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2 years ago

May 3, 2022

CLare Dominic

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‘Bitcoin is mainly worth money because others want to buy it’, The price of the bitcoin reaches milestone after milestone. Last week, the cryptocurrency even rose from 35,000 to more than 40,000 dollars (almost 33,000 euros) within a day and a half. Here too, the corona crisis seems to play an important role. Nevertheless, in the long term, other cryptocurrencies could gain the upper hand. NU.nl lists some questions and answers about the investment hype of the moment.

Why is bitcoin so popular among investors?

In short, it is one of the few investments that still yield a decent return. Interest rates are low, so if you put your money in a savings account, you earn virtually nothing from it or you even have to pay to be able to store your money there. You also earn little on bonds, while stock prices are relatively high. And if there is an investment that does increase in value, that becomes very interesting. (Bitcoin is mainly worth money because others want to buy it)

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Teunis Brosens, specialist in digital financing and legislation at ING, sees another reason. “More and more institutional investors, such as pension funds and insurers, see bitcoin as a real option to invest in. As a result, there is more interest in the digital currency. In addition, more and more governments are drawing up rules for investing in cryptocurrencies. Because of all this, digital coins are becoming more and more mainstream.”

Bitcoin is mainly worth money because others want to buy it

It is striking that a bitcoin has no underlying value, such as a share. With a share you own a piece of a company. That company can grow, make a profit and pay dividends. So there’s a cash flow behind that. This is not the case with a cryptocurrency. “The bitcoin is currently mainly worth money, because others want to buy it,” explains Rik Frehen, senior lecturer at Tilburg University.

What role does the corona crisis play?

Investors fear inflation in the future, as governments and central banks pump a lot of money into the economy to cushion the blows of the COVID-19 pandemic. “But if banks put more euros into circulation as a result of this broad policy of governments and central banks, the euro will become weaker,” explains Ralph Wessels, head of investment strategy at ABN AMRO. (Bitcoin is mainly worth money because others want to buy it)

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“This is also the case in the US. In addition, since the corona crisis, the actual interest rate, also known as real interest rates, has become negative. This is because the expected inflation is higher than the interest rate. In such a situation, investors want to invest in something stable in value.”

In addition, it is important that there is only a limited number of bitcoins in circulation. There are currently about 18.5 million and that can grow to a maximum of 21 million. Moreover, many owners do not offer their bitcoins for sale at all. That makes it even scarcer.

How far can the value still rise? (‘Bitcoin is mainly worth money because others want to buy it’)

That’s hard to predict. The price of the bitcoin fluctuates very strongly. For example, on Thursday evening, after reaching the milestone of 40,000 dollars, the currency plunged again a few hours later to an amount below 37,000 dollars, and then on Friday around noon again above 41,000 dollars.

Moreover, the currency has already fallen considerably in value before. As of December 2017, it lost 80 percent of its value in one year and also with the outbreak of COVID-19 in March last year, the price dropped by about 40 percent in a month’s time. Incidentally, there was still a value of about 4,900 dollars left. (Bitcoin is mainly worth money because others want to buy it)

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Opinions therefore differ on the future price development of bitcoin. Some market followers see bitcoin as a possible new bubble, while others predict a much higher price, beyond $ 100,000. (Bitcoin is mainly worth money because others want to buy it)

Will bitcoin ever become a widely accepted means of payment?

Although currently mainly investors seem to be interested in bitcoin and other digital currencies, they were originally intended as a means of payment. At more and more companies and institutes you can pay with the currency. For example, you can pay your tax with it in a Swiss canton and various payment service providers, including PayPal, have now also accepted it.

Yet most retailers will look strange if you want to pay for your groceries with (a piece of) a bitcoin, for example. “However, I do not rule out the possibility that in the long term you can pay with digital currencies in many places,” says Frehen. “Although I doubt that in the end bitcoin is the cryptocurrency that will win the battle.” (Bitcoin is mainly worth money because others want to buy it)

According to him, the disadvantage of bitcoin is that it was the first cryptocurrency. “Developers of other digital coins have been able to see what teething problems bitcoin has.

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They have been able to take them out when developing new currencies, which makes them better. So in the long term, it could be another currency that we’re going to use on a large scale.”