Bitcoin
Quick Take – Bitcoin
After Bitcoin’s dramatic rise from $10,000 in late July to its all time high of over $40,000 just this past week, there is something worth discussing. It is important to separate Bitcoin from the technology, its use as a currency, and its basis as an investment or store of value.
First what is Bitcoin? Bitcoin is a digital or cryptocurrency that uses peer-to-peer technology to facilitate instant payments. Unlike fiat currency, Bitcoin is created, distributed, traded, and stored with the use of a decentralized ledger system known as a blockchain. The blockchain is the underlying technology used with Bitcoin in order to verify payments instantaneously and in real time. This has tremendous value within the financial world as banks typically settle payments in as little as a day to a week. With the blockchain, processing times of ACH and Wire payments can be cut from several days to a matter of seconds. This technology has tremendous value in other industries as well including logistics, computing, and even healthcare.
Now here is where there is a major fork in the road for Bitcoin as an investment vs a currency. First and foremost, Bitcoin was created to eliminate the middlemen of payments systems which are the banks. The banks are paid a fee to store and complete the transaction on behalf of the customer. The question then becomes, what if an alternative currency were created that could be instantaneously verified, reputable and be used in the real world for real goods? This is exactly what Satoshi Nakamoto sought to pursue with the creation of Bitcoin. Up until recently, Bitcoin was used primarily by anonymous people for obscure transactions and for those willing to accept it in place of dollars - hence popular with criminals initially. As more people adopted the currency as something of value that others are willing to trade, it continued to legitimize the currency as an asset of value. Similarly, as with the dollar, there is no intrinsic asset backing the currency as the US left the Gold Standard under the Nixon administration in the 70s. We accept the dollar as an instrument of trade as it is backed by the stable and economic power of the US government and strengthens and weakens in relation to other currencies.
The announcement of PayPal and Square to hold and transact Bitcoin on their platforms has given access to millions of people and have made it easier than ever to buy physical goods for digital currency. As long as there is both demand (buyers) for bitcoin and those willing to accept it as payment (sellers) it will continue to be looked at as a store of value regardless of the price. Since there are a limited amount of Bitcoin produced, currently at over 18 Million with a cap of no more 21 Million, there is a limited supply. As we have learned in basic economics, high demand and low supply make for much higher prices. Bitcoin the investment is a question of demand. Will more and more people continue to look at it as a store of value and look to transact in it? It is a two part question. It’s one thing if people buy it and another if others actually use it. Bitcoin will fail to take off in the mainstream until it can be used to buy physical goods on a wide scale, think the checkout line in your grocery store or your morning Starbucks, however Paypal and Square have made that reality this much closer. It would not be surprising to see this take place in the very near future.
Bitcoin does not come without risk however. Currently, it can be hacked, lost, stolen, or even worse difficult to withdraw just when you need it the most. Out of 18 Million Bitcoin in existence, there are over 3-4 million bitcoins that are currently lost and another 1 Million that have already reportedly been stolen. Bitcoin is an unregulated asset and there is tremendous risk to that. As more and more people continue to adopt the currency, transact in business, and purchase it as a store of value, Bitcoin will continue to gain in popularity and thus drive the price. However, if the industry cannot fix the problem of an average user accessing and protecting their cash the risks may be too much to bear.
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