Ever since Bitcoin made headlines for its overly exceeding increase in value, there have been many speculations about its position in the market. Many critics acclaimed that the Bitcoin market exchange was just a bubble—a disaster waiting to happen—and investors would lose tremendous amount of money when it bursts.
They were right in one thing—there was indeed a bubble, and this speculated bubble did burst. However, the price crash following the bubble’s burst did not really affect most Bitcoin holders. The price of Bitcoin was still high after the price crash, and now it is on the process of stabilization and its value moves in an upward trend.
Bitcoin, as it is, is invested and traded as a commodity. However, with recent innovative development and the market’s growing adaptation of the digital currency, it has also become a form of payment. This means that Bitcoin can be viewed as a hybrid of commodity and currency. With this, let’s take a look at how Bitcoin correlates with the liquidity preference theory.
The Liquidity Preference Theory
The Liquidity Preference Theory refers to how liquid an asset is or can be under the pressure of sudden need or demand. For investors, this theory suggests a higher interest rate on high-risk securities with long-term maturity date to compensate for the sacrificed time that they do not hold this asset.
How does Bitcoin fall in the Liquidity Preference Theory?
In the case of cryptocurrency, the Liquidity Preference Theory can be applied if you see the crypto being liquid enough in the circumstance of sudden need. As for investors of Bitcoin as a commodity, the theory alludes that Bitcoin will give high returns to holders when they finally decide to trade it for flat currency.
The liquidity of Bitcoin depends on the exchanges it trades on and its level of acceptance from the market. As mentioned earlier, there is a growing adaptation for Bitcoin as a currency. More and more financial institutions and retail shops accept Bitcoin as a mode of payment. The potential for currency use disruption, headed by Bitcoin, is monumental. Today, cash is still the most liquid asset, but it is highly possible that this will be challenged due to the existence of cryptocurrency.
Especially with market makers making the Bitcoin Mercantile Exchange more liquid, traders can expect Bitcoin to follow the Liquidity Preference Theory. Looking forward, as technology and innovation disrupt the different industry sectors, it is highly likely that flat money will slowly become less valued and Bitcoin will take over as the most liquid asset there is.