A store of value is defined as “the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. More generally, a store of value is anything that retains purchasing power into the future.”
By this definition, bitcoin is much too volatile to be considered a store of value. There is a bit of irony here. Most investors in bitcoin today believe it’s a store of value. Yet if it were a store of value, they probably would not want to own it. It would be boring — like gold.
Bitcoin’s Extreme Volatility
Unlike fiat currencies such as the U.S. dollar, bitcoin has proven to be too volatile to make it a reliable vehicle in which to store value over long periods of time.
Its price history since its inception in 2009 has seen extreme ups and downs. Events such as cyber-attacks or criminal revelations have all played a part in influencing the price of bitcoin, whether for good or ill.
In 2018, Bitcoin lost over 85% of its valuation after Wall Street launched Bitcoin futures, which allowed mega-institutions to open massive shorts, and tank the entire market. This wouldn’t be as easy if Bitcoin had inherent value or government backing.
The only reason people would even consider buying bitcoin is that they believe they can sell it at a higher price in the future.
Current buyers are betting that bitcoin might later become widespread. Therefore, bitcoin is in a positive feedback loop. As more Tether is printed, more buyers come in, the prices pump, which in turn attracts more buyers, and so on. However, the reverse is also true. A fall of confidence in the currency will only cause more people to sell, leading to a downward cascade
5. Regulations will tame Bitcoin
Ever since this bull run made global headlines, regulators from around the world have been focusing their efforts on the crypto markets. While some compliant projects will survive, the majority are in for a harsh reality.
While regulators already know that regulating Bitcoin will be hard, if not impossible, they have something else they are going after. Stable coins.
In the near future, countries will adopt strict policies that restrict stable coins like Tether, and USDC from engaging in certain activities such as money laundering, and price manipulation. While these regulations will be overall beneficial to the community in the long run as it eliminates fraud, they will still likely have a negative impact on the prices of many assets that are dependant on stable coins.
Countries have been hinting at regulations for many months now, so don’t be surprised when they are eventually introduced. Just last week, America’s largest financial regulators met to discuss stablecoins, with Treasury Secretary Janet Yellen emphasizing “the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” for these digital assets.
In addition, the government has dozens of other options to tame Bitcoin. They can shut down centralized exchanges, ban Bitcoin mining, ban citizens from trading Bitcoin, restrict internet access to certain crypto platforms, and be more strict with KYC/AML requirements.
In these past few months, we’ve seen the consequences Binance is facing from dozens of regulators who are aiming to crack down on their illegal activities. To say that their actions cannot negatively impact the prices is being naive.
Binance is the largest crypto exchange on earth, and when they vanish, a huge chunk of Bitcoin’s volume and value will also vanish alongside it.
To succeed as an investor, one must look at things from a contrarian and unbiased perspective. Sharing both sides of the story, whether good or bad, is absolutely essential in determining how your asset will perform.
Many Bitcoin investors strongly underestimate the power governments have. We have countries like the USA that have started huge wars in order to protect the US dollar. If Bitcoin ever poses a threat to them, they will go to great lengths in ending it, and I think they will be successful in doing so.
With the combination of some of Bitcoin’s flaws as highlighted above, it’s evident that Bitcoin could face a rocky future. Once the price manipulation and speculation gambit has passed, Bitcoin’s value will aggressively shrink.
A correction of -99% isn’t out of the picture.
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