5 Reasons Bitcoin is Rising in Value

Physical Bitcoin Currency

What’s interesting about Bitcoin (and other legitimate cryptos such as Litecoin and Ethereum) is that, other than faith, there is no underlying value to them.

There are no accepted valuation or economic models that are taught in business schools that they defy… No price earnings ratios, no underlying mortgage backed securities, no ratings agencies… Anyone with apparent authority and knowledge of cryptocurrencies can have a legitimate opinion about what might happen.

Winklevoss Bitcoin Gold 2.0

The Winklevoss brothers can claim that Bitcoin will reach $1,000,000 per coin simply because they make the leap from Bitcoin to “Gold 2.0″… Their logic is that the market cap of gold is $6 trillion vs. the current market cap of Bitcoin (currently $300 billion). And they’re experienced Bitcoin investors so who can prove them wrong?

No one.

So, when it comes to clues as to where Bitcoin could go, we can only examine the potential for human belief as fuel for self-fulfilling prophecies. A great book for this is an 1841 book called “Extraordinary Popular Delusions and the Madness of Crowds“.

Bitcoin is rising in value for five main reasons:

1) Perceived Asset Value

Bitcoin can be used for transactions, but the transaction fees associated with using Bitcoin in everyday purchases are very high.

As such, speculators in Bitcoin are mostly viewing it as a store of value, similar to gold, or Gold 2.0. The more people who want a share of the gold market, the higher the price will go. Perhaps people are going to sell gold to invest in Bitcoin, as described in the Bloomberg video above.

However, Bitcoin has some advantages as a store of value that gold does not. Unlike gold, Bitcoin is very easy to fractionalize, and, easy to transport. And since the value of money, and therefore Bitcoin is nothing more than an idea, Bitcoin could not be easier to accompany you across borders.

2) Volatility

The volatility of Bitcoin makes using it for purchases very difficult because you are always unsure of its actual value. The price of Bitcoin changes minute by minute, sometimes in double digit percentage terms. For instance if you wanted to buy a $25,000 car with Bitcoin the seller of the car would have no way of knowing whether he or she was going to have $20,000, $25,000 or $30,000 five minutes after the transaction was completed.

However, this volatility makes it perfect as a speculative investment. This is why Bitcoin futures are fueling purchases of Bitcoin, and having a halo effect on Litecoin and Ethereum, driving up their prices as well. Futures allow people to speculate on Bitcoin both positively and negatively, wagering that an asset will either rise of fall in value.

While it seems counterintuitive, humans like uncertainty in rewards. And because of its extreme volatility, any Bitcoin related rewards are heavily cloaked in uncertainty, which makes us enjoy the rewards of investing more than rewards that are more certain (or less volatile).

3) Scarcity

The number of Bitcoin that can exist is ultimately limited to 21,000,000 Bitcoin. The number of Bitcoin is expected to reach this maximum limit around 2040 based on the protocol that states that the reward for successfully mining a block is halved every 210,000 blocks, or approximately every 4 years.

Whether this exact number of Bitcoin is immutable or not1, the experts believe that the number is fixed.

This introduces the concept of scarcity into the mix. No one wants to be left on the sidelines. So this feeds the FOMO “fear of missing out” monster… People are investing in Bitcoin for fear of not profiting from it.

4) Network Effect

Bitcoin, like Facebook, or viral videos, has a network effect. In the age of social media, incorporeal monomania is contagious. Stories about Bitcoin riches spread faster than Dot Com millionaires.

But the technology underlying Bitcoin, known as Blockchain, has many potential uses in areas beyond Bitcoin itself. The technology has applications that range from automotive, and insurance, to real estate and medicine and law.

Interest in these applications leads, inevitably, to Bitcoin… which causes curious people to learn more about Blockchain, other cryptocurrencies and to realize it all seems legit and want to invest before the rest of the world catches on.

5) Massive Confusion

With the U.S. stock market at an all time high, people are truly confused today about where to invest their money for the long term.

And, when you think about it… How much time do we have anyway?!

With artificial intelligence and robots inevitably coming to take all our jobs, the polar ice caps melting, California going up in smoke, North Korea, student loan debt over $1 trillion and growing, Trump’s tax overhaul, terrorism threats and the massive erosion of trust in the Federal government, it literally seems as though the entire world is going to hell in a hand basket.

So, if wealthy, a pile of Bitcoin is a perfect speculative vehicle, along with a bottle of rare Burgundy and a Leonardo. Hey, be like the Winklevii!

If you’re of modest means, Bitcoin is the perfect escape.

It’s like going to Vegas, but right in your pocket on Coinbase.

Footnotes

  1. There was an article titled “Bitcoin’s Dark Secret that was published on Cryptocoinsnews.com on 12/11/17. The article was subsequently pulled. I do not know if there is any truth to any of it. A link to the original text can be found on Reddit.