The irresistible rise of Bitcoin

The value of Bitcoin and other digital coins is rapidly skyrocketing. There’s more behind that rise than just speculation. There’s much demand for cryptocurrencies in countries that have a high inflation.

Bitcoin, Ethereum and other digital coins — also called cryptocurrencies — are getting more and more attention. That has everything to do with the enormous price rises of the past few months. For example, the value of one Bitcoin has shot up by more than 300 per cent since late 2016. The coin has just broken the limit of $4,000 (€3,385). In November 2011, a Bitcoin cost less than $3. The enormous rise in value is firstly a result of scarcity. The supply of Bitcoin is increasing more and more gradually. When 21 million Bitcoins are in circulation, no new coins are added.

Cryptocurrencies aren’t just popular with speculators who choose a position for a further rise. Bitcoins and other digital coins are also becoming more popular in countries with a high inflation, such as Venezuela and African countries. Because of the high inflation, the population sometimes has to pay twice as much in local currency for daily purchases such as bread or milk. Compared to traditional currencies, the value of Bitcoin can’t be hollowed out by economic mismanagement of the government and/or central bankers.

Another advantage of cryptocurrencies is that it’s very difficult to commit fraud with them. They are based on so-called Blockchain technology, so that the transaction overview is accessible to everyone, and is saved online everywhere. When frauds want to adjust a certain transaction, they have to do so on millions of computers spread throughout the world. That is as good as impossible. Although it’s very difficult to commit fraud with cryptocurrencies, swindlers sometimes try to sell fake Bitcoins.

Despite the large exchange rate rise, the size of the market for digital currencies is still quite small. The total value of all Bitcoins — by far the largest of these kinds of currencies — amounts to about €60 billion. That is significantly less than the market value of companies like Unilever (more than €80 billion). All types of cryptocurrencies combined are worth about €110 billion. Although you can pay with Bitcoin at hundreds of places in the Netherlands, the number of transactions is very limited. Because of the large price rise, many people choose to save the digital coins and to pay with euros or dollars.

Some parties predict that cryptocurrencies will take over the role of traditional currencies more and more in future. They point out the major advantages, such as the independent character — without influence from central bank of government — the low risk of fraud and the option to pay without an exchange rate in local currencies at more and more places. For now that future is still far off, if we ever get there at all. Many consumers and companies are still scared of using Bitcoin because they are unfamiliar with it or because of the enormous price fluctuations. The price stability needed before a currency can serve properly as a means of exchange or hoarding.

On the other hand, some economists see the rise of cryptocurrencies as a new kind of tulip mania. The price of Bitcoin and other currencies is now rising just as quickly as the value of bulbs did in the seventeenth century. In both cases the rally is caused for the most part by traders driving up the price of a scarce means, in the hope that they’ll be able to sell their position at a higher price in future. Market watchdog AFM warned for the risks of digital currencies at the start of the summer, which, for that matter, don’t fall under a deposit guarantee.

For now, Bitcoin and other cryptocurrencies will remain in the spotlight -major exchange rate fluctuations will ensure that. Compared to conventional currencies, there’s no central bank that could guarantee price stability. The consequences of that were recently seen with Ethereum, the value of which decreased by more than 60 per cent between mid-June and mid-July. That sharp correction is clearly a warning sign: investors who want to profit from the rise of digital currencies should start by reading about them, rather than buying some Bitcoins, Ripple, Qwark, Storj or Lisk and hoping for the best.

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