For the third year in a row, Bitcoin, as the world’s most famous cryptocurrency, has significantly exceeded the earnings that could be achieved by placing money in alternative types of investments.
In 2021, Bitcoin brought a yield of almost 60 percent, which is higher earnings compared to the record jump in the price of crude oil, the indices of American or German stocks.
The difference is even more pronounced in relation to the types of assets that suffered losses last year, such as American corporate and treasury debt securities, gold or silver.
What is the real success of cryptocurrencies based on, and are there any real calculations for the jump in the value of Bitcoin in the last three years of 1,100 percent?
Mathematical protocol
Bitcoin is a rather revolutionary form of digital money that enables decentralized transactions based on a clearly defined mathematical protocol.
The system set up in this way registers transactions between users through cryptography and digital signature, and thus protects the privacy of participants.
The fact that cryptocurrencies are not controlled by any type of regulator such as the central bank has led to their great attractiveness, especially in recent years when states and central banks are intensively abusing their monopoly on issuing money and bringing negative consequences(negative interest rates, indebtedness, inflation).
Of course, a much better advertisement for Bitcoin and other cryptocurrencies than more than the obvious misuse of state money was given by their sudden market value of several hundred or even thousands of estimates.
The strong need of investors not to miss out on profits is certainly an important component in building the market value of any type of commodity or financial instrument, but their growth of no less than a thousand estimates cannot be proof that it is overvalued or created an investment bubble.
Evaluation
However, when we talk about valuation, this is where the earthly problems of Bitcoin and other cryptocurrencies begin.
Unlike stocks and bonds, which can be relatively easily valued based on an estimate of the present value of their expected, future cash flows, cryptocurrencies do not produce any cash flow, so such estimates can hardly be useful.
Valuation of cryptocurrencies could be made on the basis of the assumption of their acceptance in the future, either on the map of users of global money or as an established custodian of property values, which is a function traditionally performed by gold and other precious metals.
Indeed, the decline in the price of gold since mid-2020, when there was no indication of the end of the pandemic, is largely due to the transition of investors to “digital gold”.
The fact that cryptocurrencies do not have the characteristics of gold such as rarity(there are many cryptocurrencies) and the consistency that gold has proven and proves for centuries have remained under the veil of abnormal earnings that cryptocurrencies have brought.
So, cryptocurrencies are currently successfully playing the role of guardians(increasers) of property value.
What’s holding it back
When it comes to replacing traditional money, it is unlikely that in this three-year period of expansion of the value of Bitcoin, there have been significant changes if we do not count the speculative maneuvers of the founders of Tesla, Mask, and similar corporate gurus.
Volatility in the movement of cryptocurrency values, slowness, and not-so-small costs in the realization of transactions continue to hinder the growth of traffic on the Bitcoin network if we ignore illegal transactions.
If we add to these weaknesses of cryptocurrency in performing the basic functions of money(gold) the great risks from the actions of states(possible ban, the introduction of taxes, etc.), the question still remains, how did this expansion follow?
Much of the answer certainly lies in the overall growth of the financial instruments and commodities market in a veritable flood of liquidity following massive monetary and fiscal stimulus implemented in key global economies.
The market capitalization(value) of all cryptocurrencies is far less than the value of the world’s largest company(Apple), so the abundance of liquidity very easily led to the growth of this not-so-large market.
Therefore, this year’s turnaround in the monetary policy of the Fed and other important central banks will be a key test for maintaining the value of Bitcoin and other cryptocurrencies.
In an investment environment where deposits and government bonds will yield tangible profits, it will be much easier to triage the historic cryptocurrency – a mere investment bubble not uncommon in human history or a more enduring instrument of preserving property values.