: Bitcoin originated with the white paper that was published in 2008 under the p

Question

: Bitcoin originated with the white paper that was published in 2008 under the pseudonym ”Satoshi Nakamoto”. Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies. Based on the article posted along with this assignment, please answer the following questions in your own words: (1) Price volatility and scaling issues frequently raise concerns about the suitability of Bitcoin as a payment instrument. While scaling issues is a technical issue, can you please explain the reason for high Bitcoin volatility? (2) Based on the classification of financial assets from this class, how would you classify Bitcoin? Why?

Explanation / Answer

1. Bitcoin has no intrinsic value and due to this the present value of bitcoin is determined on the basis of expectations about its future price. Trade in bitcoins is based on the assumption of and the expectations of future prices. For instance a buyer will buy bitcoin only if the buyer expects that the bitcoin will sell for the same price later on (at the minimum) or will sell for higher prices. Thus the price of bitcoins is highly elastic and is susceptible to significant changes as per the expectations of the buyers and the sellers (collectively known as market participants).

The change in expectations of the market participants leads to the high price volatility of Bitcoins.

2. Bitcoin will be classified as a ‘store of value’ asset. This is because Bitcoins does not generate income, cannot be consumed but still has an intrinsic economic value. Bitcoin is an alternate asset class and as a digital currency is a store of value. Bitcoin can be saved, retrieved and exchanged at a later time and hence is a store of value asset.

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