This article explores an apparent paradox between the underlying motivations for investing in Bitcoin and the justifications commonly offered by investors when discussing their choices. While many claim to support Bitcoin for its revolutionary potential, the reality of their investment motivations may tell a different story.
These competing reasons may ultimately cancel each other out, resulting in a true paradox.
History
Bitcoin was created in the aftermath of the global financial crisis in 2008. In its original whitepaper, the primary goal was to enable peer-to-peer transactions without the need for intermediaries like banks. Essentially, Bitcoin was designed to be a decentralised currency, empowering individuals to transact directly with each other.
The proposed benefits of such a currency included:
- Financial Autonomy: Users maintain full control over their funds without reliance on banks or government intervention.
- Lower Transaction Costs: By removing intermediaries, fees should be lower.
- Increased Transparency: Transactions are recorded on a public blockchain ledger, ideally minimising fraud.
- Borderless Transactions: Bitcoin allows for seamless transactions across countries without the complexities of exchange rates.
- Inflation Protection: With a fixed supply of 21 million coins, Bitcoin was designed to resist inflation compared to traditional fiat currencies.
For the first few years, Bitcoin remained relatively unknown to the public, only reaching a price of $1 in 2011.
Over the next few years, it experienced multiple boom-and-bust cycles, hovering between $500 and $1,000 USD, but still had not reached the mainstream.
Then in 2017, Bitcoin surged from under $1,000 to nearly $20,000 within a single year. This momentum continued in 2021, with the price peaking at $64,000.
Bitcoin has made many people incredibly wealthy, but is this really the true use case envisioned by its creators over 15 years ago?
Speculating vs Investing
For the purpose of this article, speculation is defined as purchasing an asset with the hope that its value will increase significantly, allowing you to sell it at a profit.
Investing, on the other hand, involves buying an asset based on the future cash flow it will produce over time. While the asset’s price may rise, the increase theoretically reflects the growth in cash flow, such as higher rent making an investment property more valuable.
By most metrics, Bitcoin is a speculative asset. The majority of people buy it with the intent of selling it later at a higher price.
There’s nothing inherently wrong with this approach—as long as it’s recognised for what it is.
The issue arises when people fail to acknowledge this. Many justify their speculative behaviour by claiming Bitcoin’s potential future use as a currency.
This is a paradox. Here’s why.
What makes a good currency?
The foundation of any effective currency is its stability. Each unit of currency should maintain relatively consistent purchasing power through the short to medium term. For example, if $1 buys one loaf of bread in January, it should be able to buy a similar amount of bread later in the year.
Now, imagine a scenario where that same $1 could buy 10 loaves of bread in just six months. In this case, you would likely hold onto your dollar, hoping to purchase more later rather than spending it now.
This behaviour shifts the currency from being a medium of exchange to a speculative asset, where people hoard it in hopes of future gains, disrupting its role as a stable unit of transaction.
And so, because price stability is a fundamental factor to useful currency, this makes Bitcoin a truly awful currency in its current state.
The Paradox
Continued speculative investment into Bitcoin will continue to degrade its suitability for a currency. The function of a currency is to be used as a medium of exchange, not as an investment vehicle.
Many people justify buying Bitcoin by claiming they believe in its future as a decentralised global currency. Yet, ironically, their speculative purchases reduce its ability to fulfill that very function.
This behaviour perpetuates a cycle that reinforces Bitcoin’s role as a speculative asset rather than a stable currency.
Feedback Loop
Bitcoin’s volatility isn’t just a byproduct of speculative investment—it actively fuels more speculation. As the price of Bitcoin fluctuates dramatically, new investors are drawn in by the potential for huge profits.
Each spike in price reinforces the perception that Bitcoin is a high-risk, high-reward asset, further encouraging speculation rather than actual use as a currency.
This creates a self-perpetuating cycle: the more Bitcoin’s price rises, the more it is viewed as a speculative asset, and the less likely it becomes that people will use it as a medium of exchange.
Instead of spending Bitcoin, holders wait for the next price increase, making it increasingly unsuitable for everyday transactions.
Actual Intentions
Let’s be honest—few people buy Bitcoin with the primary intention of using it as a currency. Most are in it for the potential financial gain, and that’s perfectly valid.
However, investing in Bitcoin carries certain connotations, particularly within the professional finance industry. Therefore, many may feel the need to justify their investments with claims about its revolutionary potential, despite the contradiction.
In recent times, many have rebranded Bitcoin as a store of wealth, similar to gold. This just replaces one contradiction with another: a good store of value shouldn’t drop 70% in just 12 months. Even without that, this argument diverges from the original use case outlined in the whitepaper.
Summary
This article was not written to convince you that Bitcoin presents terrible prospects as an investment opportunity. Many financial advisers writing about Bitcoin in 2017, 2021 and even recently have been left with egg on their faces with such statements.
It functions perfectly as a speculative asset, and if that’s something you wish to “invest” in, that’s perfectly fine. Just remember to stay diversified.
However, don’t fall into the trap of justifying your purchase by claiming that you believe in Bitcoin’s future as a currency. In doing so, you contradict the very nature of your investment. Be clear about why you’re buying it—if it’s for speculative gains, own that decision.
Then again, perhaps the ‘currency’ argument offers an easy out if the price ever tanks…
