By Robert S. Bacarella | March 25, 2021

With all the hype about bitcoin, many people are wondering if they should use and/or invest in it.

The first thing to understand about bitcoin is that no government is “backing” bitcoin. It has value if and only if people want it.

The second thing to understand is bitcoin’s supply is limited to 21 million digital “coins.” All other currencies in the world have no limitations, as a government can print as much money it needs to support its spending programs and debt levels.

Bitcoin’s limited supply means it could be a good way to protect one’s purchasing power—so long as other people keep desiring it as “money.” There are two ways bitcoins’ advocates hope it serves as money, just as dollars do: first, as a medium of exchange (MoE), and second, as store of value (SoV).

  • As a MoE, it’s true that some retailers, such as Subway, Domino’s Pizza, Home Depot and Starbucks, are accepting bitcoin as a form of payment. But this acceptance, by itself, does not materially affect the value of bitcoin. That’s because these retailers almost all instantly convert bitcoins to cash. So, for the retailer, the transaction is little different than accepting a credit or debit card. The bitcoins simply flow through the retailer to some other party that wants to own them.
  • So, it’s bitcoin as a SoV that’s primarily driving its volatility and value. A store of value is an asset that is capable of retaining value over time. Besides dollars, other stores of values include gold, silver and some other metals. Bitcoin certainly shares many of the features of these more familiar stores of value, but it is too early to know whether people will continue to have confidence in bitcoin’s ability to hold its value—especially during times of economic turmoil.

Generally, it appears that bitcoin is becoming more accepted as a MoE and SoV. But is this enough to create long-term stability and value? Could bitcoin go down the path of the Tulip Mania or the Beanie Babies phenomenon and someday collapse in price? Or could it soar in value, like a 1952 Mickey Mantle card that recently sold for $5.2 million, a record all-time high for a sport card?

Currently, investing in bitcoin is like buying a lottery ticket. It could either become worthless or become so useful as a store of value (and possibly a medium of exchange) that people will be willing to pay much higher prices for it.

Warren Buffett called it “rat poison squared.” Bill Gates said, “There’s is no better currency.” Mark Cuban stated, “I’d rather own bananas than bitcoin.” Only time will tell who is right.

In the meantime, only buy what you can afford to lose, like a lottery ticket!

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