Over the last 10 years or so, bitcoin has been growing.
More and more people are starting to use it, not only to hold value, but for everyday transactions as well. This is a main reason for bitcoin’s mind-boggling growth pattern.
However, this was eclipsed by the spiraling bear-run bitcoin displayed in 2018.
In this article I will try to explain bitcoin’s intrinsic value, and debunk some popular myths and misconceptions about bitcoin, both as a security and as a currency, starting with the most prevalent of all misconceptions regarding bitcoin: the tulip comparison.
Misconception #1: Bitcoin is a financial bubble/pyramid scheme/fool’s gold
Since traditional financial securities aren’t built like bitcoin is, most traditional analysts looking at bitcoin are baffled and perplexed. This leads most of them to believe that it’s some sort of megalithic bubble, the likes of which we haven’t seen since the 1936 tulip flower bubble.
The tulip bubble was a classic case of “The Greater Fool”.
People saw tulip prices rise, and started to purchase them just for their appreciation potential, in hopes that some greater fool will pay more for their tulips than they did, which in turn increased demand, skyrocketing the price.
At some point in 1937, however, this came to an abrupt end when over the course of a few weeks tulip prices crashed, leaving many people with overpriced, shriveling flowers not worth the price of the vase they were left to wither in.
Around the time this comparison popped up in the cryptosphere, many found the mathematical resemblance of these two phenomenon uncanny. Others, more knowledgeable about the inner mechanisms of bitcoin asked: What does this have to do with bitcoin?
The truth is that except for price charts, not much.
But it does teach us a very interesting lesson, which is the difference between value and price.
You see, tulips had no intrinsic value. They were very pretty flowers, but hard to take care of and provided no utility beyond looking good and smelling nice.
Bitcoin, however, is a novel digital infrastructure people use to transfer millions of dollars, with negligible fees and within minutes. This is far from being the case with tulips, as they cannot be divided infinitely and still retain value. Even if tulips were in any means accepted as currency, you can’t pay someone 2/3rds of a tulip, but you can definitely pay with fractions of a bitcoin.
Misconception #2: Eventual price drop
Another misconception is that the price of bitcoin will eventually decline and be worth less and less over time. This misconception also comes from the uninitiated.
Bitcoin was built to provide steady and predictable appreciation, as every four years or so, the supply of bitcoin is contracted in a process called the halvening.
This halvening occurs every 210000 blocks, by decreasing of the reward given to the miners for securing another block in the blockchain. The total amount of bitcoins that can be mined is not infinite, and is limited at 21 million BTC.
Combined with the halvening protocol, this gives bitcoin a distinct financial character.
A deflationary character.
Right off the bat, this brings a refreshing point of view to monetary economics. One very different from central banking’s “fiat” currencies ( currency that derives its value from the authority of the issuer) which are inflationary. In case the word “inflation” doesn’t mean anything to you:
In economics, inflation is the slow decline in a currency’s value due to its growing supply.
Deflation is the opposite. Obviously, a currency with a steady and limited supply, as opposed to a currency that can be minted virtually at the click of a button, with no public oversight or transparency, with pre-announced yearly inflation “goals”, is going to be better at retaining value over a long time frame. Evidently, each bull wave in bitcoin’s price ends between a 120 and 200 percent higher than the previous wave’s eventual return to the mean. This, it seems, is due to bitcoin’s deflationary nature.
In this chart, taken from https://www.officialdata.org/, we can clearly see than you would need $23.5 in 2019 to buy the same things you could get with $20 in 2009.
In this chart, comprised from price averages, we can see what is the purchasing power of $20 worth of BTC purchased in 2009.
In simple terms, the deflationary character of BTC led to the same $20 dollars being worth a few millions over the same 10 years in which the USD lost around $3.5 worth of its value and purchasing power.
And we’ve only had 2 halvenings since.
Misconception #3: Bitcoin’s rally is over
Anybody looking at BTC price charts can notice a long sideways period between bull waves.
A common misconception is that these are the times when bitcoin “sleeps”.
Sleeping usually requires inaction, although this is far from being the case in these times.
In these periods, what happens is something bitcoin aficionados call mass adoption.
At first, there were only a handful of places that accepted bitcoin as payment for goods and services, most of them over the dark web. As time progressed and people became conscious of what it is, the general public started adopting it more and more.
In 2013, the first BTC ATM was opened in Vancouver, US authorities started understanding that Bitcoin has benefits, and a University in Cyprus was the first to accept bitcoin as payment.
Here’s how it looked on the charts:
In 2014, 7-Elevens and bookstores in Mexico started accepting BTC as payment, Expedia and Microsoft started receiving BTC as payment, and everyone else started acknowledging BTC as a payment mechanism.
Even though 2014 wasn’t all that good for bitcoin:
In 2015, Bitcoin IRA, an American company enabling retirement accounts to be invested in bitcoin was formed. All while the charts looked like this:
Today, in yet another sideways period after the bulls and the bears all played their hands, we’re even seeing Ohio accept BTC for tax payments.
Moreover, a recent Cambridge study regarding crypto assets even shows us these numbers:
Here’s how 2018 looked on the charts:
Again, growing mass adoption in sideways or even bearish times.
So in light of this information and the amount of times bitcoin was prematurely declared dead, this writer can’t agree with the claims that it’s over for bitcoin. The data just doesn’t support it. Quite the contrary.
It actually suggests a different conclusion:
Bitcoin is growing, and every step back just takes us closer to where we want to go.
You see, there’s a known idiom in the cryptosphere:
“The crypto market is a device that transfers wealth from the impatient to the patient.”
So fellow HODLers – Hear me:
Soon, very soon, this community will evolve again.
And when that happens, be sure that the ones profiting are the ones who hold strong today.
Disclaimer: This article represents the author’s opinion and should not be considered investment advice.
About the author: Daniel Shlomo Peled is the found of knoks.io. For more information, see his author profile.