Sometime after midnight on May 20, 2014, the Bitcoin price jumped to $470. Prices reached the $480s later in the morning and as of 12:31 PM on May 30, the Bitstamp price is at $478.17. This surge in price is clearly an exciting event for Bitcoin investors. On r/bitcoinmarkets, the forum for Bitcoin market analysis on Reddit, people are declaring that we’ve hit the next Bitcoin “bubble.” However, while it may be exciting to watch the price surge after a few months of stagnation between $430 and $450, it doesn’t really affect the long-term prospects of Bitcoin. Bitcoin should not be judged too heavily by its fiat price, as the ultimate goal of Bitcoin is to create a monetary system completely independent of current government monetary institutions.
What The Bitcoin Price Actually Means
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In the long-term, the value of Bitcoin will be completely independent of the value of dollars, or any other fiat money. The only reason Bitcoin’s purchasing power is seemingly inextricably linked to fiat is the fact that Bitcoin is not yet as widely accepted as the fiat currencies. Once that wide acceptance does happen however, we will see a transition where prices will go from being denoted in fiat currencies to being denoted in Bitcoin and other crypto-currencies. Currently, we judge the value of Bitcoin by saying: one Bitcoin is worth X amount of dollars, and that amount of dollars can buy Y amount of goods. After the transition, however, we will judge the purchasing power of Bitcoin the same way that we currently judge the purchasing power of fiat currencies: X amount of Bitcoin can buy Y amount of goods, therefore Bitcoin has Y value.
This transition is why I don’t care about the current price of Bitcoin, and it’s why I don’t think you should care either. We should not be worried about getting a huge return on investment by driving the short-term price of Bitcoin through the roof. We should be focusing on spreading grassroots awareness about crypto-currency in order to achieve its widespread acceptance. If we can achieve that level of acceptance, the only importance fiat prices will have to Bitcoin will be their role in helping recalculate prices of consumer’s goods in terms of Bitcoin.
Is This Bitcoin Price Surge Permanent?
Normally, I would highly discourage making any kind of “authoritative” predictions on the trajectory of Bitcoin’s price. However, in this instance I can’t help but throw my own opinions into the ring. Although, I will say that economics can in no way make accurate or viable predictions or prescribe action in any way; economics can only describe events after the fact by analyzing the empirical data and employing sound theoretical analysis to interpret that data in order to provide an explanation on the effects of human action. So, any prediction can only be taken with a grain of salt, as any unknown future event may completely change the direction of Bitcoin. That being said, here’s what I think will happen with the price of Bitcoin sometime in the future, and why I think this surge isn’t permanent.
We know that there were several early investors in Bitcoin who became millionaires during the peak price in November of 2013. Some of these investors cashed out, turning their Bitcoin investments into fiat fortunes. However, some held on to their investments, anticipating an even higher fiat price. Those investors that decided to hold on to those bitcoins received a great disappointment when Mt. Gox crashed. After the crash, the price of Bitcoin dropped by more than %50, meaning that the early investors that held on to their coins took a huge loss. Those people still have those coins.
New Factors In The Bitcoin Markets
My opinion is that this current jump in prices comes as a result of several months of constant innovation, with some very interesting advances within the last few weeks. For example, the Federation of St. Kitts and Nevis recently expanded their investment-for-citizenship program to accept Bitcoin as a valid payment for a citizenship to their country. Additionally, several Bitcoin-based companies have made some exciting announcements about innovations in the Bitcoin payment system. One of the most notable is Xapo’s announcement of their Bitcoin debit card.
This debit card will operate on the payment structure of an already existing credit card company, meaning that payments can be made in Bitcoin at any store, regardless of whether or not the store actually accepts Bitcoin for payments. These kinds of innovations will make Bitcoin much more accessible to the general public, so of course some investors are going to have the desire to get into the world of Bitcoin. That is why I think the price has jumped so suddenly. However, I doubt that these price increases will last.
Why won’t they last? Well, those early investors who lost out by not cashing in their coins last November still hold their coins at a ~%50 loss. I think that new innovations in technology– mainly advancements that make Bitcoin payments even more convenient, such as Xapo’s debit card– will push the fiat price of Bitcoin even higher over the next several months. All things being equal– which is very important, any number of things could happen to disrupt this upward push on prices– Bitcoin will eventually reach $1000 once again. It is likely that the price will go even higher than the November 2013 peak.
When this new peak price is achieved, I believe that it is likely that the early investors who missed out on last year’s opportunity to cash in their coins will sell everything they have for fiat currency. If those investors do sell all of their bitcoins, their previously hoarded stocks will flood the market and the subsequent drop in prices will be enormous. Just how far the price will fall after this dump depends on the number of early investors that sell, and how much of their Bitcoin stocks the early investors will dump into the market. Once this massive sell-off happens, it could potentially cause a chain reaction of fear that causes many people to sell their coins as well. Such a panic would drive the price down even further. As a result, the price would once again be well below $1000 and would likely return to the $430-$450 floor that has been established in the last few months.
Bitcoin Price Depends On Many Variables
With that being said, I must repeat myself that I in no way claim that my prediction will happen, or is authoritative in any way. This prediction depends on many things remaining constant, which could change at any given time.
No matter what happens in the short-term, the long-term future of Bitcoin looks very promising. We have a technology that can completely change the global monetary system as we know it. We can reverse the disastrous course that the world’s central banks have put us on, all because of the free market. Bitcoin has the potential to bring to us a level of individual liberty that no government legislation could ever produce. That is what the community should be focused on. When we consider the long-term implications of the blockchain technology, the short-term fiat prices of Bitcoin seem minuscule.