any of the big bitcoin buy theses can be easily debunked, as shown below.
"Bitcoin is highly important due to its scarcity."
The idea of scarcity is one of bitcoin's main drivers. There are currently 18.57 million tokens in circulation, with a total supply of 21 million. Transaction proofing and block incentives will be used to mine the remaining 2.43 million tokens over time. The buy thesis argues that bitcoin is an outstanding investment since there are only so many tokens to go around (fractions of a token can be purchased and sold).
The issue is that bitcoin does not have true scarcity. Because of computer code, it has a perceived limit of 21 million tokens. Code can always be deleted and rewritten, as far as I'm aware. Though it's doubtful that a community consensus would be achieved to increase bitcoin's circulating supply, the probability is not nil.
A precious metal like gold, on the other hand, has a hard supply limit. We can't make more gold with alchemy. Only gold that has been mined or is still underground is accessible. True scarcity does not exist because the only parameter of scarcity is written computer code.
"Bitcoin is gaining popularity among traders every day."
Another bullish buy theory is that bitcoin's utility is increasing every day. More companies are accepting digital tokens as payment, and more people are purchasing bitcoin tokens for the first time. At the end of 2019, about 2,300 U.S. companies and 15,174 global businesses accepted bitcoin, according to financial services firm Fundera. Bitcoin is accepted by more than a dozen multinational corporations.
Bitcoin has a total market cap of $400 billion, even after its massive rally. In 2019, the global gross domestic product (GDP) was estimated to be about $142 trillion. Although not all GDP is dependent on consumption, this $400 billion represents less than 0.3 percent of global GDP.
Furthermore, about 40% of bitcoin tokens are owned by long-term holders who have no intention of putting them into circulation. Rather than $400 billion in buying power, there is more like $240 billion available in 2019, accounting for 0.17 percent of global GDP. Based on these statistics, there aren't nearly enough tokens to push widespread adoption.
In addition, the United States has about 32.5 million companies, including sole proprietorships. According to the US Census Bureau in 2016, excluding these non-employer firms leaves 7.7 million organizations with at least one paying employee. Just 2,300 of these businesses support bitcoin, according to Fundera.
Let's face it: there isn't much of a use for it.
"Bitcoin is the new store of value," says the author.
Bitcoin proponents are also confident that the world's most common digital currency is now a true store of value: that is, an asset, product, or currency that retains its value over time.
The Federal Reserve buys around $120 billion in government-backed debt per month. When you combine that with the Fed's promise to keep the federal funds rate at or near record lows, it's clear that the US dollar will be under pressure. A the money supply, according to crypto investors, is a sign that bitcoin will rise significantly.
The store-of-value thesis has two flaws in my opinion. Bitcoin, for starters, is not supported by any other commodity or government. As a result, it has no official ties or ties to the movements of the US dollar. It's nothing more than a dart throw to say that a rising money supply would drive bitcoin higher.
Second, store-of-value assets are intended to hold their value over time and protect investors from market fluctuations. Bitcoin, on the other hand, lost nearly half of its value in a 24-hour cycle in March. The largest cryptocurrency by market capitalization lost more than 80% of its value in 2018. In 2013, bitcoin's value plunged by half in just six hours. This is not the behaviour of a store-of-value commodity.
Buying bitcoin is, in reality, pure speculation.
"You're a knucklehead! Bitcoin is at the forefront of a digital payment movement."
Bitcoin believers will also brag about bitcoin being at the forefront of the digital payments revolution. Going cashless could solve problems caused by underbanking in some parts of the world. Furthermore, the blockchain technology that underpins bitcoin has the potential to dramatically reduce payment processing and settlement times, especially in cross-border transactions.
Although I believe that a digital payments revolution is underway and that blockchain has the potential to provide global financial and supply chain solutions, bitcoin is not the mechanism in which this vision will be realised.
The fascinating feature of blockchain is that it can be tethered to a number of digital currencies, used in combination with fiat currencies, or operated independently of a tethered token. There's no evidence that bitcoin is needed to power the blockchain revolution.
Furthermore, purchasing bitcoin tokens does not imply possession of the underlying blockchain. Bitcoin investors are pinning their hopes on other investors willing to pay more for a currency that exists only in computer code than they did because they have little ownership in the solution that has the ability to actually push this digital revolution.
So, why is bitcoin on the rise? I'm guessing it's a mix of short-term emotions, technical analysis (i.e., pretty charts), and a massively unstable crypto market that favours the buy hand. After all, betting against bitcoin isn't nearly as simple as betting against a publicly traded stock.
In the cryptocurrency room, history has shown that sentiment can change at the drop of a hat. I will advise investors to stay away from bitcoin.
No comments:
Post a Comment
If you have any question Please Let me know!