The past 7 days have been a wild ride for anyone invested in Bitcoin or remotely following crypto-currencies.
Bitcoin fell from a high of close to $20,000 per coin at the start of the week to below $11,000 on Friday, back to $15,000 on Friday, and then down again to $13,500 on Saturday.
After months of meteoric rise, these massive slumps in value, or more accurately, swings in value, are concerning for many. Bitcoin has had depressions before but at the time Bitcoin was still in 3 to 4 digit range and had a fraction of the mainstream attention. It’s caused skeptics to feel validated, sideline viewers to wonder, and investors to fret. The question at the back of everyone’s mind is:
“Does bitcoin have any real value?”
The answer is simple but complex at the same time. Bitcoin has as much value as we (society) give it. In that regard it operates the same as all fiat currency. The Argentinean Peso struggles despite the recent efforts of the government, because markets are skeptical about its value. The US Dollar is strong because people and the markets believe the US Dollar to be the most or among the most dependable currencies in the world.
Similarly Bitcoin, Ethereum, and other cryptocurrencies are valuable if we (society) see value in them. If tomorrow all cryptocurrency enthusiasts were to denounce cryptocurrency then crypto-markets would plummet. Alternatively, if tomorrow we announce more Bitcoin exchanges and new financial options for bitcoin (e.g. strike prices) then crypto-markets would soar. The real question when investing in Bitcoin and other forms of cryptocurrency is:
Do you believe in the underlying concept and the value it provides?
Are you bullish on a decentralized, anonymous, and an (theoretically) indisputable currency along with the underlying blockchain technology?
If you believe in that future, then the price swings will not matter because Bitcoin’s value will continue to rise over-time. This is due to it’s continued integration into society, and the scarcity factor of having a Bitcoin cap at 21 million Bitcoins. This will serve as a natural market driver until Bitcoin reaches a steady state. At this equilibrium point, there may not be much upside, but there will not be much downside either as you are betting on the financial system of the future.
If you do not believe in that financial system or medium of exchange, then no upward price spikes should matter because you are betting against the system it represents. In this situation, cryptocurrency markets will eventually collapse as society returns to the more traditional financial markets and anchors government backed paper currencies.
Of course there is a question around which cryptocurrencies have the most potential or which ‘horse to back’. Similar to other forms of currency there will be multiple winners, losers, and many changes over time. The value of each individual cryptocurrency will follow the same principals around the value we attribute it and its mainstream adoption.
In essence, outside of day-trading, the price fluctuations of Bitcoin and other cryptocurrencies are insignificant if you are making your decision to invest on the basis of the system it represents and your view of the future of money.
What do you think? Please share your thoughts and views in the comments.
Please note: this is my personal opinion. Do not take this as investment advice or representative of any company I work with.
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