Monday, May 8, 2017

Money psychology: Is Bitcoin price already too high for desirability as a currency?

The advent of Bitcoin, as well as rise of the blockchain and its growing number of different crypto-currencies, is bringing forth a great debate on whether these constructs of digital money are the wave of the future for consumers, savers, and investors.

But there are a few very interesting things that are bing missed by most individuals in the Bitcoin eco-sphere, and these are the psychology of money, and the fact that as Bitcoin has now crossed over $1600 per coin, and is being forecast to possibly go as high as $4000 by the end of the year, has the crypto-currency priced itself out of the general market?  And perhaps even more, has it already destroyed its psychological value to individuals as a viable form of money?

A layman's definition of what money is can be determined as this:  An idea backed by confidence.  And for something to be considered a medium of exchange (money) it must have the intrinsic properties that all monies have (store of value, divisible, fungible, portable, etc...), but it also must have the confidence, be it forced (by government), or voluntarily accepted (by critical mass of consumers and retailers), to act as a recognized medium of exchange.

Thus as the price of Bitcoin in dollars as well as other currencies skyrockets due to speculation and investor sentiment, the question that has to be asked is whether or not Bitcoin has priced itself out of the ability to become an accepted currency, simply by the fact that the majority of individuals today can only afford to purchase fractions of the currency, rather than whole Bitcoin's themselves.

Picture this.  A person has $20 they can afford to use to purchase Bitcoin, so they create a digital wallet and go through an exchange to buy some of the crypto-currency.  Now this individual understands the basics of monetary division when it comes to dollars as they have used quarters, dimes, nickles, and pennies for nearly all of their lives.

But at today's price, $20 will buy that individual only .0125 of a Bitcoin, which in physical terms would equate to a penny and a quarter of a penny.  So psychologically, that individual has exchanged $20 for a penny.

Image result for how much bitcoin will $20 buy

Now of course in the crypto-currency realm .0125% of a Bitcoin is not valued at one cent, but you can see the psychology of this as people used to dealing in round numbers and limited fractions in their money now have to go outside the box to try to come to the understanding that it will be unlikely they will ever own a single full Bitcoin since more than half of Americans alone cannot even afford to pay $500 if a sudden emergency required them to come up with those funds in addition to their normal budget.

Then of course there is the reality that the amount of retailers who deal in Bitcoin is still quite limited, and the marketing of Bitcoin as a viable medium of exchange in the mainstream is almost negligible.  And also the fact remains that if people don't see Bitcoin promoted in the mainstream media, or shown in some viable application from the commercial advertising they are programmed to trust, then Bitcoin, as well as other crypto-currencies, will remain as fringe ideas and concepts, or as simply a construct traded in financial markets under the guise of a speculative investment.

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