Is Bitcoin Overpriced?

Financial Experts and common people alike are puzzled by the enormous price one has to pay, to just own one piece of Bitcoin (about USD 6,000, at Oct-17 typical exchange’s quoted price).

Who are those “rich” buyers?

Conventional wisdom could not give a good explanation or clue to such a unusual cryptocurrency phenomenon.

Let us go through some of them and hopefully come up with some answers.

Bitcoin has no (physical) intrinsic value, other than that it is a digital currency worked much like cash; that it can be spent or received anonymously. Gold on the other hand, is recognized as having some intrinsic value in it.  It retains its luster, malleability, and resistance to tarnishing, thus making it useful for numerous manufacturing and jewelry purposes. Both are known for its scarcity. One still wonders, what “real” intrinsic value is Bitcoin offering to us?

Some smart technologists claimed that the core intrinsic value of Bitcoin cryptocurrency come from its blockchain technology capabilities (1) it can be traded anonymously, (2) it enables to carry out cross-border transaction fees at much lower costs and (3) the relative fast speed of transaction, in minutes vs intermediaries like banks which take a few days to complete simple financial transactions.

Adam Smith’s invisible hand of supply and demand explain the market value of Bitcoin – it is simply what someone is willing to pay. Demand is based on perceived value. So many of them are willing and able to play the “Who is the greater fool?” game.

The above is commonly described as “extrinsic value” of bitcoin. The speculators are willing to put their bets on volatility of prices as day or swing traders; and as long term “investors”, they hope that Bitcoin price will rise higher and higher in the future, the longer the better.

People often cast nasty judgment on Bitcoin. They say, “Bitcoin is just used as money for drugs, prostitutes, and other unsavory behavior.” They generally condemn the currency as a conduit for nefarious activity in order to undermine its credibility. – It may be happening but are being tackled studiously by nearly all countries’ governments around the world.

In the absence of Bitcoin speculation, what is left is the utilitarian value? What you can “do” with it that you can’t do with other traditional currencies. And then, there’s Paul Krugman, writing for the New York Times : “To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why Bitcoin should be a stable store of value,” Krugman writes.

In short, cryptocurrency is digital cash transaction between two parties and without a central body as an arbiter of trust.  The miners are the people who uses crypto (math) to verify the peer to peer transactions, and are paid a small fee for their efforts.

Bitcoin, current cryptocurrency leader are restricted to only 21 million bitcoins in circulation at its maximum.  It is difficult to reach this target value by its inherent design. The problem, as more Bitcoins are being mined, the harder it becomes to mine them. “Only those with specialised, high-powered machinery are able to profitably extract bitcoins nowadays,” explains Jordan Tuwiner, Founder & CEO at Buy Bitcoin Worldwide. So, more demand for a limited supply of Bitcoins each year means higher and higher prices.

You can get more info at – Beginner’s guide to bitcoin – CoinDesk’s Information Center

Even more recently, Damordan wrote a blog post, The Crypto Currency Debate: The Future of Money or Speculative Hype? In it, he argues that the future of cryptocurrencies, as a legitimate form of payment, will have to lose some of its attributes that make it so alluring as a speculative asset.

Bitcoin and other cryptocurrencies’ major challenge are to overcome prospective users’ suspicion, and become known as a legitimate medium of exchange for legal purposes.

So investing in cryptocurrencies might be a prudent investment, but which one that should be is a more complex question, with fewer clear answers.

Flash News (31-Oct-17):  CME Group Inc. is planning to have Bitcoin Future Contracts listed in its exchange before end of this year – The implication is volatility of  Bitcoin currency can be hedged! It addresses a major concern of Bitcoin’s usefulness as a stable stored currency.

CME Group Inc. (Chicago Mercantile Exchange & Chicago Board of Trade) is an American financial market company operating the world’s largest options and futures exchange.

If you would like to know whether you are ready for it,  please read my recent post on “5 Tips To Trade Bitcoin Or Volatile Cryptocurrency”

For cryptocurrency starter, you may like to consider opening an account with Coinbase, a secure online platform for buying, selling, transferring, and storing digital currency.

Note:- If  you buys or sells US$100 of digital currency or more through Coinbase using this link, you and your referral will both get US$10 worth of free bitcoin.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.

But, the real investment opportunity in this field might be not only cryptocurrencies, but innovative applications of the blockchain.