July 21, 2014 Reading Time: 3 minutes

By Tien Nguyen

Bitcoin has been a significant innovation of electric money for the past five years and with a fascinating and breakthrough characteristic, it is undoubtedly true that Bitcoin is marking a whole new turning point in money’s features, particularly in money transaction. Bitcoin is the first decentralized digital currency and compared to other alternatives and it has two significant advantages–free transaction costs and anonymity-that has rocked the financial technology world for the last few years. The popularity of bitcoin has grown quickly, which attracts a lot of investors from individuals to organizations, from local to global. However, to analyze the real value of bitcoin, we should be carefully considered that whether it plays as another new medium of exchange or a new investment vehicle for speculative games.

In order to examine the validity of money, according to Dr. Shelton, the very first condition is honesty in money-money should serve as an honest measure and a reliable store of value. Truly, money has long played an important role, in which individuals voluntarily involve in transaction using this convenient means as a medium of exchange. In this case, bitcoin lightly met this condition as a breaking news was that a Lamborghini dealership from California – firstly sold a certified preowned Model S—Tesla’s flagship electric car—for about 91.4 bitcoins, which was around $119,000 at that time (Foxhall, 2013). Based on the occurring events, it shows that organizations and individuals have started using Bitcoin as a new medium of exchange because of the involvement of trust. However, those kinds of exchanges do not happen in a daily basis by volunteering individuals, which means that bitcoin is trusted yet not sound. In order words, due to bitcoin’s high volatility and legitimate hurdles, it is still too early to affirm that bitcoin could be another new medium of exchange in the market.

On the other hand, one of the reasons why bitcoin became the rock star in the financial world is its speculative potential. Bitcoin is so appealing and attractive for the past few years when it initial value was around $0.30 and at the same year, it rapidly rose to $32 (Lee, 2013). The rate of return in this case was 1056.67%. Imaging if you bought 10 bitcoins at the price of $5, and one year later it went up to $500/bitcoin, then you would have earned $4,500 out of initial $50 investment. With its price has skyrocketed in a short-term; it would be unfortunate if investors possibly missed such an opportunity. Obviously, as bitcoin was overvalued, it would create a bubble and when it bursts, it will crash hard. Indeed, investors experienced bitcoin’s bubble, not once, but five times already and it has not crashed yet. Bubble of bitcoin is the case of not going back to zero and it is telling us something here. Something is not logical like it is supposed to be and something that just makes the world of finance more surprisingly interesting and ecstatic.

As the rapid growth of bitcoin and necessary requests of security, bitcoin has strongly adjusted and improved its network security to satisfy investors and gain credibility. However, the most suspicious question for bitcoin is that its long-term potential. In short, it is hard to predict the future of bitcoin in the long run, however, there are positive signals for investors to have an optimistic view about the coming times of bitcoin. Larry Summer, a former Treasury Secretary, once expressed that: “I think Bitcoin has the potential to be a very, very important development”.  In the meantime, many investors have taken advantages in bitcoin as a short-term investment. In short, it is undeniable that bitcoin has changed the face of digital currency in the world of finance and it is proven to serve as a new investment vehicle, but to become a new medium of exchange, there is still a long way to go.

Johannes Schmidt

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