Bitcoin (CCC:BTC-USD) today is at over $59,000, up over 100% since the beginning of the year. This meteoric rise in just three months has brought significant attention to this cryptocurrency. In fact, over the last year, Bitcoin has risen from $6,791, up well over 700%.
One question that has very logically arisen, given Bitcoin’s huge price appreciation, is what is Bitcoin’s real raison d’être, its basic purpose.
Everyone used to say that Bitcoin is a digital store of value. After all, there is a limited supply of Bitcoins. There can only be 21 million Bitcoins mined. Its supply is artificially constrained so that, just like gold, whose supply only increases with mining, Bitcoin’s supply will slowly increase to its final cap. So it was often compared with gold.
For example, mining rewards for Bitcoin have to halve every four years. As it stands now there are already about 18.6 million Bitcoins in the public sphere, leaving less than 2.4 million more Bitcoins that can be mined. This allows a limited increase in supply, just like there is with gold.
The problem now with its meteoric rise is that the original Bitcoin purpose as a store of value has now changed.
As Bank of America recently pointed out in their Commodity Strategist piece, Bitcoin has a “dirty secret.” Here is what the author concluded:
“The main argument for Bitcoin is not diversification, stable returns, or inflation protection, but sheer price appreciation.”
And price speculation as a purpose to own this digital currency has led to another reason. It has turned into a modern-day digital “fear-of-missing-out” (FOMA) currency.
Although no one can ever know their true motivations, many institutions seem to be jumping in based on this FOMA motivation. They don’t want to be seen as the last one after it skyrockets in price — the last one to convert into a digital currency believer. So they are buying Bitcoin now, simply because to be seen as not owning it when (or if) the price hits $1 million or more, would be worse than not owning it.
Keep in mind that the comparison with the gold spot price, as a store of value, no longer applies. For example, gold started ended last year at $1,896.49. As of April 2, it was at $1,730.32, down $106.17, or down 5.6%. In the past year, though, gold has risen — it is just nothing compared to Bitcoin, as you can see.
What to Do With Bitcoin Now
By the way, owning a currency because it is going up, and just for that reason, is not a bad thing. It seems a little bit hypocritical to me to see value investors like Warren Buffett and Charles Munger despise this as a reason for buying Bitcoin.
For example, two years ago, Buffett told his Berkshire Hathaway shareholders (NYSE:BRK.A, NYSE:BRK.B) that Bitcoin was a “gambling device” with “lots of frauds connected with it.” On a more intellectual level, Charles Munger, the vice-chairman of Berkshire Hathaway told investors that Bitcoin is an “artificial substitute for gold.” He does not like gold either, since governments cannot control its supply, just like Bitcoin. But, of course, that is one of the original purposes of Bitcoin – to be a currency free of governmental control.
However, their main resistance to owning gold, and substitutes like Bitcoin is that they have no inherent value. Their value comes from perceived value, and they produce no actual real returns like dividends from inherent cash flow.
No one believes that Warren Buffett is a genius for picking dividend-bearing stocks. He made money on stocks that rose in price, or perceived value. Therefore, from a 30,000-foot point of view, there is no real difference in owning gold, stocks, or cryptos. The main reason for doing so is price appreciation.
So, here is my conclusion. If Bitcoin’s raison d’être is to provide price appreciation, don’t be afraid of buying it, since, in the end, this is the same reason as one buys stocks or gold.
On the date of publication, Mark R. Hake held a long position in Bitcoin.