Bitcoin is back in the headlines. Last week, it hit a two-year high, the U.S. Securities and Exchange Commission (SEC) approved the listing and trading of a specific Bitcoin ETF, and after a long slump, institutional investors and international banks are showing increased interest in the cryptocurrency.
There is renewed enthusiasm for a puzzling financial product that is largely unexplained by traditional financial asset theory, and no new theoretical justification for the demand for Bitcoin and its astounding valuation.
Regulators and economists have every reason to sound the alarm. The latest relevant notice was posted on the European Central Bank's (ECB) blog (dated February 22, 2024) by Ulrich Beintheil and Jurgen Schaaf, Directors of Market Infrastructure & Payments. They point out that Bitcoin has failed to deliver on its promise to become a global decentralized digital currency. Bitcoin is hardly used for legitimate remittances or payments. The experts point out that despite the SEC's approval of a Bitcoin ETF, the fact that it is unsuitable as a means of payment or investment remains unchanged.
So why is this cryptocurrency experiencing such high valuations and renewed demand? Let's take a look at the data since its launch in 2009.
According to the latest estimates from Crypto.com, there will be around 580 million cryptocurrency users in 2023. This means that demand has increased by around 34% from 2022. The number of users continues to grow this year.
Last year, Bitcoin owners grew 33%, from 222 million to 296 million. Ethereum's user base is set to grow 39% between 2022 and 2023, from 89 million to 124 million. Many users store both currencies in their digital wallets.
Spain is a good example of high-income countries’ engagement with cryptocurrencies, with between 5% and 7% of adults claiming to own cryptocurrency, according to the National Securities Market Commission (CNMV), and around 40% of these crypto users store Bitcoin in digital wallets.
The typical profile of a Bitcoin user is a young male who is a student or a worker, tends to live in an urban area and has a high monthly income. This is a surprising profile, as these characteristics would suggest a higher level of financial education and caution.
Bitcoin's price has always been a rollercoaster of fluctuations. Its price remained near zero until it rose above $900 at the end of 2016. By 2017, the first boom arrived, surging to $19,345 in December. Then came corrections in 2018 and 2019. 2020 saw a new rebound, from a low valuation of $5,000 in March when the pandemic began, to $27,000 by the end of the year.
In November 2021, Bitcoin reached an all-time high of $68,700. From this value, there was a significant correction, with the cryptocurrency dropping to $16,600 by the end of 2022. This coincided with rising interest rates (shrinking the money supply and increasing the value of traditional currencies). And throughout 2023, Bitcoin experienced a recovery from its lowest levels. It started the year at around $16,500, its lowest since November 2020, but ended the year near $42,200.
As of October 2023, its value is on the rise: Bitcoin started 2024 at $43,450 and is already up more than 20% this year, to about $57,000… and it's only just March.
Currently, Bitcoin’s market cap is over $1 trillion, a level not reached since November 2021. In other words, this rollercoaster ride has been characterized by extreme volatility without any real justification for a recovery.
It is clear that Bitcoin regains value when the rate of return on other traditional financial investments in the market declines, and it is understandable that its value plummets whenever the price of fiat currencies (government-issued currencies) rises. However, its connection to real-world events is shaky, and the price of Bitcoin is subject to opaque determinants, while the arguments behind cryptocurrencies are generally weak. Speculation and market manipulation are rampant regarding this digital currency.
In addition to this, there is also a perception that Bitcoin's value has to do with its future relative scarcity, since Bitcoin's (theoretical) maximum supply is 21 million. Around 19 million Bitcoins have been mined, and there are just under 2 million more available to be mined. This idea of scarcity is reinforced by the so-called halving (which occurs every four years, with the next one scheduled for April 2024), when the reward for mining a new block is halved. Still, these arguments are insufficient to justify using Bitcoin as an investment or means of payment.
In short, despite the new euphoria, cryptocurrencies remain an inadequate instrument for the majority of retail investors and are useless as a means of payment. It is a completely unprotected asset without any regulator oversight. Such excessive risk-taking seems incomprehensible. Profit potential is overestimated and possible losses are not sufficiently taken into account.
Cryptocurrencies are a highly opaque instrument, so little is known about the people who have lost large amounts of money in the cryptocurrency market. But when we consider the profile of crypto investors, it is clear that something is wrong with financial education in many countries.
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