3 Reasons Why the Price of Bitcoin is Surging

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With Bitcoin enjoying a spike in price against government currencies, there is lots of talk about it on the Interwebs. As if you need to be told, be careful with your money. Much of the commentary declares a Bitcoin bubble for one reason or another.

It might be a bubble, but nobody actually knows. Like any service or good, there are many dimensions to value storage and transfer.

That depends on the ultimate viscosity of Bitcoin. But Bitcoin certainly has value of a different kind: These evanescent strings of code have no intrinsic value whatsoever! Anyone relying on them as a store of value is a volunteer victim. Smart people stick with U. No major currency has intrinsic value. This is as true of Bitcoin as it is of dollars, sandwiches, and sand. So the intrinsic value question, which seems to cut in favor of traditional currencies, is actually a wash.

Bitcoin is good with transferability—far better than any physical currency and quite a bit better than most payment systems. The genius of PayPal after it gave up on being a replacement monetary system itself was quick transfer to most places that rich people want to send money.

Bitcoin allows quick transfer anywhere the Internet goes. Bitcoin bombs badly in the area of acceptance. Watch the video at the link two or three times if you need to. Acceptance of different form-factors for value and payments can change. How many billions of dollars per year do we pay for storage and transfer of money? Assuming the algorithms work as advertised, the quantity of Bitcoin will rise to a pre-established level of about 21 million over the next couple of decades and will never increase after that.

This compares favorably to fiat currencies, the quantity of which are amended by their managers, sometimes quite dramatically, to undercut their value. If you want to hold money, holding Bitcoin is a better deal than holding dollars. Which brings us to…. Without central planners around to carefully debase its value, Bitcoin might go deflationary, with people refusing to spend it while it rises against all other stores of value and goods.

People are buying it in anticipation of its future increase in value. Deflation can theoretically cause an economy to seize up, with everyone refusing to buy in anticipation of their money gaining in value over the short term. There is room for discussion about whether hyper-deflation can actually occur, how long a hyper-deflation can persist, and whether the avoidance of deflation is worth the risk of having centrally managed currency.

I have a hard time being concerned that excessive savings could occur. However, whatever the case with those related issues, Bitcoin is probably deflation-prone compared to dollars and other managed currencies.

Where you put your money is a reflection of your values. Payment systems and governments today are definitely gawking through that window into our souls. Bitcoin, on the other hand, allows payments to be made with very little chance of their being tracked. Sophisticated efforts to mask payments will be met by sophisticated efforts to track them. Relatively speaking, though, payments through traditional payment systems like checks, credit cards, and online transfer are super-easy to track.

Cash is pretty darn hard to track. So Bitcoin stacks up well against our formal payment systems, but equally or perhaps poorly to cash. The digital, distributed nature of Bitcoin makes it resistant to official seizure. Are you in a country that exercises capital controls? Put your money into Bitcoin and you can email it to yourself. Carve your Bitcoin code into the inner lip of your frisbee before heading out on that Black Sea vacation. Cypriots apparently did not move into Bitcoin in significant numbers.

Because Bitcoin transactions are relatively hard to track, many can be conducted—how to put this? In relation to the weight of the tax burden, Bitcoin may grow underground economies. Indeed, it flourishes where transactions in drugs, for example are outright illegal. Bitcoin probably moves the Laffer curve to the left.

The tough one for Bitcoin is security. Individuals have lost Bitcoin because of hard-drive crashes. This will cause small losses in the total quantity of Bitcoin over time. Bitcoin exchanges have collapsed because hackers broke in. When a Bitcoin transaction has happened, it is final. The downside of a currency that costs nothing to transfer is the lack of a number to call.

So Bitcoin lags traditional currencies along the security dimension. But this is not intrinsic to Bitcoin. Security will get better as people learn and technology advances.

There may be Bitcoin-based payment services, banks, and lenders that provide reversibility, security, that pay interest, and all the other goodies associated with dollars today. To the extent they can stay clear of the regulatory morass, they may be less expensive, more innovative, and, in the early going, more risky.

Only a fool can say. No offense, all of you declaring a Bitcoin bubble. Every buyer converts currency to Bitcoin for transfer, and every seller immediately converts it to her local currency. Its equilibrium price ends up pretty low.

If lots of people hold Bitcoin just becausethat highly viscous environment suggests a high price for Bitcoin relative to other currencies and things. Whatever the case, people are now buying Bitcoin because they think others are going to buy it in the future. What does matter, I think, is having this outlet.

The availability of Bitcoin is a small, but growing and important security against fiat currencies and state-controlled payments. It is a competitor to state money. Skip to main content. April 5, Share Tweet Like Submit Plus. Which brings us to… Deflation-Resistance: BitCoinpaymentspaypalsurveillanceseizureBitcoin bubbleCapital Controlsprivacybubbles.

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