Photo credit: keep_bitcoin_real

Every investment must be seen in the light of supply and demand. The S&D balance defines the value of every investment. It also defines the risk since the components of demand might be more or less speculative. So, let’s see:

Bitcoin Supply

The maximum supply is theoretically fixed. There’s a maximum amount of Bitcoin that can be mined. Still, there is no guarantee that when we reach the limit of 21 million, BTC’s protocol won’t be changed to allow further mining. Assuming it’s not, Bitcoin becomes an interesting potential reserve for value, since it is finite and unregulated.

Bitcoin Demand

The two most important Bitcoin’s features are its theoretical fixed supply and its unregulated nature. The unregulated facet attracted lots of attention by illegal activities desperately wanting to find an abstract reserve of value, where they could store their wealth and move it around safely and easily. The untraceable nature of Bitcoin brought crime right into the 21st century finance world. There are others interested in BTCs like libertarians and people trying to stay off-grid. However, I believe that financial crime has been the biggest driver for the coin’s growth and adoption.

Having a natural demand made the cryptocurrency attractive for mainstream finance. Unsurprisingly, during the last couple of years many financial institutions have unsuccessfully tried to create ETFs for Bitcoin and other cryptocurrencies. Finally, this has been circumvented through the creation of a futures marketplace for Bitcoin. Now, institutional investors can have exposure to the crypto gold. Interestingly, retail investors already have plenty of exchange apps where they can trade Bitcoin.

Therefore, we now have the first layer of demand: people not wanting to be financially traceable. The second layer is composed by investors looking for value storage. The third layer is all kinds of speculators (seasoned, amateurs, curious) wanting to join the crowd and make a buck. The first two layers should compose the majority of any market. When the third one becomes the leader of the pack, troubles emerge.