As the value of a bitcoin continues to depreciate this week, currently holding above the $20,000 support level after having fallen to nearly $18,000 on June 19th, it is worth reflecting on the cryptocurrency’s performance. Certain questions come to mind: has it lived up to investor and user expectations? Is it destined for endless cycles of volatile buying pressure and selling pressure? Is it worth buying these dips, or is it just a pyramid scheme as many economists have claimed? Is it a true alternative to fiat money as its mysterious inventor, Satoshi Nakamoto, ostensibly hoped it would be? Let’s explore these concerns, and the merits of Bitcoin, as we ask the central question: is Bitcoin worth buying now?
Supposed Benefits of Bitcoin
According to Bitcoin apologists, there are myriad benefits that warrant use of, and investment in, this cryptocurrency. Chief among them is its ‘decentralized’ status: rather than being issued, regulated, and influenced by a central bank and government, as is the case with fiat currencies, Bitcoin is liberated from these authorities by means of a blockchain. The blockchain is essentially a decentralized data storage system that is operated and shared via computer network, perfectly tracking all transactions and ‘mining’ of new bitcoins.
This system enables Bitcoin users and investors to circumvent traditional bureaucratic and unreliable institutions such as banks and the aforementioned authorities by means of distributed ledgers, which can’t be tampered with. Other such benefits that follow from this include scarcity (there are a finite number of bitcoins to be mined, with no option for bitcoin-printing ad infinitum), privacy (the blockchain does not track your identity, credit score, etc.), simplicity (there is no need to fill out piles of paperwork for hefty transactions or pay clusters of fees to third-party institutions), and security (because it is entirely virtual, it cannot be stolen off your person, nor can Bitcoin’s blockchain be hacked or modified retroactively). For more information on supposed benefits, read here.
Criticisms of These Claims
Unfortunately, the past couple years in the financial markets have revealed an unpleasant truth: Bitcoin is apparently not nearly as decentralized as it intends to be. Even with no Bitcoin-specific central bank affecting its quantity or value via monetary policy, the value of a bitcoin is nonetheless vulnerable to the decisions of central banks worldwide.
As central banks around the world pulled out all the stops to stimulate their respective countries’ economies during COVID-induced slowdowns, even engaging in quantitative easing en masse to artificially promote lending and buying, Bitcoin’s value soared accordingly. Likewise, as many central banks have begun interest rate hikes and implementing quantitative tightening to quell near-ubiquitous hyperinflation, Bitcoin’s value has plummeted as investors flee risk assets. Thus, both Bitcoin’s all-time high of nearly $69,000 per coin in the fall of 2021, as well as its current drop down to the $20,000 zone, are relatively synchronized with global central bank efforts, particularly those of the US’ Federal Reserve. This behavior strongly indicates that Bitcoin’s price action is indirectly influenced by monetary policy after all, regardless of an innovative blockchain. After all, central banks exist to help control markets, not currencies alone.
Likewise, many of the other alleged perks of Bitcoin are less enticing than they appear at face-value. Regarding its scarcity, a limited supply of anything is not enough to guarantee it has a store of value, especially if demand for it is volatile. Regarding privacy, this may grant a user some comfort, but it is not too helpful here; surveillance states still exist, and you cannot approach the blockchain about refinancing a mortgage. Regarding simplicity, these features can also be interpreted as bugs: easy, peer-to-peer transactions of this kind are a scammer’s dream, and what you avoid paying in fees you might pay exponentially in unrealized/realized losses. Regarding security, these benefits are not particularly special; many consumers don’t carry physical cash around anymore, and banks’ mutable records can enable them to better protect customers from theft and mishaps, even retroactively.
Why It’s Worth Something
Nonetheless, despite all these legitimate concerns and chaotic volatility, Bitcoin is still valuable. How can we tell? Because its price isn’t at zero. This may seem silly, but it is true. For as long as demand for Bitcoin exists, it will always be worth something. It only ought to be recognized that this value is primarily the result of speculation, not fundamentals.
Though Bitcoin’s value will likely continue to depreciate as interest rates rise, consumer spending slows, and the novelty of cryptocurrency wears off in the face of disappointing losses, this is likely not the end of its story. Even as the utopian mythology and bizarre religious language surrounding the crypto movement (hopefully) fade, Bitcoin has historically proven itself as a viable way to make money, if you accept the inherent risk. After all, Bitcoin’s value is contingent upon the desire of institutions and regular Joes to make a quick buck, an intention pervasive throughout most of human history. To expect the value of a bitcoin to soon hit zero seems akin to expecting most casinos to close up shop soon.
How to Trade Safely
The notion of trading Bitcoin safely is a bit of an oxymoron, considering that Bitcoin is arguably one of the most unsafe assets available to own. However, with careful risk management, this is not an issue. Here is my personal approach to trading Bitcoin: 1) Keep your position size small enough that no actual damage can be done to your account, i.e., only purchase what you would feel completely comfortable losing. 2) Opt for holding a position for months or a few years as opposed to day trading, short-term swing trading, or investing. With both day and short-term swing trading, you risk missing out on the longer-term climbs, whereas investing should be reserved for trustworthy securities that have fundamentals which are promising decades down the road. 3) Have fun; at its best, trading Bitcoin has more in common with playing a game than making meaningful financial decisions.
Bitcoin has many supposed perks that are rooted in it being a decentralized alternative to fiat currency, including scarcity, privacy, simplicity, and security.
However, Bitcoin does not appear to be as decentralized as its apologists claim, considering its value is heavily influenced by monetary policy, diminishing its benefits.
Nonetheless, despite the likelihood of further selloffs, demand for Bitcoin will probably continue in light of its historical periods of success. Speculative buying will likely return.
When I trade Bitcoin, I prefer to only purchase small amounts I feel comfortable losing, hold my position for months or a few years, and treat it as an indulgence, not a serious purchase.
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