The Economist: Bitcoin’s high price is reasonable and can be self-sustaining through demand

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The success of Bitcoin depends on whether it can find a more balanced role in the existing financial system.

Original title: “Bitcoin Hard to Beat: Bitcoin may justify its high price, but it will not affect global finance”
Written by: The Economist Compiled by: Houlang Finance

In 2013, when the price of Bitcoin first soared to around $1,000, it created a cryptocurrency millionaire. After that, the market overheated and caused a bubble, which made some early fans despair at the time.

A downturned man in Wales was looking for early discarded hard drives in the garbage dump because it contained 7,500 accidentally discarded bitcoins. The value of these bitcoins increased from zero to $7.5 million. Since then, Bitcoin has been rising frantically. Driven by speculators and market manipulation, its price soared to around $19,000 in December 2017, but fell by more than four-fifths in the following year .

The recent rise in Bitcoin is by far the most glorious period. After three-months has tripled, the price has now exceeded $35,000. In other words, lying in the Newport garbage dump in Wales is a piece of computer hardware worth more than $2.6 billion.

The current market’s enthusiasm for Bitcoin is amazing, because the liberals living in the basement are not the only ones who are hyping Bitcoin. Some elites on Wall Street have joined them.

For example, Larry Fink, the manager of the Blackstone Group, the world’s largest asset management company, stated in December that Bitcoin could become a new “global market.” Renaissance hedge fund Renaissance Technologies and other large hedge funds have been betting on cryptocurrencies. Ruchi Sharma, a strategist at Morgan Stanley, believes that the rising US debt will make cryptocurrencies more attractive.

The Economist: Bitcoin's high price is reasonable and can be self-sustaining through demand

If the total Canadian dollar is narrowly defined as including banknotes and central bank reserves, the total value of issued bitcoin exceeds the Canadian dollar. However, few people think that it has any chance to replace the currency issued by the government. This is just the dream of the early believers.

For example, it is too inefficient to be used for payment; Bitcoin can only process less than ten transactions per second. In contrast, the underlying payment companies of consumer finance, such as Alipay and Venmo, can solve these problems. If Bitcoin can solve this problem, the government will quickly ban any technology that can threaten its monetary sovereignty. Regulatory resistance has forced Facebook’s proposed digital currency Libra to be renamed (changed to Diem) and reduce Libra’s original ambitions.

At the same time, as central banks improve payment systems and launch their own digital currencies, the competition between national digital currencies and Bitcoin is also heating up.

The Economist: Bitcoin's high price is reasonable and can be self-sustaining through demand

Instead, Bitcoin’s enthusiasm is rooted in the possibility that it may eventually provide a secure store of value—just like gold, but more convenient (because maintaining a digital wallet is easier than maintaining a physical vault). It will occupy a small but permanent part of the investor’s portfolio.

Like Bitcoin, gold has no interest or dividends. In contrast, Bitcoin is different in that gold has basic uses. It is investors’ fluctuating demand for gold that drives gold prices, not jewelers and chip manufacturers.

Therefore, it is conceivable that the high price of Bitcoin can also be self-sustained by demand. If Bitcoin can be as popular as gold by investors (position market value), according to JPMorgan Chase Bank calculations, the price of Bitcoin will rise to US$146,000. Compared to gold, millennial investors in the current market seem to prefer to invest in cryptocurrencies.

The Economist: Bitcoin's high price is reasonable and can be self-sustaining through demand

There are many reasons to doubt whether Bitcoin can become gold.

Its price is highly volatile and changes with the fluctuation of the stock market. It is almost undesirable to use Bitcoin as a safe haven asset, because the market lacks liquidity and cryptocurrency trading is still unregulated. In the market, fraud and theft are rampant, Bitcoin provides convenience for online drug sales and other crimes. Investors of cryptocurrencies must tolerate large investment and reputational risks. Hedge funds that thrive on risky investments may be swarming in, but some established Wall Street financial institutions, such as pension funds, remain indifferent.

The Economist: Bitcoin's high price is reasonable and can be self-sustaining through demand

Perhaps it is the wrong view to think that the rise of Bitcoin is out of control. Eventually, Bitcoin will reach a settlement with regulators, there will be more liquid transactions and suppression of criminal activities (the anonymity of Bitcoin is a bit overestimated), so that Bitcoin will have a wider appeal.

At the very beginning, Bitcoin was given the hope of subverting the global monetary system. Today, its success depends on whether it can find a more balanced role in the existing financial system.