The price of Bitcoin just reached $11,000, but should those holding Bitcoin be worried?
Bitcoin is a cryptocurrency, and is the world’s first decentralised currency, meaning that no central bank holds power over the currency, and so it's the first international currency since gold. For example, the dollar is the world’s “reserve currency”, but you cannot find or spend a dollar in the majority of the world. On the other hand, Bitcoin can be used everywhere, (if the vendor accepts this payment method), and exists as a free market. This means that its price is determined from the users of the currency, and no single entity can change or influence this like the Bank of England can for the pound.
Currently, one Bitcoin is equal in value to 7686.57 pounds, but many believe Bitcoin, and a majority of these new cryptocurrencies, to be in an economic bubble. This means that there is the trade in the asset at a price which greatly exceeds its real or intrinsic value, or is based upon implausible or inconsistent views about the future. This is a massive problem with Bitcoin, due to its unregulated nature, meaning that it is very volatile and is liable to a sudden drop in value, just two days ago dropping in value from almost $10,000 by $540.
Why is Bitcoin so volatile?
Firstly, the public view of Bitcoin isn’t the best, it’s wide user over the dark web for illegal activities such as drug trade have created a negative public outlook on the currency. Further, Bitcoin price is based on its perceived value, unlike a centralised currency where the value is set by the central bank. Instead, due to the limit of 21 million Bitcoins available in total (ever), the value is set only by what you, me and the miners of the currency view it at.
The last major factor leading to this volatility is Bitcoins utility as a form of money. Unlike most stable currencies, Bitcoins cannot fulfil all the functions of money as it cannot provide a real store of value, as it is based solely on perceived value. This means that it cannot easily be transferred throughout the world into different “fiat” (in other words just normal monies) currencies, and anyone with a significant amount of Bitcoin cannot easily liquidate this into fiat currency without affecting the market greatly.
So, should you be worried?
Well, the former manager of a large hedge fund Fortress stated he believes that Bitcoin will close at $40,000 next year, promising a large increase in the value of Bitcoin, but with the large volatility of the currency, it seems like a bad time to invest, especially as prices are currently are at their highest recorded. In fact, during the writing of this article, the price of bitcoin rose by 67.42 pounds! But, if you own Bitcoin, your future certainly looks wealthy.