Unique character makes bitcoin fickle

Bitcoin has started an impressive rise after mid-March. The cryptocurrency has risen by no less than 75% in just over a month and a half. In the currency world, bitcoin - just like other cryptocurrencies - is an odd one out.

Unlike regular currencies, cryptocurrencies are not issued as legal tender by any country. There is no central bank trying to get or keep inflation at around 2%. According to economists, a currency depreciation around that level is enough to make people spend money rather than hoard it, without eroding purchasing power too quickly. Bitcoin lacks this mechanism. Due to the enormous price increase of the coin, the owners of the coin had every reason not to spend their coins.

$90 million pizza
In fact, anyone who did use the (limited) options to pay in bitcoin is not very smart in retrospect. The best example of this is the pizza man. On May 22, 2010, Laszlo Hanyecz - an American computer programmer - bought two large pizzas from a well-known chain. The 10.000 bitcoins he settled with were worth about $30 at the time. It is to be hoped for Hanyecz that the pizzas tasted good, because at the current price that is almost $90 million.

energy guzzler
Another difference with traditional currencies is that the trading volume of bitcoin is vastly lower and less insightful. The global currency market is about $6,6 trillion on a normal trading day, according to the Bank of International Settlements (BIS). That is more than 20 times as much as the combined value of all crypto coins in the world. E

n infinitely more than the trading volume of bitcoin & co. Actually, that's a good thing. Trend platform Digiconomist has calculated that the computer power to carry out a bitcoin transaction costs about 700 kWh of energy. By way of comparison: an average household can use this for many weeks.

Cut and trade
According to some calculations, the energy consumption of bitcoin trading is about as high as that of all of Switzerland. This is because every transaction on many computers is recorded in the so-called blockchain. With this technology, all kinds of trade information can be stored in a reliable, fraud-resistant manner.

Blockchain can be used to cut the value proofs of all kinds of things into small pieces and to trade them (tokenization). In the future, large real estate funds and companies may opt for this when raising money from investors instead of going public.

Toy of sentiment
Due to the lack of global transaction flows and the influence of central banks with their inflation policies, bitcoin is mainly a plaything of market sentiment. You will therefore not soon catch me predicting whether bitcoins will become more or less worth.

I dare to do that for blockchain technology and tokenization. If it is possible to reduce the high energy consumption, there will be so many new applications for this in the coming years that you will be hearing a lot about it in the coming years.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.