Bitcoin has broken all records in 2020. Since the beginning of the year, its value has increased more than 3 times. Meanwhile, the value of the largest tech companies (the FAANGs) increased by 43%, gold by 22%, and the S&P 500 by 12%. Those who invested in oil lost 21% (as of 26 November).
Every social network is filled with lively discussions about Bitcoin’s course to date and possible future scenarios. For my part, my prediction is that bitcoin will continue to display high volatility into January 2021, followed by a moderate decrease in value and consolidation. Importantly, this level will be higher than bitcoin’s price over the summer. But please, don’t take this as financial advice! I’m just sharing some thoughts.
Behind the usual hype and wild forecasts, the most interesting factor seems to have gone almost unnoticed. For the third time in Bitcoin’s short history, the year’s fourth quarter has brought significant price action. In the fourth quarter of 2013 bitcoin jumped from $180 to $1,000 USD, before falling to $650 in the closing days of the year. Then the long crypto winter started, and by autumn 2015, the price had fallen to $230.
Similarly, at the beginning of the fourth quarter of 2017 Bitcoin stood at $4,500, and at its peak — December 17, 2017 — came close to $20k. However, the fairy tale soon ended, and in early February 2018 the price dropped as low as $6,000, before rebounding.
Every time this has happened, blockchain industry professionals, investors and commentators of various kinds have praised Bitcoin to the sky, and then sent it back to the depths of the Mariana Trench. Every time the same arguments have been made to support depressingly similar forecasts. But every time, Bitcoin has demonstrated amazing and predictable stability over the long term.
The First and Second Waves of the Cryptocurrency Boom
Attentive analysts have identified a key feature in common between two previous strong price rises. Both times were associated with a massive influx of new investment based on powerful mathematics mixed with human greed, on programming inseparable from fraud, and on pitting the knowledge and skill of the minority against the stupidity and recklessness of the majority.
In 2013, the rise of Bitcoin was linked with the creation of more virtual currencies. Some of these existed for just a couple of weeks, others for some months, and there are a few that still exist today. The situation was repeated in 2017. Bitcoin’s rapid price increase occurred alongside the ICO boom. Cryptocurrencies morphed into tokens — a quick way to raise funds for a project. The overwhelming majority of buyers dreamed that spending $10k would make them millionaires in a few years. During ICO fever, billions of dollars were lost or stolen. Only a few projects with clear functionality and professional teams actually managed to implement their ideas. Many projects folded through mismanagement; in other notable cases, they had to be wound up, and some founders were fined millions of dollars by regulators.
The second wave of enthusiasm for blockchain showed that digital value can take the form not only of currencies but also of digital assets. Today the largest corporations and governments are following this path. In 2020, there was barely a month when one or another Central Bank didn’t announce its plans to issue a national digital currency. In a number of countries — from the USA to Russia, from Switzerland to Singapore — governments legalised digital assets as an investment instrument, providing broad access not only for qualified investors, but also for regular people. In 2021, at least in the United States, this access will be provided to major financial institutions. This is likely to have a significant impact on Bitcoin’s price.
The Missing Link
Now let’s try to solve the mystery of the underlying basis for Bitcoin’s appreciation through 2020. Among the most obvious reasons are the COVID-19 pandemic, global economic problems, and the beginning of a worldwide crisis. However, in my opinion, the real reason is quite different.
To solve the mystery, let’s go back to 2009 and reread old forums, posts on internet boards for geeks and specialist literature for programmers. A careful analysis of these digital artifacts will reveal a remarkable picture — or rather, a skilfully-composed tapestry of information. This composition blends the developments of the U.S. National Security Agency, software solutions for сypherpunks, dreams about private money, the idea of new accounting, and much more.
Knowing these ideas and Bitcoin’s context back in 2009 gives us a unique insight. Initially, Bitcoin (or more specifically, blockchain, the underlying technology of which Bitcoin was the first implementation) was developed as a multifunctional tool. It was equally suitable as a distributed database, an environment for accounting operations, tracking money, a way to process any kind of transaction, and finally, as a basis for the formation of more complex digital assets.
