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November 18, 2018

Bitcoin: Cryptocurrency or Cryptoasset?

Virtual currencies such as Bitcoins are not legal tender in Kenya./COURTESY
Virtual currencies such as Bitcoins are not legal tender in Kenya./COURTESY

August 2017 saw cryptocurrency enthusiasts and traders alike hold their breath as the value of Bitcoin soared past the USD 4,000 mark, representing a 400% appreciation since January 2017. At the time, economists, on one hand, speculated that this was merely a bubble, and that the value of Bitcoin would drop substantially before the end of the year. On the other side of the isle, enthusiasts said the USD 4,000 mark was merely the beginning, speculating that bitcoin would hit the USD 7,000 mark before the close of the year. Fast-forward three months later, the value of Bitcoin currently stands just below USD 11,000. This represents a tenfold increase in this year alone!

Back in August, numerous economic analysts, myself included, noted that the rapid appreciation in the value of Bitcoin was due to two main factors: increased institutional investor interest and mainstream acceptance. As it stands, these are arguably the same factors underlying the remarkable run currently being experienced. However, an even stronger underpinning factor may be considered: the fear of missing out. Understandably, investors, noting the exponential growth of Bitcoin, do not want to miss out on the action. As a result, the last three months have witnessed increased investor activity with numerous players overpaying for the asset in a bid to get a piece of the cake. As a result of this speculative activity, Bitcoin has experienced tremendous growth.

This action, however, has led to a number of Bitcoin proponents arguing that the cryptocurrency has transcended currency status to asset status. True to speak, while the value of the asset continues to appreciate, its real time use has remained largely the same. Yes, it is possible to actively buy and sell goods using Bitcoin, however, the same is relatively limited. Investors, rather than investing in the currency, as a currency, are investing in the same as an asset – a crypto-asset so to speak.

Perhaps this is the ultimate end that Bitcoin is careening toward. Given the nature of Bitcoin’s underlying technology, only 21 million Bitcoins can ever be created. Currently, approximately 16.5 million Bitcoins are in circulation, with an estimated 3,500 being created every day. Unless the foundational technology is updated to increase the number of Bitcoins that can be in existence, we can expect the ceiling to be reached relatively quickly. Once this ceiling is achieved, Bitcoin may be considered too valuable an asset, due to its limited nature, to be utilised as purely a currency.

At this point, however, any forecast as to what the future of Bitcoin may hold is purely speculative. As positive as its growth may be, we must admit that we are clearly in uncharted waters. Perhaps the best approach to take at the moment is to wait and see.

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