If you are an adult living in an organized society, you conduct your every day business with some sort of money (unless a witch doctor or a mentalist has convinced you that bartering in chickens and bananas is the way to live your life, which is totally fine by me.. whatever makes you happy!).
And chances are you’ve heard of Bitcoin.
Funny money for lots of people.
Here’s the thing, though,
Bitcoin (like all the other cryptocurrencies) is not money.
Cryptos are actually validators of processes and enablers of transactions.
But that’s a different story…
Maybe we’ll talk about it some other time. Not today.
Today, let’s talk about Bitcoin’s price.
I am sure you’ve heard or read all those expert opinions from mainstream and fringe media panelists, journalists, and experts of sorts.
“How can a virtual currency with no real value, have a price of 10,000 American dollars?”
“It’s a bubble filled with speculators that will burst.”
“Even at a thousand bucks, it’s a bubble”.
Well, let’s see..
It’s true that Bitcoin’s price (as the price of other cryptos), has experienced a meteoric rise in the last couple of years.
No doubt there’s speculation in there..
People buying and selling coins in Crypto Exchanges for the pure purpose of making money.
But each one of these cryptocurrencies, has also a utility value.
It is created to serve a purpose.
– Like securing transactions…
– Validating medical records…
– Or making sure, the money you donated to a charity, are delivered to the hurricane victim you chose, and not into the pockets of a crooked politician.
That’s the real value behind cryptos.
But, most of us are only hearing about “how much Bitcoin’s price has risen this week”.
Just like financial derivatives.
You know, options and futures.
Buy something by paying a fraction of its price.
Derivatives exist to hedge your risk.
Invest 900 dollars in Apple stock, and buy an Apple put option for 50 dollars.
If the price of the stock falls, you balance your losses with the profits from the option contract.
But most traders used them to speculate.
Because derivatives use leverage.
So you can enjoy the full profits of an asset, by paying only a fraction of its value.
Derivatives destroyed many companies, and careers back in the 2000’s.
Because they were used for speculation.
And the same thing has happened with Bitcoin.
During the last few weeks, the price of many cryptocurrencies fell by A LOT!
And a lot of speculators looking for another easy profit, got hit badly.
Funny money, right?
The party is over..
Well, not quite.
Because the price of Bitcoin reflects a lot more than just what speculators do in Crypto Exchanges.
Traders are just one part of the equation to determine Bitcoin’s price.
There are also those who consider it an investment.
Those who have bought (and are still buying) Bitcoin, to keep.
This amount of Bitcoins therefore, is removed from daily circulation.
Less coins around to buy and sell.
And then, we have those who use Bitcoin for actual transactions.
Because as we have already said, Bitcoin is a transaction enabler.
Here’s an example:
Let’s say there’s a guy in Chile that produces refrigerators.
Our guy needs steel to make them, right?
He finds a steel manufacturer in China that has dropped the wholesale price by 40%.
But the offer expires tomorrow..
The money must be in their bank accounts (cleared) by tomorrow morning.
And the minimum order to get it at this price, is 200,000 tons.
Our guy needs this desperately. The profit margins for him will be I-N-S-A-N-E.
How can he pull this off?
To clear a transaction worth millions with someone he has never done business before?
How long will it take? 2 days? 3 days? A week?
What about foreign exchange rates, bank transfer costs? How much is all that?
5%..10%? More? Remember.. it’s only a day..
But if the two parties agree to complete this transaction with Bitcoin:
1) The transaction will be over in an hour (instead of up to a week).
2)The cost will be as low as 2% for both parties (the traditional route will be a lot more expensive).
How much would you pay for that?
To buy your raw materials 40% cheaper?
To sell with a 400% profit margin bacause of that cheap purchase?
And to pay a ridiculously low amount of money to complete this transaction with a country that has very strict rules for foreign businesses?
Does 10,000 dollars sound too much now?
OK, let’s say it still sounds like a lot (for the sake of the argument)..
But our guy is not alone in this world..
During the same day there are 100 more businesses that want to conduct transactions of the same magnitude..
100 million dollars each.
That’s 10 Billion Dollars worth of demand for Bitcoin.
And there are also those who want to buy a pizza..
Or an iPhone..
And the numbers keep growing..
How many Bitcoins do we have in circulation?
According to the Bitcoin ledger, there are only 16,9 million bitcoin outstanding.
Roughly 5.5 million bitcoin is held by the top 1000 addresses in the blockchain (the bitcoin ledger).
Between that, and about 10 million bitcoin needed by merchants , there are only 1,400,000 bitcoins free for people to use.
Not so many, right?
So a market is created automatically to facilitate all this new demand.
And the price can increase significantly, because there are simply not enough coins to satisfy the growing demand globally.
And by the way, you can’t just go and “print” new Bitcoins like the FED prints dollars.
Because the total sum of Bitcoin, is finite.
Only 21 million Bitcoins will be mined, to be exact.
With every new Bitcoin “mined”, the process becomes more difficult. It takes more time and resources to produce the next one..
So, you get the picture now?
It’s true, there is a speculative percentage incorporated in the daily price of Bitcoin, and that of many other cryptocurrencies.
But speculation alone does not tell the whole story.
There is a whole world of investors and businesses that generate transactions worth billions of dollars everyday.
These transactions also have a great impact on the final price you see printed in the charts.
So before you decide to buy or condemn any crypto, you should do your own due dilligence.
Emotions and self-proclaimed gurus, are mostly bad advisors for any decision that could impact your personal and financial future.
And you’re too smart to fall for that..
Be safe, everybody,