The late 2020 rally of Bitcoin has sparked renewed interest in the most famous cryptocurrency. In December 2020 alone it climbed 49.8% and during the first week of 2021 it has topped $30,000. But what is it that makes Bitcoin have any value at all? Is it a real asset class and could we see it go to zero as some have predicted?
Many have stated that Bitcoin’s value proposition is ‘digital gold’. I think this is a good analogy. Like gold and it’s many stories of myth and legend, Bitcoin is almost mythical, certainly in it’s beginnings and its mysterious creator. It has an almost religious following with millions truly believing in its ability to become a new store of value.
It’s this belief that gives Bitcoin value. Something is only worth what someone is willing to pay for it. If history is anything to go by, then Bitcoin’s value will continue to be volatile and this latest meteoric rise will be checked and corrected at some point. But with so many people following and believing in Bitcoin, it is very unlikely to crash to zero. In fact, any correction could simply lead to the next ‘buy the dip’ charge and lead it to fresh highs.
One of Bitcoins main selling points as a store of value versus the traditional FIAT currencies is that it is finite. Only 21 million Bitcoins can ever be made. No central bank money printing machines can be used to create more. It’s also solved a key problem with digital assets. That of duplicate spending. The blockchain protocol has solved the issue because it records all transactions in a distributed and decentralised log. You can’t simply create a copy of your coins and spend them again once you have completed your original transaction.
This second wave of Bitcoin has been much quieter and more under the radar than the previous ‘bubble’ that led it to highs of $17,000 back in December 2017. It’s only now that the recent price action is back in the mainstream press. One change is that new institutional money is now joining the party and the FOMO effect isn’t just reserved for millennials and retail punters. We’re now seeing large institutions analysing Bitcoin with a senior analyst at Citibank even going as far as predicting $300,000 in a leaked report.
So, why is Bitcoin any different to gold as a store of value? I accept the fact that Bitcoin isn’t a currency, but as a new digital alternative to some shiny yellow metal we dig out of the ground, I think it has a case.