“One key properties of Bitcoin explain its impressive price momentum”

“One key properties of Bitcoin explain its impressive price momentum”

After hovering around $9,000 for most of 2020, Bitcoin’s price surged rapidly in the fall. The price of the cryptocurrency crossed the $30,000 (about €24,910) threshold in December before reaching an all-time high of $41,590 on January 8. Since the first quote of $0.000764 in October 2009, the value of Bitcoin in U.S. dollars has thus been multiplied by more than 54 million times.

Bitcoin is still often considered a speculative financial asset today, and the impressive evolution of its price has been interpreted as the development of a speculative bubble. But is the Bitcoin price surge really the result of unfounded financial speculation?

To answer this question, it should be noted that Bitcoin is specifically designed as a decentralized payment system, i.e. as an intermediary for exchanges and a possible alternative currency.

At this point, however, a recent study suggests that two fundamental properties of Bitcoin’s monetary design protocol may explain its impressive price dynamics (” Bitcoin Price Dynamics and Hyperdeflation: A Part of Monetary Theory methods”, Alexander Sokic, Revue Economique n° 72/1, Presses de Sciences Po, 2021).

No third party
Bitcoin is designed as a decentralized transaction intermediary. This means that it allows payments to be made directly between two participants without the need for any third party, such as a central bank (when paying with paper money) or the banking system (when paying with a Bible).

It is effectively a large registry open and visible to all participants, where transactions and payments are recorded in blocks that are frozen very regularly (as if placed under glass) and are cryptographically immutable. Then we talk about “blockchain” technology to designate this blockchain of frozen transactions.

By the end of 2040, the number of the cryptocurrency is irreversibly fixed at a maximum of 21 million bitcoins, and its divisibility is up to 8 decimal places, which explains its increasing use for monetary reasons (i.e. as an intermediary for exchanges), resulting in an ever-increasing value.

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