The most striking feature of Bitcoin was and remains its limited supply. This feature has still not been fully appreciated to this day. Bitcoin is often called ‘digital gold’. However, over the entire history of mankind more than 190,000 tons of gold have been extracted, some of which were used for jewellery and technical applications, while the rest have been used as a tool for storing and accumulating value. At the same time, somewhere between 2,600 and 2,900 tons of additional gold are mined annually. Meanwhile, there will never be more than 21 million BTC. In other words, it is wrong to compare Bitcoin with gold.
With this in mind, it’s not hard to find another function, enabled at the moment that Satoshi Nakamoto (whoever he was), launched his creation. Bitcoin is a tool for accumulating wealth; a store of value. Or, as we call it more informally, Treasure.
Bitcoin is not well adapted to the most important function of money: a means of exchange. The story is well-known in the crypto world of the programmer who, back in the distant past (2010), paid thousands of bitcoins for pizza. There are other stories like it. (According to rumors, some of these people still suffer from depression.) Even in an extreme case of a deflationary currency, issued in a strictly-defined amount; its availability is intended to decrease year-on-year in order to increase its buying power, Bitcoin still won’t be suitable. Bitcoin is designed to be stored, not spent. It is, by all considerations, treasure.
Bitcoin is also not suitable as a platform for digital finance — for shares, futures and so on. The pioneer here was Ethereum, its forks and modifications. Bitcoin is simply not well adapted for use as such a platform. It does not allow for easy implementation of the required functionality.
But Bitcoin is ideal as treasure, or a tool for accumulating wealth and storing value. Such an asset must include several features:
- Firstly, it must be limited. No form of treasure features unpredictable scarcity. For example, one of the best-performing assets of recent times was a certain variety of whiskey, produced in marked bottles, strictly limited in production each year. From 2009–2018, investments in rare whiskey have returned an average of 582%. This is a classic example of a store of value. Thanks to the outstanding reputation of the manufacturer, an investor knows in advance the number of bottles that will exist and the impossibility of counterfeiting them
- Secondly, it must have the convenience of secure storage. Strictly speaking, property in a unique location, where the number of land lots is extremely limited, can also be considered as a store of value. However earthquakes, climate events and civil conflicts happen all too often. There is always a chance of waking up in the morning and finding your treasure has turned to ruins. The best form of treasure is one that is always with you and is absolutely unavailable to anyone else.
- Thirdly, there should be a guarantee against falsification. There is a multi-billion-dollar industry in counterfeiting art, vintage coins, museum cars and other items considered treasure by wealthy investors. This industry is dominated by the most powerful criminal syndicates and genuine masters of their crafts. Bitcoin, however, is known to be impossible to forge.
- Fourthly, an important property of a viable form of treasure is liquidity. The faster and safer, with fewer intermediaries and the least attention from outsiders, it is possible to convert an asset into money or into another asset, the more it can be considered treasure. Bitcoin is beyond compare here, too. All that is required is internet access.
- Fifthly, but perhaps most important of all, the treasure should have the character of wealth, the smell of luxury and, above all, those with money should have an irresistible desire to own this asset.
Eventually, everything that people do is driven by their thoughts, interests, emotions and experiences. Treasure is, simply, what those with wealth consider to be treasure. Therefore, the history of Bitcoin has been a super-efficient, multi-step, global campaign to convince the wealthy population that Bitcoin has the character of treasure, smells of wealth, and is a desirable asset that should be acquired ahead of all other assets as soon as possible. It is likely that Bitcoin represents the first campaign of this kind, implemented not by a deeply ideological group of individuals, but by a kind of collective mindset of a self-organising global community.
That means that there is no single group of Bitcoin ‘masters’ who have been working day and night for 10 years to give it that status of treasure. There are coders and developers, investors and marketing professionals, observers and critics. Interacting with each other, they act as a kind of collective mind, which has turned Bitcoin into the most convenient, effective, and therefore the most promising form of treasure of all.
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