the Bitcoin (CRYPTO: BTC) bubble can finally burst.
The largest cryptocurrency’s price fell below $ 30,000 on Tuesday for the first time since the start of the year in response to the Chinese government’s crackdown on Bitcoin mining. It was the last bad news for Bitcoin, coming after You’re here CEO Elon Musk has said his company will stop accepting Bitcoin as a payment method. Bitcoin prices peaked with the Coinbase IPOs in April and have fallen about 50% since then. Interest in cryptocurrency is also likely to wane as the value of digital coins declines, and with the economy now open, some investors may choose to revert to pre-pandemic activity, leaving their interest in the coin behind. cryptocurrency.
Still, the most ardent Bitcoin bulls support digital currency, but their arguments for a cryptocurrency takeover conveniently ignore a number of holes.
1. Bitcoin doesn’t solve a real problem
Bitcoin does not exist because it is necessary, but simply because it can exist. While there are real use cases for this, such as in economically defunct countries like Venezuela, and for ransom payments when criminals don’t want to be tracked, the idea that Bitcoin will replace fiat currency is far-fetched. , if not totally ridiculous. .
Bitcoin supporters invented a war on fiat money to give cryptocurrency a purpose, but fiat money like the US dollar works exactly as intended, as a medium of exchange or a store of value. While inflation is a concern for holding cash, the volatility of Bitcoin and other cryptocurrencies shows that they are much less reliable as stores of value.
The reaction to the news in China, where officials have said they want to “squeeze” on Bitcoin, is revealing. If cryptocurrency proponents believed that Bitcoin offered a real alternative to fiat money, then Bitcoin’s price would not have been affected or it could even have increased, as the government’s overbreadth offers an argument for the use of Bitcoin. This was not the case, however, as the news wiped out around 20% of Bitcoin’s value over the weekend, although the currency recouped some of those losses.
2. Almost all of its value is speculative
Most bulls argue that Bitcoin’s value is tied to its ability to be “digital gold” and to act as a hedge against inflation. But in reality, Bitcoin’s value stems mainly from the fact that it is a vehicle for speculation. In many ways, it is the perfect speculative asset. It trades 24/7 around the world, giving investors more people to trade with and a lot more time to do it. There are no fundamentals to attach to its value, so its price is primarily a factor in technical graphics, emotions, social media commentary and news. In an era where memes stocks have taken over the market, Bitcoin has also become a meme itself with its bigger bulls adopting laser eyes in their social media profile pictures to identify with the phrase “laser beams.” up to $ 100,000 “, or until the price of a bitcoin reaches $ 100,000.
Bitcoin can function as a currency, but its primary use case is to be traded in the hope of making speculative profits. This approach basically boils down to the Biggest Fool theory, where traders buy an asset in the hope that someone else will pay more for it. This has mainly worked for Bitcoin so far, but that’s not a good reason for it to climb to $ 500,000 as bulls like Cathie Wood have argued.
3. Rarity alone does not equal value.
One of the favorite arguments of Bitcoin backers is that its scarcity gives it value. The number of bitcoins will be capped at 21 million, which Bitcoin bulls say explains the reason for its value. About 18.5 million has been mined so far, but it will continue to be until 2140 due to the periodic slowing of the mining reward known as halving.
It is true that scarcity helps to add value to some things like gold and gems, a work of art or other collectable item. But scarcity alone doesn’t translate into value. Each work of art, for example, is unique, but only a few million dollars in auctions. This is because they are made by famous artists, there is something particularly eye-catching about it, or there is another cover attached to it. Likewise, a 1909-11 Honus Wagner baseball card recently sold for almost $ 4 million, but most baseball cards are nearly worthless, although they are old and out of print, in others. rare terms. .
In order to create lasting value, Bitcoin needs more than scarcity. Being limited to 21 million is not enough to justify a valuation as high as the most valued companies in the world.
After the recent boom and wider adoption by mainstream institutions, Bitcoin appears to be here to stay, but the biggest risk to the currency may be falling prices and loss of interest from the general public. A further fall in the price could create a negative feedback loop that would lead to margin calls, large losses and a disillusioned investor base that loses faith in the currency.
At this point, the value of Bitcoin is tied to the buzz surrounding it. If he loses that, he may never reach his previous highs.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.