Bitcoin is hitting a fevered pace.
Is this more hype or do we have some legs behind what is taking place? Before answering that, let us dive into what the numbers could mean.
Some are predicting that Bitcoin could surpass the total value of gold. This would put Bitcoin in the $16 trillion range. Looking at the total number of Bitcoin, we can see how this would be $800K-$1M per coin. Of course, this depends upon how many BTC one believes are truly available, with some estimates that more than 5 million were lost.
These numbers are absurd. Or are they? When it comes to Bitcoin, we have to be clear on what we are dealing with.
We will dig into this.
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Bitcoin To $16 Trillion?
There is a lot of nonsense out there about Bitcoin. Actually, this stems from a misunderstanding surrounding the Fed, inflation, and money. It led to outdated ideologies that are not applicable in today's economy. On top of that, it takes the ire off those who are really causing the problem and places it elsewhere.
That said, what are we dealing with?
Money provides two key components: medium of exchange and unit of account. It can be a store of value but, as evidenced by markets, does not always serve that purpose.
With Bitcoin, there is little medium of exchange. This narrative is dying down yet is still prevalent. Some believe that BTC will be used to buy things. It is not going to happen.
There are a couple reasons for this. To start, price stability is not part of Bitcoin's makeup. The reason why it is a great trading vehicle makes it a lousy medium of exchange. Second, distribution is a problem. Currency needs to be widespread to be utilized. Bitcoin is a HODLer asset. This is only growing as Wall Street firms custody billions in BTC.
That leave the unit of account.
Again, we have a few on the fringe that believe evertyhing will be price in Satoshi. This is unlikely due to human tendencies. There are four generations of people who understand the US Dollar. They know how many are in a barrel of oil and a tuna fish sandwich.
There are hundreds of trillions in global debt, much of it priced in USD. Then we have an similar amount on balance sheets, using the same denomination. Today, the dollar evolved into a mesaurement, like a kilometer.
If this is the case, how can Bitcoin ascend to such high levels? Is it a hype cycle?
Actually, there is a valid reason for this.
Confidence In Bitcoin
Governments are suddenly talking about Bitcoin as a strategic reserve. Each week, there are a couple officials that gain publicity for proposing the idea. This can be at the federal, state, or provincial levels.
Trump made headlines on the campaign trail, stating that he would push the United States in that direction. This is supported by a bill in the US Congress put forth by Cynthia Lummis, the senator from Wyoming.
The latest headline is Japan, who is looking at making Bitcoin part of its reserve. In the United States, Texas made a similar announcement earlier in the week.
Bitcoin could surpass the gold market if there is the confidence in this asset. Monetary and financial history helps us to understand this is the basis. Considence is the name of the game. Whatever large numbers of people believe in is what is utilized.
This is true for assets, currency, and institutions. Another way of looking at this is to focus upon what occurs when confidence flips. What happens when people lose confidence in something financial or monetary? Things collapse.
We see this with stocks, real estate, currencies, and financial institutions. A bank run is nothing more than a loss of confidence.
Thus, the question with Bitcoin is not whether it has inherent value. Instead, with Bitcoin it boils down to whether the confidence as an asset is real or not?
If the answer is negative, then we are looking at a lot of hype. However, the discussion around the leading cryptocurrency appears to have validity. For it to follow through requires action. As they say, talk is cheap.
The proposed ideas around Bitcoin being part of reserves, if passed, would provide a lot of buy demand. This changes the entire equation. Here is where we could see a massive move, one which eventually pushes the value towards the level of gold.
Bitcoin is misleading. It is not a currency. Instead, view it as a digital asset. Most are trying to apply the idea of currency to something that does not have their properties.
We are dealing with a financial asset. Hence, confidence is the barometer that we use to judge the future direction of things.
Is the confidence in Bitcoin increasing? If so, along with being sustained, then we could see the gold level targeted. Based upon market capitalization, this would put the $16 trillion figure in play.