Why Bitcoin is glorified gambling

 Firstly, I have finished my exams now and will be returning to my normal schedule. And secondly, tomorrow marks my blog’s 1st birthday, it has been a brilliant year for sharing my take on economics with all of you and I am glad to say that it has been an enlightening journey writing this blog and I hope that it has provided a certain degree of educational value to all of you. Without further ado, let’s get onto today’s controversial topic, bitcoin.

I will be discussing what bitcoin is, whether it should be considered a currency, how it has accumulated its value, and why it is volatile.

Bitcoin is considered the “poster boy” for cryptocurrencies, this is on account of its large trading volume, price (at the time of writing this blog, (29/06) the price is £16,543) and fame. Bitcoin is considered by some, “the future of money”, this is because the “currency” itself is encrypted (hence “crypto”-currency) and completely online allowing for a reduction of frictional costs (the costs taken by the transfer of the money to take place). Due to the safety, the ease of use and the reduction of frictional costs- since they are online and can be transferred internationally without the need of worrying about the conversion rate- bitcoin and other cryptocurrencies seem to be a better alternative than bank transfers. However, there is a huge reason why cryptocurrencies and by extension NFTs (Non-Fungible Tokens) are not good to invest in, let alone be the future of currency.

Bitcoin has no intrinsic value. This means that bitcoin itself has no use since it is not useful to have a bitcoin if its price of it is disregarded. Bitcoin has no cultural, artistic, or functional value. Therefore, bitcoin is a fiat currency. Some of you might be thinking- all currencies in the world are also fiat, so why is bitcoin being a fiat currency bad? It is bad because most of the state-recognised currencies around the world are also used to pay taxes. This means that the value of the pound (for example) is derived from an individual’s need to pay tax. Furthermore, the pound is accepted in all shops and stores across the UK, however, bitcoin was only used for tesla (which has now been shifted to Dogecoin). Even valuable metals i.e., gold and platinum are used for jewellery, tech components and catalytic converters in cars.

If Bitcoin is useless, then why does it have value? This can be attributed to the “Greater fool theory”, this is when there is a bubble present in a market and people want to enter it to make a profit hence there will be a “greater fool” than the seller who will purchase the asset at a higher price. In bitcoin, this is very prominent. There was a large uptick in the volume of assets purchased when the people were fascinated by bitcoin, resulting in a large increase in the price of the cryptocurrency. Moreover, the price skyrocketed each time Elon Musk or Tesla tweeted about them. This means that the demand for bitcoin is derived from its fame, hence I would call this “the cryptocurrency bubble.” Since the popularity of any item, regardless of its importance, fluctuates drastically over time as does the graph for the price of bitcoin. Bitcoin has fallen 5.4% since the morning of today (30/06), 10.52% in the past 5 days (25/06-30/06), and 55.58% since last year. However, it has risen 689.01% in the past 5 years. This shows to me, at least, that bitcoin’s fame is falling and that the “hype” around these pointless cryptocurrencies is dying down, resulting in a reduction in the demand for bitcoin, allowing the market forces to drop the price. This becomes apparent as Bitcoin is at a 2.5-year low.

Above is a one-year graph for the price of bitcoin. For reference, the price has fallen 68.4% since its peak in November 2021

This bubble is sure to burst as soon as a recessionary period strikes many of the western economies, where individuals will not be able to be spendthrifts. I believe that bitcoin only gained value as a result of the increased money circulating around the economy (due to low interest rates, high government spending, increased QE, reduced travel costs, low inflation et cetera), allowing people to be less frugal with their money and spend it on less secure investments as they were able to handle larger amounts of risk, without threatening their lifestyles. I believe that another, more serious recessionary period[1], where the lifestyles of citizens will be threatened, is coming within the next 3-7 years (the time period is an educated estimate). This will cause a crash in the price of bitcoin as many people will need savings during this time, hence, will liquidise these assets quickly causing the price of bitcoin to fall rapidly.  


[1] I will go into details why I believe that a severe recession is going to be coming soon.

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