If you’ve followed the price of Bitcoin for the last twelve months, you’ll know it’s a rollercoaster ride. As an asset class, it’s completely unique. It’s absolutely normal for the price to swing by 20% in either direction daily.
If you’ve followed the price of Bitcoin for the last five years, you’ll have exactly the same impression, too. Throughout the almost decade-long lifespan of the planet’s most popular digital currency, two things seem consistent: a general upwards trend and volatility… lots of volatility!
Yet Another Bubble..
Many commentators claim that Bitcoin is nothing but a speculative bubble. Most of these voices come from the world of institutional finance and actually have the most to lose from Bitcoin’s revolutionary potential. Heads of huge, government-backed banks obviously don’t want to endorse an asset-like currency that could render them obsolete.
In reality, the history of Bitcoin has been permeated with lots of speculative bubbles. There was an epic 71% crash in April 2013. Later in that same year, media attention drove the price skywards in a true mania. The cost of a single Bitcoin surged from around $120 right up to $1,150. Then the bubble burst and there was a massive correction. Similar happened twice in the year 2017 and once more in early 2018. Even as far back as summer 2012, there were huge corrections of around 57% that had early investors reeling.
The reason the bubble never entirely bursts is that people find something in Bitcoin that they cannot find elsewhere. Bitcoin represents true economic freedom. This makes it immensely powerful. It’s scarce like gold; yet you can buy it online. It’s transferred digitally and can be stored securely entirely for free. You don’t need vaults or guns to guard it like you do with gold, and no single authority can act in a way that will debase it. Each time there is a bull run in the market, more converts realize the potential power of Bitcoin, and thus the crash that follows never takes the price down as low as the point that the run started off at.
Ultimately, it’s this permission-less quality that gives Bitcoin value. It’s a truly unique asset class that can quickly draw greedy individuals in when the price starts to rise quickly. It’s these “get-rich-quick” individuals that get burned when some piece of negative press causes yet another speculative bubble to burst. They don’t understand what they’ve bought so sell when the price starts to drop or because they fear it reaching zero. However, there is such a hardcore of support that it’s unlikely to drop past a certain point.
As more people realize that Bitcoin offers much more than simply a way to make some cash, the price can only continue to go up. Let’s look at some of the reasons why this is the case though.
The most important feature of Bitcoin that makes it continue to go up in price is its limited supply. There will only ever be 21 million Bitcoin. Classic economics states that when a demand exceeds supply, prices go up. Since the supply of Bitcoin is fixed, and the demand for a form of money completely free from government intrusion grows, the price can only go one direction – upwards.
No Central Point of Failure or Control
Another feature of Bitcoin that makes it special and unique as an asset class is that it has no central point of failure and no one can control it. Cryptocurrencies are databases that exist on many different computers across the globe, thanks to the technology that underpins them, the blockchain, they can’t be falsely updated. Each transaction must abide by the network rules. This article is much too short to explain just how robust a system it is, but the take-home message is that Bitcoin is incredibly resistant to external forces. In fact, the Bitcoin network has worked perfectly for the best part of a decade now without faults or successful attacks levied against it.
Unlike other cryptocurrencies, such as Ether or DASH, there isn’t even a controlling entity of Bitcoin. Even though these other digital coins are similarly decentralized, they could fall victim to a malicious attack from within.
Second Layer Scaling Solutions Make Bitcoin More Usable Than Ever
One of the few problems with Bitcoin is that its popularity made it prohibitively expensive to use for payments. For those who are yet to fully grasp the “store of value” quality Bitcoin has, this cost reduced the potential functionality of Bitcoin. Again, there isn’t time in this piece to explain exactly why fees rose so much (if you’re interested, Google “Bitcoin scaling debate”). However, thanks to second layer scaling techniques such as SegWit and the Lightning Network, these fees are dropping again.
What’s more, these additional features not only preserve Bitcoin exactly as it was originally conceived, they add additional functionality as a second layer. The full potential of these innovations is yet to be realized, but they certainly add value to the network as it is now capable of much more than it was at the start.
Whilst the price of Bitcoin might increase one day and decrease the next forever as more money enters the market, it will become more stable and therefore more useful as a medium of exchange.