Sounds like a miracle (or a scam). You buy bitcoin and its value multiplies several times every year. But where does that value come from? If I made money, did someone else lose money? How far can its value grow?
Bitcoin is a phenomenon that raises many questions. I first heard about Bitcoin around 2012 (2013?). Its value was counted in tens of dollars and I was fascinated by money that can operate as an open source project without any government control and authority. I didn't buy or mine Bitcoin at the time. Today I would buy a house with it.
So I've been around the Bitcoin community longer and I'm sensing different sentiments. I sense one brutal trend in it. From the days when Linux geeks were sending electronic money via command line, to the adoption of early "more normal" users, to today's situation where Bitcoin is bought by people who have no idea what it is but just want to get rich.
To be clear: wanting to get rich is a normal thing. The problem is when someone tries to get rich on something they don't know how to work. That's when it's very easy to go broke instead of getting rich. That's why I want to summarize in simple terms how it is with Bitcoin.
Why is Bitcoin valuable?
One has to think about why ordinary money has value in the first place. Money is an amazing invention that has moved our society forward significantly. It enables trade, which helps us to create wealth through greater efficiency. I get money for creating software with my colleagues. I'm more efficient at this activity than people who make food or clothes. I'm not efficient at that. So I give them money and I get the food and clothes. Honestly, if money did not exist, I'd be hungry and naked. Money has value because of the belief that it will get us the things we need to live.
But what about Bitcoin? Why is that one worth anything? The explanation is primitively simple. Because the people who buy it, also consider it to be money, which it is since you can buy things on the internet with it.
But Bitcoin is the first technology that makes it possible to send value from one person to another without anyone else having to oversee it. If, say, I buy something on Shopify and pay for it with Bitcoin, Shopify can verify on its own, without the help of a bank or the state, that I sent it the right amount and that I didn't counterfeit those Bitcoins. This gives Bitcoin an advantage over state money, where I have to trust both the bank and the state.
Another reason why Bitcoin can retain value is that it has a finite amount. In fact, there will never be more than 21 million Bitcoins. It is also a fact that any person can verify its authenticity. That is, whether someone is creating their own Bitcoins out of nothing. This puts Bitcoin in the category of assets similar to gold or land, which are also only a finite quantity and we cannot just create them. But Bitcoin has much better liquidity compared to conventional assets, which means it's possible to easily send any amount of money to the other side of the planet, cheaply and quickly.
Nobody can take Bitcoin away from you, either. Just remember the password, which the bailiff, the tax office, or anyone else won't get from you. That you don't need something like that? That can easily change. Politicians can't be relied upon.
Why is the value of Bitcoin rising?
Let's say you're interested in buying land in a location where no one is selling land, but the demand for such land exists. You can expect its price to be high. Conversely, if you want to buy land in a location where there is high supply (many sellers) and low demand (few buyers), you can expect its price to be lower. The value of land is therefore ultimately determined by the market and the ratio between supply and demand.
The same is true for Bitcoin. The more people want to buy it, the higher its price goes. Conversely, when more people sell than buy, its price goes down. But as more and more people start using Bitcoin, and not many people stop using it (or sell it) its value goes up.
But how is it possible that Bitcoin's value is still rising? Where does it come from? Who loses money from the fact that I am getting rich? Of course, nothing is free. Intuitively, the thought may occur to us that someone who trades Bitcoin must be losing money since most are getting rich. But the truth is that it is those who have state money instead of Bitcoin who are losing money.
When the value of Bitcoin goes up, the value of fiat (state) money goes down. Also because of the supply/demand ratio. When I buy Bitcoin, I sell dollars. The more people buy it, the less demand there is for government money and its value goes down. It's not falling as fast as Bitcoin is rising. That's because there is much less value in Bitcoin than in state money. But the fact is that the profits from Bitcoin are paid by people who have savings in euros, dollars, and other state currencies. The cruel thing is that the value of this money has been declining all our lives and we are used to it. It's called inflation. That's why it doesn't seem like anything fundamental has changed that much since Bitcoin was launched. But if the trend continues like this it will be felt more and more and we may end up in hyperinflation.
In this context, Bitcoin is starting to look like a good hedge against hyperinflation (diversification of risk). After all, if you convert some of your money into Bitcoin, you will be less affected by hyperinflation. If it comes.
How far can the price of Bitcoin go?
I'll start by answering this question in a negative way. It can go to zero. If there is a bug in the protocol and Bitcoin can suddenly be counterfeited, it will suddenly become worthless. But since its code is open, and anyone can look at how it works, it's very unlikely that someone hasn't found and exploited such a bug by now.
We might as well consider that a better cryptocurrency will come along and people will start using that one. There are already thousands of other cryptocurrencies, and the only one better than Bitcoin is Monero, in my opinion. Even then, not in everything. Bitcoin is the king that everybody uses. I don't know anyone who uses cryptocurrencies, but not Bitcoin. Its value will go down too, but I don't believe it will be cheaper in the long run than it is today.
Well, where can its price go? I don't know. For several years (maybe since the beginning), there has been a discusion of a million-dollar price as the value at which Bitcoin can stabilize if it is used en masse. But in such a situation, we can also count on hyperinflation and the eventual collapse of the classical system of state money. It is probably clear that if something like that were to happen, it would mean a very serious crisis, which is what I am realistically afraid of. But I am not an economist, so do not take me too seriously. Although even today no economist can say how the price of anything will evolve. It will always be decided by the market, and it will be unpredictable.
Finally, unsolicited advice
If you decide to buy Bitcoin, make a few things clear to start with:
- Be clear about why you want to buy Bitcoin. Is it to get rich? A hedge against inflation? Do you want to buy drugs on the internet? (In that case, I recommend Monero instead.) One of my motivations for using Bitcoin, for example, is that by doing so I'm helping to create an alternative to the state monopoly on money.
- When buying or selling, try not to give in to your emotions. At the end of 2017, many people bought Bitcoin too expensively because they were afraid they would miss the train. Consequently, in 2018 Bitcoin only went down, which scared many people and they started selling at a big loss. For starters, try buying Bitcoin for a small amount that you can lose and see for yourself what it's like.
- Learn how Bitcoin works! This is probably the most important advice I can give you. There are downsides to freedom, and that is that you take responsibility for your decisions. If you lose your Bitcoins, you can't write to "support" asking for help. This is because Bitcoin is not an institution and thus has no "support".
If you have any questions, feel free to comment on this post. But the best way is self-education. Everything you need is on the internet, it just takes precious time.
And don't forget: "Don't trust, verify!"