Despite market volatility, many hold Bitcoin to its true value
Many people started to understand cryptocurrency from its “price” and entered the market with the dream of getting rich overnight. However, the crypto market is highly volatile. Investors who come in often get lost in “altcoins”. Only a few end up retreating unscathed from the high risk market.
After the crypto winter of 2018, the prices of many competing coins have fallen by 99%, and even the price of Bitcoin has fallen from the highest point of $19,891 to $3,200. In the first half of 2019, Bitcoin rose by a maximum of 333%, and then it fell from $13,868 to a shock. As of now, the price of Bitcoin is hovering around $7,200. This indicates another starting point of a crypto winter, so why should we stay in this market?
Come for altcoin, and stay for bitcoin.
Although the crypto market is in a bear market, there are still many traditional financial institutions that are going North to enter the crypto market. Their goal is clear: Bitcoin.
Those who stay for Bitcoin
Now many traditional financial institutions can be seen entering the market. Fidelity, the fourth largest investment fund in the world, officially launched Fidelity Digital Assets at the end of last year, and provided cryptocurrency trading and custody services for institutional investors in early 2019.
Coincidentally, Intercontinental Exchange (ICE), the third largest stock exchange in the world, has also set up a subsidiary, the Bakkt Digital Currency Trading Platform, to provide “Bitcoin Physical Delivery Futures”. Meanwhile, ICE has its own delivery warehouse and custodial services. All these phenomena indicate that institutional investors are entering the market.
So what is the charm of Bitcoin? Why did agencies enter? Why are ordinary investors staying?
The true value of Bitcoin
The full name of Bitcoin’s white paper is “Bitcoin: A Peer-to-Peer Electronic Cash System.” Bitcoin is hoping to create a quasi-financial asset that is outside the existing financial system, but still serves as a transaction medium and stored-value unit. The development of Bitcoin over the past decade also proves that Bitcoin does have the potential to become a “currency.”
The US dollar, Taiwan dollar, and RMB are endorsed by the government. In other words, if you hold $100, the government owes you $100, so you take this banknote to various stores for consumption. This is given by the government’s guarantee. Bitcoin is different. Its concept is more like currencies such as gold and silver. It is because of the characteristics of this commodity that it has become a highly liquid commodity. It is also used as a currency due to its high consensus.
However, Bitcoin also has its differences from gold and silver. It is not a physical commodity, so it does not have “actual value” in the beginning. Satoshi Nakamoto designed a mining and halving mechanism every four years to allow Bitcoin to spread out. Through the “consensus building” approach, as more and more people use Bitcoin as a transaction medium, and with more and more agreement on Bitcoin, the scarcity of Bitcoin (a total of 21 million) naturally drives up the price of Bitcoin.
Bitcoin is both a “storage of value” and a “transaction medium”
Many people define Bitcoin using its properties as a storage of value and a medium of exchange.
Bincentive believes in both, because Bitcoin “does not experience inflation”.
In September 2018, the US Federal Reserve announced a further 0.25% interest rate cut as expected by the market. What does this mean? In simpler terms, the United States has to print banknotes. In order to prevent the devaluation of banknotes, we will have to quickly consume or invest, and prevent assets from shrinking.
This mechanism is called “quantitative easing QE”. It was originally a stimulus to promote the economy and make the liquidity of assets better. However in the past ten years, our stock market and housing prices have stayed at the top.
Of course, this is also bad. People became too anxious to spend money, so many derivative products were created, and the 2008 subprime storm was born. The biggest problem with quantitative easing is that it will cause inflation, which will make our money have less and less purchasing power.
So it’s not that your salary can’t keep up with housing prices. It’s that your money is getting thinner and thinner.
The 21 million Bitcoin design eliminates the issue of inflation, which means that as technology becomes more developed, the purchasing power of each Bitcoin will become stronger. Many people compare gold to Bitcoin, which is similar in terms of “scarcity”.
The antidote to government failure?
In addition, when the national government fails, Bitcoin can also play an amazing role.
With the world’s top cocoa origin and 300 billion barrels of crude oil reserves, Venezuela continued its dictatorship during the Chavez period after President Nicolás Maduro Moros took office in 2013. Price inflation has been severely out of control.
In 2016 alone, prices rose by 800%. Nowadays, with the national debt crisis, Venezuela is facing the cruel reality of industrial collapse, capital flight, foreign capital withdrawal, and unsustainable infrastructure.
And when the government fails, its currency becomes worthless. You can see that the Bolivian currency float in Venezuela is changing at a rate that changes every day, showing the value of the country ’s national currency completely losing trust. The highest annual inflation rate reached 1,300,000%.
If you don’t know what it feels like, a tea egg from 7–11 is $10 NTD in 2019. The same tea egg would be selling for $13,000 NTD starting 2020. And this only accounts for annual inflation. Imagine that it costs 14 million to buy a chicken. Today’s chicken may be twice the price by the afternoon. When the government loses trust and the currency fails, the economy is in fact inoperable.
According to Bloomberg News, the local Bitcoin market set a record on April 17, and the day’s transaction volume reached $1 million, ranking second in the world. Venezuela has also begun to use Bitcoin as a method of foreign exchange money to the country. This is the value of Bitcoin.
Is Bitcoin a safe-haven asset?
It can be seen from the figure that after you break away from the gold standard, the price of gold has risen. In fact, the correct statement should be that our money is becoming less and less valuable. Especially after the release of gold’s ETF, the price of gold has been growing, which is why Bitcoin’s ETF is so exciting.
At present, the market value of gold’s assets is 8 trillion U.S. dollars, while Bitcoin is only 0.13 trillion U.S. dollars, which is why many institutions and investors are optimistic about Bitcoin.
For traditional financial institutions, another value of Bitcoin is “hedging.”
Economic globalization has caused the flow of goods, technology, services, talents, and currencies across the world to be transnational and cross-regional, and this liquidity has transformed the world into an almost unified market. Countries in this market maximize their own advantages. The high degree of division of labor in the market also maximizes global productivity.
In addition to globalization, while global economic markets self-reinforced, they also now sync in financial crisis. For example, US subprime mortgages between October 2007 and March 2009 caused the global stock market to collapse. The market value of the US S&P and other well-known indexes evaporated in half overnight.
Grayscale, a cryptocurrency asset company, points out that the price of Bitcoin and traditional market assets, such as stocks, real estate, and bonds, has a low correlation. In other words, various assets have begun to show positive correlations in extreme markets, and Bitcoin may not be affected. This is also the most attractive place for Bitcoin to institutions.
Institutions could allocate some assets to Bitcoin to hedge. For example, at the beginning of the year, the relationship between China and the United States was summarized by the trade war. The stock market and real estate were also not performing so well. One could then move some assets to traditional hedging asset — gold, and also allocate some funds to cryptocurrencies.
To conclude, perhaps we quote from the founder of the Bridgewater Fund, Dario:
“This is a good time when most central bankers want their currencies to depreciate in the fiat currency system, and we can ask ourselves which currency is the best currency after the US dollar, or which currency is the best reserve of wealth.”
This article expresses an independent view of Bincentive. Bincentive is not responsible for investment profits and losses, and investors should carefully consider various investment risks.
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