Unless you’ve been living under a rock, chances are you’ve probably heard of Bitcoin. Bitcoin is a digital currency that does not exist in any kind of physical form. Unlike fiat currency, Bitcoin and all other cryptocurrencies are stored and transferred via digital wallets.
Crypto’s meteoric rise in recent years has resulted in the currency having its fair share of supporters and detractors. On one hand, crypto enthusiasts are convinced that Bitcoin and other cryptocurrencies are set to rival fiat currencies as a medium of exchange.
Meanwhile, detractors believe that cryptocurrencies are a scam and a bubble. Often cited is the fact that cryptos are not backed by any true assets i.e. gold or actual hard currencies.
Both camps have their own respective points that make sense. However, it should be noted that in today’s highly digitalized world, the need for currency to actually exist in a physical form has diminished significantly.
With that in mind, let’s take a look at how cryptocurrencies such as Bitcoin are able to derive their value despite not actually existing physically.
Bitcoin was first introduced into the market in 2009 by its creator; Satoshi Nakamoto. Looking to create a currency that would exhibit inflation-proof characteristics, Nakamoto utilized blockchain technology to develop the bitcoin network.
Initially used as a medium of exchange by users of the deep web, Bitcoin was originally prized for the pseudo anonymity it offered along with the ease in which it allowed funds to be transferred.
Bitcoin has since exploded into popularity becoming one of the most volatile mainstream investments in the world. In the early days, Bitcoin was bought by retail investors and crypto enthusiasts who believed in the potential of blockchain technology. It has been one of the best cryptocurrencies to invest in over the 2010 – 2020 decade, however it remains to be seen whether it’ll hang onto that title in the 2020s.
Since then, the price of Bitcoin has undergone numerous market crashes, bull runs, and stagnations. However, the bull runs seen in 2016 and 2017 have led to institutional investors taking an interest in the cryptocurrency.
As banks and even some governments have begun buying up Bitcoin, cryptocurrency is beginning to cease being seen as a niche asset class. Instead, cryptos are seen as being a mainstream investment – something which has served to further drive-up demand and thus increasing prices. The emergence of Bitcoin ETFs on the scene has only further pushed crypto investments into the mainstream as investors can use their stockbroker accounts to invest in this asset class via these regulated vehicles.
With entire countries being forced into lockdown as a result of the COVID-19 outbreak, the economic damage wrought by the massive drop in consumption is yet to be truly felt.
In an effort to contain the economic fallout, governments around the world have been introducing stimulus packages with the intention of injecting liquidity into the economy.
Inflation as a result of excess liquidity is one unintended side-effect of these stimulus packages. This leads to an erosion in the value of cash assets and as a result, investors have looked at cryptocurrencies such as Bitcoin as a hedge, as confirmed by the authors of several cryptocurrency books.
As there is only a limited supply of Bitcoins on the market (21 million), it is theoretically resistant to inflation. The recent 2020 and 2021 crypto bull market could be attributed to an influx of investors looking to shore up the value of their cash assets.
3. Political Uncertainty
Geopolitical tension and political uncertainty tend to go hand in hand with an economic downturn. As foreign investment plummets and the local economy contracts, the strength of a nation’s currency begins to weaken.
Consequently, this leads to a reduction in said currency’s buying power. To circumvent this, citizens in the country may opt to purchase foreign currency as a means of hedging against this. Unfortunately, government restrictions can make this impossible which is where cryptocurrencies like Bitcoin come into play.
Because cryptos are decentralized, they can be easily purchased by anyone with a digital wallet and an internet connection. Hence making it very difficult for governments to regulate them.
Given the rise in instability in various nations around the world including the United States, it is easy to see why the price of Bitcoins and other cryptocurrencies have also risen accordingly.
Cryptocurrencies may be a volatile and unpredictable investment. However, the lack of regulation and decentralized nature makes it attractive to some.
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