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In February 2021, as the price of bitcoin approached $ 50,000, investors were enthusiastic about whether its price would reach $ 100,000 in 2021. With the price of bitcoin currently hovering around $ 36,300, investors could ask the same question. question, but with less enthusiasm. I suggest that the answer to the question today, in June, is the same as in February; and this answer is quite possible, but unlikely.
As bitcoins skyrocket to over $ 12,000 for a BTC, many central banks like the ECB or the US federal government … [+] Reserve warn of the risk of a bubble. Britain and the ECB want to monitor trade on suspicion of money laundering. The main U.S. derivatives regulator has said it will allow CME Group Inc (CME.O) and CBOE Global Markets Inc (CBOE.O) to list Bitcoin futures. Toulouse. December 6, 2017. (Photo by Alain Pitton / NurPhoto via Getty Images)
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The most important point I want to make in this post concerns the reasons for the improbable. But first, I want to make a few comments on the totally possible.
Keep in mind the phenomenon of memes stocks that was so pronounced in 2021. One of the most important aspects of stocks like GameStop GME and AMC is that their market prices diverge so drastically from their corresponding core values. Actions meme are essentially games of feeling, and feeling can make all kinds of things possible in the short term. Bitcoin is a big game of sentiment, a point that I have explored in my academic research.
Keep in mind the amount of influence that figures like Elon Musk can have. Musk gave bitcoin a boost when Tesla TSLA bought $ 1.5 billion worth of bitcoin and agreed to accept cryptocurrency as a form of payment for its vehicles. However, Musk then did an about-face when he recognized the climate change downside associated with processing bitcoin transactions. Processing bitcoin transactions consumes an incredible amount of electricity. Tesla’s reversal produced enough revaluation among bitcoin investors to induce a drop, from around $ 63,600 in mid-April to $ 33,400.
The climate change issue associated with blockchain technology in general, and bitcoin in particular, is the main reason for the unlikely part of the answer. The huge demand for bitcoin transaction processing is a fundamental fact of life; and he is an investor that most investors have turned a blind eye to. Plain and simple: The rise in the price of bitcoin of less than $ 10,000 a year ago is not due to the fact that the fundamentals of bitcoin transaction processing have improved between three and seven times.
At a recent event at Stanford University, I had the opportunity to ask Mark Carney, the United Nations Special Envoy for Climate Change, about his thoughts on cryptocurrency. Carney is in a good position to comment on this question. He is an economist who ran two central banks, England and Canada, and before that he worked on Wall Street. It includes finance as well as climate change.
I framed my question to Carney by mentioning that China, where most bitcoin transaction processing takes place, has decided to discourage the processing of cryptocurrency transactions, as such processing is inconsistent with the commitment of the countries to fight against climate change. In response to my question, Carney raised three points.
First, with climate change presenting the existential challenge it poses, the last thing we need is financial transaction technology that makes the challenge more difficult. Of course, bitcoin does this because of its huge appetite for electricity.
Second, some argue that bitcoin’s huge appetite for electricity processing will bring more attention to the need to tackle climate change. This argument, Carney suggests, makes no sense, because there are better and cheaper ways to call attention to our need to deal with the challenges of climate change.
Third, there are many digital currencies in the world. Not all digital currencies require blockchain technologies. Competition between technologies usually leads to effective solutions. This should also happen with competing digital currencies. In addition, investing in improvements in processing technology could lead to drastic improvements in the demand for electricity associated with blockchain.
I think Carney is right on all three points. There is a lot of irrationality in the price of bitcoin.
It is not clear how long it will take for bitcoin to reflect its fundamental value, although the sooner the better. The lack of clarity comes from the strong presence of feeling. In the age of meme investing, what is clear is that many investors like to bet on sentiment.
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