Readers may recall my concern about bitcoin’s precipitous rise in late December. This has not abated:
Graph from Buy Bitcoin Worldwide
So what does this mean to me? Not as an investor, and don’t take anything I say to be investment advice, but as someone who, being part of American society, uses cash, checks, and credit cards – but not cryptocurrency.
First, I’ve never been a currency trader, and I’m guessing it’s a quick way to lose a fortune. This is really a currency trade at this point, isn’t it? But with one difference, as CNN/Business points out:
Investors have sent the price of bitcoin skyrocketing during the pandemic as the Federal Reserve cut interest rates to near zero in March 2020 (and expects to keep them there for several more years), severely weakening the US dollar.
That makes bitcoin, comparatively, an attractive currency. There’s a set limit to the number of bitcoins on the planet, and investors believe that once the supply runs out, the digital coin’s value can only increase.
No more new bitcoins, sometime in the future. That limitation differs from other currencies in which the issuing body can print more money, whether it’s to cover debts or compensate for increasing wealth. Currency traders must try to factor those changes into their calculations.
In the bitcoin case, though, the X factor may be investor naivete. That is a much larger X factor than governmental issuance.
But the other problem here is that limitation on how many bitcoins can be issued. One of the primary goals of most governments is growing the economy, which means stronger production of goods and services over time. Concomitant with a successful result is the need to issue more money in order to cover the increase in national wealth; otherwise, individual prices would plunge and disconcert everyone who depends on stable or even increasing prices.
Bitcoin apparently won’t do that. Indeed, that is a factor in the recent gain in the price of bitcoins. That suggests that bitcoin’s future as a primary currency is highly dubious.
I am also wary as the way to profit off a bitcoin investment is purely through the currency trading option. So far as I know or even visualize, investing in bitcoin doesn’t yield dividends. It’s all predicated on the bet that bitcoin’s value will increase faster than the currency against which trades are occurring.
And, for a currency dependent on a digital infrastructure, that worries me. A successful hack, or a collective decision by international government entities to shut bitcoin down, could be an extremely damaging hit to a financial situation.
But do your own thinking. Maybe I don’t understand currencies as well as I think I do.
