Bitcoin fever has made a comeback. On March 5, the cryptocurrency reached a record high price and has since continued its upward trajectory. In 2024, it has outperformed nearly every other asset, offering investors significant returns. However, along with the resurgence of enthusiasm for bitcoin, there is also an increase in myths and confusion surrounding the factors influencing its price movements.
Over the past month, the price of bitcoin has surged by nearly 70 percent. This remarkable increase has been lauded within crypto circles as a welcomed resurgence, viewed as a return to the exciting phase of a predictable boom-and-bust cycle.
The phrases "number go up" and "it's just math" have become tongue-in-cheek mantras adopted by crypto enthusiasts and sarcastic jabs from skeptics. However, they encapsulate a belief held by staunch supporters that the economic framework of the Bitcoin system—where a fixed supply of 21 million coins and a predetermined release schedule are hardcoded into the software—will naturally drive the price upwards over time. These believers perceive scarcity as a remedy to the rampant inflation of traditional currencies, which steadily lose value, and the unsustainable levels of debt accrued by governments worldwide.
Bitcoin is presently being exchanged at a value exceeding $72,000 per unit. Advocates such as Samson Mow, the CEO of JAN3, a technology company focused on bitcoin, have expressed their anticipation for this worth to escalate significantly, potentially reaching $1 million in the near term. Mow emphasized to WIRED in November, "The monetary system is inherently flawed."
Amid the jubilation over rising cryptocurrency prices, few are asking the difficult question of how to price them. James Angel, a Georgetown University economist specializing in financial markets, says the proposition is deceptively tricky. Bitcoin defies conventional valuation methods because there is no company behind it whose performance can be analyzed. It does not generate revenue, is not widely used for payments or any other purpose, and is not issued by any government. It resists easy comparisons. But one thing is certain, says Angel: “A limited supply does not equate to infinite value.”
Bitcoin came into existence in 2008 following a worldwide financial crisis. It originated from a dissatisfaction with the custodians of the global economy and the actions of major banks and financial organizations, whose risky financial practices paved the way for the collapse.
The innovative form of "digital currency" was intentionally crafted to wrest control over monetary policy – the mechanisms governing the inflow and outflow of money – from central banks. This involved implementing strict limits on the supply of currency and establishing a predefined schedule for the release of new coins.
"The fundamental issue with traditional currency lies in the necessity of trust for its functionality," articulated Satoshi Nakamoto, the enigmatic creator of Bitcoin, in a forum post from 2009. "Central banks are entrusted with the responsibility of preserving the value of the currency, yet the history of fiat currencies is rife with instances of this trust being violated." Satoshi and their early collaborators envisioned that if Bitcoin could establish itself as a universally accepted currency, the savings of individuals would be shielded from devaluation resulting from the policies of any bank or government.
The rise of Bitcoin has sparked the development of a significant body of academic literature focused on the challenging task of determining the value of this novel asset class. According to Silvia Dal Bianco, an economist at University College London, the difficulty arises from the elusive nature of Bitcoin, which resists straightforward categorization. Dal Bianco suggests that evaluating the value of Bitcoin, to a certain extent, hinges on our perception of what Bitcoin represents.
As of now, Bitcoin has not seen widespread adoption as a medium of exchange for purchasing goods and services. Consequently, individuals who anticipate a rise in its price often highlight its potential as a digital counterpart to gold – a commodity with finite supply that enables owners to safeguard against inflation and broader economic upheaval.
While the argument regarding Bitcoin's potential as a digital equivalent to gold holds some validity, the intricacies of its deflationary characteristics are often oversimplified on social media platforms. The discourse frequently reduces these nuances to a simplistic notion like: "The finite supply of Bitcoin will inevitably lead to price appreciation." This perspective gives rise to the "number go up" philosophy commonly observed in Bitcoin discussions.
According to Angel, the concept of Bitcoin's fixed supply has already been factored into its price long ago. "In a market that operates efficiently, any widely known information should already be reflected in the current price," Angel asserts.
A prevalent misconception concerning Bitcoin's supply dynamics revolves around the belief that a phenomenon called the halving – which involves reducing the amount of new Bitcoin introduced into circulation by half approximately every four years – is certain to drive the price upwards. With the next halving scheduled for next month, speculation has arisen regarding another potential price surge. However, Angel contends that the historical upswings following previous halving events are primarily attributed to self-fulfilling speculation rather than any inherent economic mechanism within the Bitcoin system.
