Even individuals who do not know the difference between a blockchain and a dog chain are interested in Bitcoin due to its remarkable increase in value in 2017.

On January 1 the dollar value of a Bitcoin was $899.65. Half a year later it had more than doubled to $2,511.57. This is a monthly return of 18.6%, or an annualized return of over 223%. That drew a lot of attention.

Those who jumped on the bandwagon at the news of these returns were hurt badly. They lost 26% of their investment in the next 15 days. Clearly, there are some right ways and wrong ways to invest in cryptocurrencies such as Bitcoin. The rules are a little surprising to some because they have nothing to do with computer networks or the technology behind cryptocurrencies.

Image: Bloomberg News

Image: Bloomberg News

Every financial asset responds to the law of supply and demand. An increase in supply for the same amount of demand will lower the price. A decrease in supply for the same amount of demand will raise the price. Demand works in the opposite direction, so for the same supply an increase in demand raises the price and a decrease lowers the price.

As the price of Bitcoin rose, more buyers came into the market, driving up the price. The supply of Bitcoin also rose over the first six months of 2017 by a predetermined rate of about 3%. Clearly, the percentage increase in buyers greatly exceeded this increase in supply.

It is also just as clear that the numbers of buyers decreased sharply in the first half of July, accounting for the significant drop in price. Anticipating these changes in demand, and the corresponding impact on price, may be too difficult for even the most experienced investor. There are very few fundamental criteria to evaluate, leaving only esoteric strategies such as chart analysis or Fibonacci sequences.

Fortunately, there is another approach. Like all currencies, cryptocurrencies are valuable because there is a group of people who believe in their value. For national currencies is group is comprised of residents of that nation and typically those who trade with that nation. The same is true for gold and other precious metals.

Every buyer of Bitcoin believes in the fundamental value of Bitcoin. They may have different views as to the ultimate market value, but they all believe that they will be able to convert their Bitcoin to other currencies whenever they want. This makes them a member of the Bitcoin community.

A fundamental belief in the value of the cryptocurrency is not the only way to define the community that holds the currency. Residents of a nation have confidence in the continuation of their country, and their belief in the fundamental value of their currency is just an expression of this larger, more powerful faith.

A desire to impact the human condition, or even a specific industry, can transcend national boundaries. Cryptocurrencies can help unify a community of individuals who are committed to creating a change. Such “cause” cryptocurrencies have the potential to create an intrinsic value, such as gold has, which reflects the strength of the commitment the community has to change they envision.

This is very different from Bitcoin, which some are suggesting serves no purpose. This suggests that once speculators leave the market, the value of Bitcoin will evaporate. If correct, Bitcoin may be remembered only for blazing the trail for cryptocurrencies that create value by making a lasting impact.


Read more