Bitcoin: Healthy and Here to Stay? My Predictions.

Bitcoin, the increasingly popular virtual currency touted as an alternative to the dollar, has smashed record highs over $1000 per unit within the past week. People who obtained large amounts of Bitcoin for next to nothing just a few years ago find themselves a millionaire today. There is no question that the Bitcoin frenzy has made some people very rich.

However, the main thrust behind the idea of Bitcoin is that it can eventually replace or at least rival the US dollar as a widely-circulated currency used in everyday transactions. The selling points behind Bitcoin are that it cannot be controlled or unnaturally inflated (as nobody can generate Bitcoins at will), and that it is a “cyrpto-currency” that can offer more anonymity for digital transactions than the regular banking system will offer. The point of Bitcoin, as touted by the true believers, is that it can eventually rise to a level of enough prominence to challenge the dollar as a widely-used medium of exchange.

My prediction on Bitcoin is twofold. 1) In the short term, I predict that many people who invest in Bitcoin are going to lose a lot of money. 2) In the long term, I predict that is it unlikely Bitcoin will ever be considered a real-deal currency. I am sympathetic to what the Bitcoin believers want to achieve; that is, a free-market currency with no government control. That does not change the fact that I do not think Bitcoin will ever achieve this.

Here is the key thing to consider: Why does anyone want Bitcoins? As of right now, the only reason that 99% of Bitcoin owners are in the market is to make money in dollars. Nobody wants Bitcoin for it’s own sake. A Bitcoin has no inherent use; it is a string of numbers floating in cyberspace. Nobody cares about those numbers. What they do care about is how much the string of numbers is worth in dollars. People are seeing Bitcoin rise in relation to the dollar, and they are buying up Bitcoin not to use it, but to resell it to someone else in dollars. Bitcoin is about dollars, not Bitcoins.

Why is Bitcoin rising in price? Because it’s in demand. Why is it in demand? Because people want to buy and resell in dollars. More people are buying, the price is rising, people become more excited about making money and more people buy. Bitcoin is in the midst of a massive bubble. This is a full-blown mania. At some point, probably soon-ish, a majority of investors are going to realize that the price of Bitcoin is becoming too high; that is, that the price is unrealistically high for what a Bitcoin is actually worth paying for. Some investors are suddenly going to unload Bitcoin for dollars in fear of an imminent collapse. This will cause the price to lower. As the price lowers, it is likely that a large number of investors are going to panic and start selling off Bitcoin wildly. This will cause the price to absolutely crash. I’m not sure how low Bitcoin will go at that time, but it will go much lower than it is now. After the crash, the price will not quickly rebound. Investors will become wary of Bitcoin. The market will thin considerably. People left holding stashes of Bitcoin at that time will lose a lot of money, especially if they bought Bitcoin at prices like we’re seeing nowadays.

Longer-term, I doubt Bitcoin will ever be a widely-circulated currency. People want Bitcoins to exchange for dollars. Various Bitcoins may exchange hands a few times for different goods and services, but ultimately that Bitcoin is going to find it’s way into the hands of someone that wants to exchange it for dollars. The desire to exchange Bitcoin for dollars is at the very root of all Bitcoin transactions.  We can see that Bitcoin is not money. Dollars are the money in this situation. Bitcoin is being treated as a way to get real money. This is creating the instability we see in the Bitcoin markets today. I do not think that Bitcoin will ever be stable enough to act a real currency. A currency with wild value fluctuations like Bitcoin’s will never be considered legitimate by the masses. Especially after the Bitcoin crash, people are going to stay away. In order for a currency to be born, billions of people will need to start using it. Billions of people will not be using Bitcoin; it will be only a niche-use item. At any rate, the point is this: Bitcoin is nothing more than a proxy for dollars. Unless Bitcoin becomes something more than a proxy for dollars, it will never be a currency. I do not think Bitcoin will ever be more than a proxy for dollars; so, no currency.

There is a chance Bitcoin could become a currency in the future. I won’t close the door on it. Maybe the “crypto” aspects of Bitcoin will have present some type of inherent-value as currency. Whether or not that happens, keep this in mind: A major Bitcoin crash will occur at some point in the near-ish future. If you’re in Bitcoin, or thinking of getting in, be very careful.

 

 

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