Is Bitcoin a Financial Investment or Money? Image credit: AdobeStock
Today, many people purchase Bitcoin on platforms like bitcoin revolution and use it as a financial investment. Essentially, individuals buy and keep Bitcoin in their digital wallets, hoping its value will increase. And this has prompted some individuals to wonder whether Bitcoin is a financial investment or money?
There’s no clear line between financial assets and money. To some people, money is also an asset, only that it’s highly liquid. Fiat money’s liquidity is the reason why people use it to transact or make payments. Although Satoshi Nakamoto initially developed Bitcoin to serve as a currency, its demand as a speculative investment is increasing rapidly.
Investors’ speculation has increased Bitcoin price quickly, prompting some experts to define it as a financial bubble. That means the asset’s price has diverged from the underlying fundamental value. Essentially, this economic phenomenon happens when an asset’s increasing demand causes a continuous price increase beyond the underlying value.
With the rising price, investors will enjoy the increasing costs, tempting them to purchase more. Some are also afraid about missing the chance to invest in a good asset due to the upward momentum, thinking the trend will remain. Unfortunately, the bubble eventually pops up, leading to a significant price drop and leaving investors with large losses.
Bitcoin prices fluctuate wildly throughout the year. For instance, this virtual currency ended 2017 with almost a 1,400% gain. Some financial experts compare investors’ Bitcoin excitement to the 1990s technology stocks response and 2000s houses. In these cases, investors continued to purchase even when prices increased, hoping others would invest in the asset from them at higher prices. But some bought the investment assets because they were afraid of missing out on possible chances to profit, which pushed prices higher.
National governments have traditionally produced fiat currencies. Being fiat means commodities like gold don’t back the value of money. Instead, the general acceptance that it is money gives it value. That means people use the U.S coins and dollar bills as money because they have agreed to use them in their economies.
Conventionally, money serves as value storage, exchange medium, and account unit. That means people must accept cash in exchange for services and goods to work as an exchange medium. People use Bitcoin as an exchange medium for a limited number of services and goods.
Over the years, the number of enterprises that take Bitcoin as an exchange medium has been rising. However, these transactions comprise a small economic part. Additionally, Satoshi Nakamoto created Bitcoin to serve as a peer-to-peer payment system. However, most Bitcoin transactions between companies and consumers involve intermediaries that facilitate them. That’s because most people need intermediaries to convert Bitcoin into fiat currencies.
What’s more, people require an exchange medium that retains a stable value. Historically, Bitcoin’s value has not been steady. Since money acts as value storage, that value stability is crucial. But Bitcoin’s value has increased dramatically over recent years. Volatile prices may not seem like a threat to money’s value storage with the rising costs. But with falling prices, people realize the essence of a stable value. Thus, volatility damages Bitcoin’s credibility as a value storage. It’s also a significant hurdle to its use and acceptance as a currency.
The same fluctuation can confuse sellers and buyers when using Bitcoin as an accounting unit. Essentially, this virtual currency trades at varying prices on different crypto exchanges. And this can complicate pricing decisions further. Nevertheless, some merchants still accept Bitcoin payments because they believe in its technology and future.
Bitcoin has traits that enable it to serve as money and asset. Today, some merchants accept Bitcoin payments for commodities and services. Also, some people purchase Bitcoin as an investment, hoping its value will appreciate over the years. Thus, Bitcoin is arguably a financial investment and money.