Scarcity and Demand Will Drive Bitcoin Much Higher
Hang onto your Bitcoin
Bitcoin was originally created, among other reasons, to be a store of value similar to gold. People have grown tired of the value of the U.S. dollar continuing to erode because of the money policies of the Federal Reserve.
In order to keep it from operating in a similar way fiat money does, the creator included a 21 million ceiling on how many Bitcoins could ever exist. One of the major reasons for that is so someone can't come along and simply boost the number of Bitcoins in the same way the Fed creates money out of thin air, which would put downward pressure on the price of the cryptocurrency.
Rising demand, limited supply
It's interesting to read and listen to some of those on Wall Street that talk or write as if they're clueless as to what's driving the price of Bitcoin up.
The bottom line is it's a supply/demand situation; something that has always been the primary driver of prices across all asset classes. There could be secondary factors like safety, portability and anonymity being part of the attraction of Bitcoin, but all cryptocurrencies that are legitimate include that as part of what they inherently are; some do it better than others.
As a matter of fact, a lot of the reason many of these cryptocurrencies will fall by the wayside is because they are scams, and also lack the type of code that is highly resistant to being hacked.
That's one of the reasons you read about hedge funds that are investing in the various cryptocurrencies hiring on strong IT teams, or paying for tech specialists. They're looking for poorly written cold that would undermine the currency and those investing in it if it's hackable.
The good news is we're almost sure to see Bitcoin and the cryptocurrency market have the bubble pop in 2018, and that will clear the market of most of the weak or fake tokens, and leave it much stronger afterwards.
In turn, that will generate more trust and demand, which will drive Bitcoin and the surviving currencies much higher.
We're not even close to demand assuaging in the near future. Meanwhile, the supply is not only limited on the ceiling, but there is also scarcity because of lost or misplaced keys.
A key is similar to a password, but different in the sense it can never be reset like a password can be. If you lose the key, there is no way to access your Bitcoins.
The point is, a significant number of Bitcoins are not being actively traded, estimated at about 5 million, with an estimate by Chainalysis saying as many as 2.5 million Bitcoins have been lost.
Other more conservative estimates have it closer to about 1.5 million coins lost. However you measure it, that's a lot when considering there will only ever be 21 million Bitcoins.
Other reasons for scarcity
Another reason there will continue to be Bitcoin scarcity is a lot of people are buying up large lots of them, with one of the more public cases being the Winklevoss twins, which had filed a lawsuit against Facebook and lost; although they came out if it with a $65 million payout.
They took about $11 million of that and invested it in Bitcoin when it was priced at about $120. That means they acquired over 91,000 Bitcoins. They said they haven't sold any of them since they bought the cryptocurrency. Their combined Bitcoin holdings alone have jumped to over $1 billion in value.
While there have been few public announcements of other big holdings of Bitcoin, it can be concluded that large hedgefunds are buying up a lot of the cryptocurrency.
How many will be for sale on the market will be fewer and fewer, which means soaring demand will push the price of Bitcoin to much higher levels than most even imagine.
Seeing the potential, the Winklevoss twins have built the first digital currency exchange that is licensed and regulated. The New York State Department of Financial Services regulates the exchange, called 'Gemini,' as a trust.
After being rejected once, the twins are also having their application to launch an ETF called the Winklevoss Bitcoin Trust, reviewed by the Securities Exchange Commission (SEC).
Not only is all of the above point to scarcity of Bitcoin, but the mysterious and legendary creator of Bitcoin, going by the name of Satoshi Nakamoto, reportedly holds a little under 1 million Bitcoins.
There is not doubt Bitcoin and cryptocurrencies will have the bubble pop on them in the not-too-distant future, but that should be considered a positive for the sector.
Once the smoke clears and there is more knowledge of and confidence in the asset class, even more people will rush in to own at least a portion of a Bitcoin. That will in turn drive the price up further.
For now Bitcoin will remain volatile, but if you decide to take a position in it, understand it'll take wide swings, and it's already plummeted by about 80 percent during one of its corrections.
The reason why the market is getting jittery isn't necessarily that it could happen again, but because of the rising price, the stakes are much higher.
My thought is to hold onto your Bitcoins no matter what happens in the near term. It is highly unlikely Bitcoin will ever go away, and even if it were to, it would take years for it to play out.
For now and over the next several years, we'll see a lot of wealth produced from Bitcoin, don't be one of those that regret for the rest of your life that you sold before it soared to extraordinary levels.
Just keep in mind the supply and demand environment, and the built-in scarcity that comes with Bitcoin. As long as demand remains in place, anything that happens in the short term will only be temporary, no matter how hard and quick the price drops.