Ask ChatGPT: What’s an Ideal Currency for Investing? Is it Bitcoin?

#1. Stability

ChatGPT recommends looking for a “relatively stable currency with a history of maintaining its value over time.” The only problem is stability – being an alien concept in the often unbridled wild west of the Bitcoin markets.

The currency is highly volatile, as you’ll see in these examples:

1. Bitcoin jumped by 1950% from $974 to $20,000 in 2017
2. It fell by 30% in intraday trading on May 19th, 2021, in part triggered by Tesla gutting payments in crypto.
3. It wiped off 60% of its value in 2022 from its historic price pinnacle of more than $65,000 in November 2021 after a series of industry misfortunes.
4. It rallied 40% in January 2023 in its best one-month performance since October 2021.

These examples illustrate the legendary volatility of Bitcoin. But don’t get it twisted: this is precisely why it’s become a popular investment destination. Its volatility and accompanying high risk translate into high rewards.

#2. Liquidity

Liquidity in finance refers to how quickly an asset can be converted to cash without too much price fluctuation. Cash is the most liquid asset on the liquidity spectrum, while assets like real estate, machinery, or collectibles are highly illiquid.

So, where does Bitcoin fall? It’s considered relatively liquid. This liquidity is thanks to many trusted exchanges enabling traders from all walks of life to buy and sell the currency. This is good for trade volume and, thus, liquidity.

However, during emotion-fueled selling, Bitcoin can experience a liquidity crunch. But such a phenomenon is rare and happens mainly in individual exchanges. For instance, during the FTX bank run, which precipitated its eventual fall, the exchange was in the throes of a severe liquidity crisis.

In the long-term you might say that Bitcoin has a history of maintaining value (thanks to its enormous upswings) but, for now, stability remains a pipedream for BTC.

#3. Inflation

ChatGPT offers that “inflation can erode the value of a currency over time, so look for a currency that has a low inflation rate.” Does our currency pass this test?

Bitcoin’s inflation resistance is actually one of its most extolled virtues. This is due to its supply being hard capped at 21 million. No other coins will be ever mined (and thus enter circulation) in the currency’s lifetime.

Also, the Bitcoin network undergoes what’s known as halving every four years, when miners’ block rewards are slashed in half while reducing the amount of BTC released into circulation.

Bitcoin’s fixed supply and halving regime make BTC “scarce” and inflation-resistant. For this reason, the currency has been christened “digital gold” and an inflation hedge.

Bitcoin’s tightly controlled supply mechanism is in stark contrast to fiat money that governments print at a whim. The impact of this is evidenced by living costs shooting up across the globe, with some currencies being rendered effectively worthless.

#4. Economic Policies

ChatGPT submits that: “the economic policies of the country issuing the currency can impact its value.” These policies constitute things such as:

• Money supply
• Adjusting interest rates
• Taxes (tax incentives, reducing or increasing taxes)
• Government budget
• Job creation

But since Bitcoin isn’t issued by any government, it has no explicit economic policies. Yet, its creator(s) designed the currency to reflect certain unique economic philosophies:

1. Decentralization: Bitcoin operates peer-to-peer without any figure calling the shots.
2. Immutability and transparency: Bitcoin’s transaction records are forever available for anyone to see. This curbs vested interests and corruption
3. Inclusion: As long as you have access to the internet, you can access Bitcoin regardless of your origin, gender, or status
4. Controlled supply: Bitcoin’s fixed supply combats inflation and is deflationary in that sense
5. Security: Bitcoin employs state-of-the-art cryptography to secure transactions
6. Censorship resistance and autonomy: Unlike with fiat money, no government can confiscate your Bitcoin by sheer whim

#5. Interest rates

ChatGPT says that “higher interest rates generally make a currency more attractive to investors….” But just like economic policies, interest rates are not a concept that’s inherent to Bitcoin. For a fiat currency such as the USD, the Fed can raise interest rates to control inflation or lower them to give the economy a shot in the arm.

But for Bitcoin, interest rates enter the picture only in the form of yield on lending. The Bitcoin network is not amenable to programming and doesn’t support DeFi products atop it.

On the other hand smart-contract projects like Ethereum offer native yield through staking and DeFi.

In Bitcoin’s defense it has traditionally risen so much that earning a yield hasn’t really been a concern. And many yield products like Celsius and Voyager have failed in the past.