In today’s Money Morning…news that naturally caused quite a stir…it’s all relative…maybe that’s all it will take to start a much bigger change…and more…
You’d think by now that the world’s media would have gotten used to Elon Musk.
A man who seemingly can’t stand not being in the spotlight. Forever making bold, brash, and sometimes foolish decisions.
However, his latest stunt may be his most polarising yet…
Musk, with the help of his prized electric car company, Tesla, has dived headfirst into Bitcoin [BTC]. Buying US$1.5 billion worth of the cryptocurrency.
News that naturally caused quite a stir.
What is far more interesting though, is the fact that Tesla is planning to accept bitcoin as a form of payment. Meaning some people may soon be able to drive away in a new car using a ‘currency’ that is notorious for its wild price fluctuations.
A development that has reignited the debate once more about the acceptance of bitcoin and as to whether or not bitcoin could ever become a prominent currency. After all, as many hardcore bitcoin enthusiasts will tell you, the ultimate goal is to one day replace fiat currencies as we know it.
As for whether or not that is actually possible though; well…it depends on who you ask.
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A Volatile Bitcoin Price and Bitcoin Acceptance
First of all, let’s address the biggest elephant in the room: price.
No one can deny that the ‘price’ of bitcoin is volatile.
At the time of writing, bitcoin is up over 21% in the past week. And is down roughly 4.64% in the past 24 hours.
That kind of volatility is not something that we’re used to seeing from a currency. Which is why many argue that bitcoin isn’t a good fit to become a true currency. These wild fluctuations would make it too confusing and too punishing to use as an everyday medium of exchange.
For example, let’s say you bought a new Tesla today for one bitcoin at a value of $45,000. Then, one week later, let’s say the value of bitcoin rises to $50,000.
You’d probably be feeling pretty hard done by. After all, you’ve paid your one bitcoin, but it has subsequently risen by 11% in value — leaving you out of pocket of that $5,000 difference.
Having said that, fiat currencies have a similar problem. We just call it deflation, rather than volatility. And while they aren’t totally similar, the impacts are near identical. Granted, deflation is often a far rarer and longer-term issue.
My point is your overall purchasing power has changed. And this is the heart of the issue when it comes to bitcoin as a currency.
Compared to fiat, the purchasing power of bitcoin fluctuates too often and too much. Exposing users to wild price changes that would likely be disastrous for day-to-day commerce.
But that seemingly hasn’t stopped businesses like Musk from taking a chance on bitcoin. With plenty of niche examples of the cryptocurrency being used in place of regular dollars.
The first and most famous example is that of Laszlo Hanyecz, a software developer who was a true early adopter of bitcoin. Mingling with the then small internet community back in 2010 — just one year after it was first created.
On 22 May 2010 though, Laszlo spent 10,000 bitcoins to buy two large pizzas. A purchase that was equal to roughly US$41 at the time.
Today, those spent bitcoins would be worth over US$451 million!
A perfect real-world example of the kind of opportunity cost that would make most people squirm.
Which is precisely why so many believe bitcoin will never be able to replace fiat currency.
But, there is still another argument to be made in favour of bitcoin.
It’s all relative
See, I get the argument against bitcoin because of its volatility. There is no shirking the fact that its ‘value’ swings wildly.
What I do want you to think about though, is what this change of value is expressed in.
After all, whenever someone talks about the ‘price’ of bitcoin rising, they’re talking about the price of one bitcoin relative to a fiat currency. Usually the US dollar.
This ‘price’ is assuming that people will always convert their bitcoin into fiat money. Probably for a net gain, like an investment.
However, if bitcoin were to become a proper currency, this point is moot.
As one of the more popular cryptocurrency jokes goes: one bitcoin is worth one bitcoin. A line that is often intended to convey the cult-like obsession of bitcoin’s biggest believers.
If you’re buying goods in bitcoin, paying your rent or mortgage in bitcoin, and getting paid in bitcoin…then the relative price to the US dollar or any other fiat currency is meaningless.
In this scenario, the volatility of bitcoin is irrelevant.
However, I will concede that bridging this gap between utopian thought experiment and economic reality is far more complicated. With this simple analogy glossing over plenty of the more complex and challenging issues.
My point though still stands.
Hypothetically speaking, bitcoin could become the world’s primary currency. It is simply a matter of convincing enough people to adopt it.
Which is precisely why Elon Musk’s latest gambit is a fascinating one. Bringing attention once more to the possibility of bitcoin becoming much more widely adopted.
I’m not saying it will happen, or that it will necessarily succeed.
But at the very least, someone is trying.
And who knows, maybe that’s all it will take to start a much bigger change.
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.