Bitcoin may have limited supply, but demand will not be unlimited. Once bitcoin is revealed to be worthless, demand will dry up. | Source: Shutterstock
By CCN Markets: As the resident “Bitcoin Skeptic” here at CCN, it’s my job to provide some level – headed arguments about why you should be extremely careful about buying or trading bitcoin, or any other cryptocurrencies. Don’t be a sucker.
And ignore hype from the media.
Today I’m focusing on the argument that bitcoin’s limited supply will mean that the cryptocurrency is always in demand. Consequently, ongoing demand with limited supply will drive the coin’s price up over the long term.
There are three gaping holes in this argument.
The first argument is that bitcoin is not the only game in town. There are numerous other cryptocurrencies, some more well-known than others. Because all of these cryptocurrencies are effectively the same, they are commodities.
The price of bitcoin in US dollars will depend on its exchange rate relative to other cryptocurrencies, and we would expect other cryptocurrencies to continually appear.
Bitcoin bulls believe the exchange rate between BTC in relation to other cryptocurrencies will constantly adjust in proportion to their relative supplies.
Bulls also say that as the supply of other cryptocurrencies increases, there will be an appreciation in the exchange rate of BTC with respect to these other cryptocurrencies.
Therefore, bitcoin’s share of market capitalization should remain stable over time.
That’s not necessarily true.