According to Dal Bianco, the closest approximation to fundamentals for Bitcoin – characteristics that can be leveraged for a robust valuation – is the cost associated with producing new coins. Similar to how the price of gold is linked to the expense of extracting ore from the ground, the price of Bitcoin should, at least to some extent, reflect the hardware and energy expenditures associated with mining new Bitcoin. However, the design of the Bitcoin system complicates this valuation method. To maintain a consistent release of new supply, the process of Bitcoin mining becomes progressively more computationally demanding – and consequently more costly – as competition among miners escalates, and vice versa. If the price of Bitcoin increases, more miners are incentivized to join the network, driving up costs for all participants. Therefore, as Satoshi outlined in a 2010 forum post, the price of Bitcoin "dictates the cost of production more than the other way around."
When divorced from quantifiable fundamentals and practical utility, fluctuations in the price of Bitcoin largely stem from a collective belief regarding whether the price will ascend or descend. "It's about people's perceptions of Bitcoin – it's about animal spirits," notes Dal Bianco. This mindset isn't exclusive to cryptocurrencies; in 2021, investors fueled a craze around "meme stocks," propelling prices to dizzying heights. Investors were no longer speculating on the potential of the underlying businesses; instead, they were merely banking on further price hikes.
Dal Bianco observes that the recent surge in Bitcoin's price is intensifying the buzz surrounding it, attracting even more speculators and fueling a "self-reinforcing cycle." Similarly, she notes that when collective confidence in the anticipation of further price appreciation wanes, the resulting downturn can be equally abrupt. In such circumstances, demand can evaporate as quickly as it materializes.
As of March 3, Michael Green, the chief strategist at Simplify, an asset management firm, engaged in a wager with Peter McCormack, the host of the podcast "What Bitcoin Did." The bet was centered on the price of Bitcoin. Green staked $20,000 on his belief that Bitcoin would not attain a price of $100,000 per coin by the year's end, while McCormack wagered $100,000 in contention that it would.
Green explains that the bet was partly driven by a desire to spotlight the weaknesses in the economic principles often presented as gospel by Bitcoin enthusiasts. He specifically disagrees with the portrayal of Bitcoin to investors as "a store of value intended to become the currency of the future," labeling it as "economic nonsense." Green argues that due to the diminishing supply of Bitcoin over time as individuals lose access to irrecoverable wallets, it cannot sustain a credit system. He asserts that the cost of borrowing will inevitably escalate to a level where it becomes unaffordable for almost everyone.
In January, regulators in the United States gave their approval for the first batch of Bitcoin exchange-traded funds (ETFs), providing individuals with a means to invest in the cryptocurrency through a brokerage, similar to investing in a regular stock. The introduction of Bitcoin ETFs is believed to have triggered the recent surge in price by unleashing a surge of demand among investors – both institutional and retail – who were previously unable or unwilling to engage with a cryptocurrency exchange or manage crypto assets manually.
According to Green, the approval of these new Bitcoin funds by regulators has incentivized financial institutions, for whom ETFs represent a fresh revenue stream, to allocate significant resources towards marketing efforts aimed at driving demand. Consequently, there is a disincentive to highlight any shortcomings in the rationale behind Bitcoin's economic principles.
Green contends that the faith in the future prospects of Bitcoin has taken on a religious fervor. According to him, this missionary zeal is more likely to impact the price than any intrinsic economic mechanisms embedded within the system. Even in the event of McCormack losing the bet, Green suggests it could still be considered a worthwhile marketing investment.
However, McCormack refutes any suggestion that the wager with Green was a marketing ploy. He asserts, "I made the bet to prove him wrong."
Angel argues that the influence of evangelism on the price of Bitcoin restricts the possibility of engaging in sincere discussions about the potential of the Bitcoin system. "Once you become a believer, you have a significant financial incentive to evangelize about the virtues of Bitcoin," he explains. "If there were a Nobel Prize in marketing, it should be awarded to Satoshi Nakamoto."
Bitcoin's most ardent supporters also acknowledge and embrace this phenomenon. Mow expresses, "Bitcoin price appreciation serves as its own advertisement." Investors are drawn in by the promise of wealth, and subsequently, they delve into the "rabbit hole" of Bitcoin themselves, contributing to the formation of a new cohort of believers who propagate the Bitcoin gospel.