Bitcoin reaching a Price of 40,000 shows the Difficulty of the BTC Money NarrativeJanuary 12, 2021
The crypto community has been celebrating the fact that the bitcoin token price reached 40,000 USD recently. This surpassed the previous record by 100 percent and defined the start of 2021 as the year that a bitcoin institutional adoption went drastically up. Of course, this was a cause for celebration among those who always supported digital currencies as a revolutionary technology that is only getting toward its rightful place in the modern world. Yet this astronomical climb in price did not enforce the notion that bitcoin and other digital currencies are here to stay.
Instead, it also showcased another important factor of this network and that is its sheer speculative value in USD or any other fiat currency. That might not be breaking news to many who have been following the crypto markets, but what it does build somewhat a negative long-term narrative when it comes to actual bitcoin adoption by regular users. In other words, while the present bull run has been a godsend for all traders, investors, and institutional players, it also showed everyone else that it is really hard to perceive BTC, ETH, or any other digital token as an actual workable alternative to regular currencies. The problems with that notion can only grow larger in the coming years and thus present a serious problem down the road.
The issue with the process of using bitcoin as a currency quickly materializes if someone considers its actual application in the real-world environment. For example, if a person is selling a physical thing, like a car, and offering the same in bitcoin tokens, what would its price be? At that moment, the first question that comes after that is the assessment of the current bitcoin price. There is a huge difference in asking for one BTC in December 2020 and in January 2021. Potentially that difference amounts to over 20,000 USD.
If the time difference is larger than that and it stretches between March 2020 and January this year, the difference in the fiat value could amount to something closer to 35,000 USD. The previous history of this cryptocurrency saw similar incredible ranges between the highs and lows. In many ways, this inherent volatility of the crypto markets is one of their essential defining factors for the present period. But it is also a huge counter-argument to any narrative that paints bitcoin as a digital currency that can be comparable to traditional fiat alternatives.
Concept of Money
The idea of money is not complex at all. Instead, it represents a low entropy system that allows for the facilitation of exchanging real things. Money represents an agreement about value, which then in turn makes an exchange of the same money for goods and services possible. As Adam Smith put it, money exists to allow the circulation of consumable goods and services. Today, in the age of esports and social media, the same concept is still valid. Precisely because of it, the idea of labeling cryptocurrencies as money is highly problematic.
The fact that money is never actually exchanged into anything else, but that it only changes hands, is often misunderstood or ignored in the real-world environment. People stick with money because they perceive it as a permanent holder of roughly equal value. No one keeps hold of a single US dollar bill hoping that it will double in value in a year. Yet precisely this is happening when people acquire digital currencies and engage in things like the HODL strategy.
Iran Rial Example
The concepts above can be easily demonstrated in the case of the Iranian national currency, the rial. This fiat currency saw a process of devaluation over 3,500 times in the last 50 years. Because of that very few if any in the country have any confidence in this currency when it comes to its money-linked behaviors. Instead, it is more akin to something like a ceremonial currency that only exists as a form of a symbol that any country has to have, like a flag or a national anthem.
Because of this, the rial is practically no longer used in Iran by the ordinary citizen. Instead, people prefer anything from USD to physical gold. Both this precious metal and the foreign currencies offer a higher level of safety and stability of people’s monetary holdings than their native national currency. A similar pattern can be found in many historical moments of exceedingly high inflation. That includes the post-world war on Germany and the Weimar Republic, as well as the Republic of Yugoslavia in the 1990s.
Instability in Both Directions
A huge difference between these examples of Iran, Germany, and Yugoslavia is the fact that the BTC token price is not under any influence of inflation. More precisely, the entire bitcoin network is completely inflation-proof from the deepest element of its blockchain setup. Instead, the volatility, in this case, includes the strange option of the value of tokens actually going much higher not only falling down. That is why the price of bitcoin is now so much larger than that from 2019.
This is great for anyone who wants to profit from that massive potential for a price change. But, it is also a huge downside for anyone who wants to use it as an actual money alternative. This is not stopping many who have to use it, like those in the tech community in Cuba or many other locations that have similar problems. However, the entire concept of bitcoin taking over some of the roles of the faulty traditional currencies is getting weaker with these levels of insane instability. It is hard to say what will be the solution for this conundrum, being that in some ways, the bitcoin network will have to reject its investors or the users of its monetary service. Right now, there does not seem to be a way for these two groups to coexist and have what they want at the same time.