By Alex Lielacher
The digital currency bitcoin rallied by over 300 percent since the start of the year and has recently surpassed the $4,000 mark. Unsurprisingly, many financial markets pundits consider such a sharp rally the creation of an asset bubble.
In all fairness, the returns that bitcoin and its digital peers in the crypto assets space are experiencing have not been seen since the day and age of the internet bubble in the late 1990s. However, Bitcoin has very different fundamentals than early internet stocks and a much more promising growth trajectory.
1. The Growing Acceptance of Bitcoin as Legal Tender
One of Bitcoin’s biggest challenges so far has been acceptance by lawmakers and financial regulators due to its decentralized nature and its unfortunate association with criminal activities carried out on the dark web. However, Bitcoin’s “official” acceptance is on the rise.
In April 2017, Japan announced that it would officially begin accepting Bitcoin as a legal payment method, which immediately boosted the price of bitcoin and has led to a substantial increase in merchant adoption across Japan.
In the Philippines, citizens have been increasingly using Bitcoin to send and receive low-cost remittances. This has not gone unnoticed by the country’s central bank, which announced in February 2017 that it will regulate Bitcoin so that the digital currency can be used as an officially accepted remittance system and, thereby, granting it full legal status.
Countries such as Australia and Russia have recently made similar statements that could lead to Bitcoin becoming a fully accepted medium of exchange in their respective countries. This is a trend that is likely to continue, given the growing demand for Bitcoin as an investment as well as an online payment system.
2. Increasing Merchant Adoption
In the early years of Bitcoin, merchant adoption was limited to a few brave ecommerce stores, usually run by early-stage Bitcoin enthusiasts. This, however, has changed substantially as leading tech companies and ecommerce platforms have chosen to accept Bitcoin as a payment method. Microsoft, Rakuten and Overstock are three of the largest companies to accept Bitcoin payments.
With bitcoin’s sharp price rally, increased media coverage and newfound acceptance in places such as Japan, Bitcoin merchant adoption is on the rise and this trend will likely continue.
The arguments for online merchants to accept Bitcoin are actually very strong; fees are lower than for credit card payments, chargeback fraud is entirely eliminated, new customers can be reached in underbanked regions and a new, tech-savvy consumer base can be attracted.
The more that merchant adoption increases globally, the more there will be regular and stable demand for the digital currency. And given the current low rate of merchant adoption, there is a substantial room for upside.
3. Bitcoin Is Increasingly Acting as a Store of Wealth in Distressed Economies
Another reason why Bitcoin is most likely not a bubble is that is has a much-need real world application in economically distressed countries. In places such as Venezuela, Bolivia and Zimbabwe, for example, bitcoin has been acting as a store of wealth and as an alternative spending currency as local currencies are weakening into worthlessness. This can be witnessed by increasing bitcoin trading volumes that are negatively correlated with the performance of local currencies and economic growth in distressed regions.
Bitcoin also allows individuals and businesses in countries with strict capital controls, such as Venezuela, to receive much-needed remittances to stay financially afloat. In other words, wherever there is economic distress, Bitcoin demand will likely rise and Bitcoin adoption will grow.
4. Bitcoin Has Only Just Gone Mainstream
You could say that 2017 has been the year in which Bitcoin has finally gone mainstream. Five years ago, if you would have asked the average person on the street what Bitcoin is, they would have most likely given you a bewildered look. Today, most people have at least heard of Bitcoin and many even know that one bitcoin is worth more than an ounce of gold.
Now that Bitcoin has become mainstream, the buying potential from new investors is immense, especially as institutional investors have started to open up to the idea of investing in bitcoin and other digital currencies.
5. Bitcoin’s Supply Is Limited
Finally, one of the key reason why Bitcoin has become so valuable is that its increasing demand is met with a fixed limited supply.
Because of the way Bitcoin was created, only 21 million coins can ever be mined. Furthermore, the rate at which new coins are created slows down over time, which means the increasing demand for the digital currency is not only met with a limited total supply but also with a continuously slowing supply.
The discussion of whether Bitcoin is a bubble or not will likely continue indefinitely, but the comparison between Bitcoin and early internet stocks does not hold true due to the fundamental differences between the two asset classes.