Bitcoin is back on everyone’s lips. It hit a two-year-high over the past week, while the U.S. Securities and Exchange Commission (SEC) has authorized the listing and trading of certain Bitcoin ETFs. After a long slump, institutional investors and international banks are showing a growing commitment towards cryptocurrencies.
Enthusiasm has resurfaced for an instrument that’s difficult to understand: it’s almost inexplicable when coming at it from the conventional theory of financial assets, nor are there new theoretical foundations that allow us to understand the demand for Bitcoin and its surprising valuation.
Regulators and economists have every reason to issue warnings. The last relevant notice was posted on the blog of the European Central Bank (ECB) – entry dated February 22, 2024 – by Ulrich Binseil and Jürgen Schaaf, two of the directors of Market Infrastructure & Payments. They point out that Bitcoin has failed in its promise to be the global decentralized digital currency: it’s rarely used for legitimate transfers and payments. The two experts indicate that – despite the approval of Bitcoin ETFs by the SEC – it doesn’t change the fact that it’s inappropriate as a means of payment or investment.
How is it possible, then, that this cryptocurrency is back in demand at such a high valuation? Well, let’s look at some data since its launch back in 2009:
The most recent estimation from Crypto.com indicates that some 580 million people were cryptocurrency users in 2023. This means that demand increased by around 34% from 2022. This year, the number of users continues to grow.
Last year, Bitcoin owners grew by 33%, from 222 million individuals to 296 million. For Ethereum, the number of users increased by 39% between 2022 and 2023, going from 89 million to 124 million. A large number of users keep both currencies in their digital wallets.
In Spain – a good representation of an upper-income country’s engagement with crypto – according to the National Securities Market Commission (CNMV), between 5% and 7% of adults claim to own cryptocurrencies, with about 40% of these crypto users keeping bitcoins in their digital wallets.
The typical profile of a Bitcoin user corresponds to a young man, who either studies or works. They tend to reside in urban areas and have a high monthly income. This is a surprising profile, because with such characteristics, one may expect a higher level of financial education and prudence.
As for the price of Bitcoin, it has always been a roller coaster. The price remained close to zero until the end of 2016, when it surpassed $900. By 2017, the first boom arrived: it skyrocketed to $19,345 in December. Then, there was a correction during 2018 and 2019. In 2020, a new rebound was observed from $5,000 – its lowest valuation, at the beginning of the pandemic in March – to $27,000, the figure that it closed the year at.
In November 2021, Bitcoin reached its all-time high of $68,700. From this value, there was a significant correction that took the cryptocurrency all the way down to $16,600 by the end of 2022, coinciding with the rise in interest rates (which shrinks the money supply and increases the value of traditional currencies). And, over the course of 2023, it experienced a recovery from its lowest levels. It started the year with a value around $16,500 – the lowest since November 2020 – and yet it ended close to $42,200.
As of October 2023, its value has been rising. Bitcoin began 2024 at $43,450. And it has already appreciated by more than 20% so far this year, standing at around $57,000… and we’re barely in March.
The capitalization of Bitcoin today exceeds $1 trillion, a threshold that hasn’t been reached since November 2021. In short, this roller-coast ride has been defined by enormous volatility, lacking any factors that can justify its recovery.
It’s clear that Bitcoin regains value when the market sees lower returns on other conventional financial investments, just as it’s understandable why its value plummets whenever the price of fiat money (government-issued money) rises. But still, the link to real-world events is unstable and the argument behind crypto is generally fragile, while the price of Bitcoin is subject to non-transparent determinants. Speculation and market manipulation are rife when it comes to this digital currency.
Added to this is the perception that Bitcoin’s value has something to do with the future relative scarcity of bitcoins, since it (theoretically) has a maximum volume of 21 million coins (tokens). Nearly 19 million bitcoins have been mined and just under two million remain to be mined. This idea of scarcity is reinforced by the so-called halving processes – which take place every four years, the next being set for April 2024 – in which the reward for mining a new block is reduced by half. Even so, these arguments are insufficient to justify Bitcoin’s use as either an investment or as a means of payment.
In short – despite the new period of euphoria – cryptocurrencies remain an inadequate instrument for the majority of retail investors and are also not useful as a means of payment. It’s a totally unprotected asset, without scrutiny by supervisors. Such excessive risk-taking seems incomprehensible. The possibilities of profit are overvalued and the possible losses aren’t sufficiently taken into consideration.
Being such a non-transparent instrument, little is known about those who have lost a lot of money in the crypto market. But clearly, something must have gone wrong in financial education in many countries, given the profile of cryptocurrency investors.