Where Is Bitcoin Going In The Long Term?
Bitcoin has just finished going up to $4800 then back down to $3100.
Who knows where it will go next?
I like Bitcoin compared to every other cryptocurrency, in its actual use case meaning there are hundreds of coins out there, but most aren’t really used for anything.
Bitcoin has the unique status as representing a reasonable volume of actual trade.
After all, the fallacy of so many cryptocurrencies is, in the long run, where does the real value come from?
It’s easy to say it has value because other people will accept it in exchange, but what will make them accept it in exchange?
During the insane ICOs taking place, which I believe is the biggest scam in modern investing (I’m frankly amazed governments allow this sort of Ponzi scheme) there are people giving value for them because they expect someone else to pay more.
However, this isn't logical and won't last long. If you doubt me look at every other Ponzi scheme in history.
For something to have real long-term value it requires some sort of utility, this is the basis of market value.
The sole value of digital wallets lies in their acceptance by others in exchange for value and the associated benefits. For bitcoin, this is primarily an asset protection benefit.
One risk, therefore, is someone might learn to crack into wallets and extract the coins, thereby removing it as a safe store of wealth.
Even more interesting would be for governments to learned how to do this in the case of the prosecution, especially if they could get in the middle of transactions.
At the moment, their inability to do so gives Bitcoin an advantage no other form of asset protection has — since all physical goods could theoretically be seized.
How much is this worth?
Hard to say and the network effect makes it even harder to predict.
Of course, the other area of potential weakness is if the ability to freely exchange it for another currency was impeded — as some areas have attempted to do.
If I have a coin today worth $1000 and I figure there’s a good chance next year it will be worth $2000 — why would I pay with the coin as opposed to regular cash? I would be insane to do so.
Michael Bruce Rosmer
Although there can always be a black market, the friction of these transactions would greatly diminish the overall value.
The way around this, of course, is to establish a broad payment network built on bitcoin.
At the moment, it’s nowhere near large enough to function without free convertibility, but potentially — in the long run — it could be.
In fact, if it was easy enough to spend on a broad enough range of goods and services, it could function as a stand-alone solution for transactions.
I’d imagine the dreamers take this approach. In fact, I was with someone a couple nights ago who commented on “bitcoin replacing the dollar”.
I don’t see this happening based on at least the current iteration.
Is it possible technology could develop and adjust this?
I’m not sufficiently familiar with the technology and its malleability to say.
A Potential Medium of Exchange?
However, let us examine it as a dollar replacing payment network and look closer at an area of concern others consider a strength, but I believe is a weakness.
What would make people willing to accept Bitcoin as opposed to regular currency for their purchases?
They would have to somehow believe it was going to result in making more profit either by reducing their costs, getting them a broader range of customers, or appreciating in value between when they received it and when they spent it.
What’s the case for reducing their costs?
- Lower transaction fees: on the network there essentially aren’t any fees so at present the fees involve getting in and out of the network. At the moment, the fees are too high to make it competitive, but these could easily come down
- Less risk due to no chargebacks, etc. as found on credit cards
Both of these are conceivable advantages and as a business, I’d be willing to consider it as a payment method on this basis.
One could argue limitations in say recurring transactions, etc. is a barrier, which is true but there’s no reason technology couldn’t be installed to address this challenge and a certain portion of the market doesn’t need recurring transactions.
Likewise, it’s conceivable certain clients would be more willing to deal with a company, where they could spend bitcoin and might even pay a slightly higher price for this privilege.
Certainly, this would be true for criminals, though there’s a risk government would require businesses to have some sort of KYC (Know Your Client) or source of funds associated with transactions at some point, if this were the case.
Again, it doesn’t seem like enough to take the entire market but has a significant market value.
Finally, what about the perception of the Bitcoin being worth more when exchanged than it is worth when being received?
Right now, a HUGE reservation to accepting Bitcoin in any form — other than immediate convertibility — is the high volatility.
You could accept $100 for a product today and next week it could be worth $66 and you’re suddenly losing money. Literally, accepting Bitcoin could sink businesses if they didn’t convert it immediately.
On the other hand, the general trend especially lately has been up.
In other words, at least on a portion of their sales — so long as this trend is persistent enough — could make sense for a number of businesses to hold.
Now, let’s look at the flip side.
What would make consumers willing to spend with Bitcoin?
Here is where I believe we see a substantial breakdown in the system.
Of course, you’ll always have the criminal element who don’t want to deal with the regular banking system and we’re doing away with cash, so Bitcoin becomes a backup for them.
But beyond this what’s the incentive for end users?
If I was to buy something today, I could generally pay for it on credit card and I’ve got the ability to charge it back, get access to the money interest-free for a period of time, and I can collect points.
It’s also probably always going to be a much lower friction transaction.
Conceivably, merchants could incentivize you not to use your credit card with internal point systems to avoid transaction fees for them (someone is paying for your points) and the ability for them not to rebill you has other advantages — though less so compared with the ability to get easy refunds.
There is a much more concerning possibility though, the very economics that might cause merchants to accept it would result in consumers not spending it.
Bitcoin advocates often come from the same school of thought as gold bugs and conspiracy theorists who hold the view “inflation” is bad and “money printing is bad”.
But consider what reasonable inflation does?
It encourages investment and spending by providing a negative incentive for holding cash.
Bitcoin has a restricted limit of 21 million coins and unless there’s some technology change this is going to create a potential contracting supply relative to demand over time.
What they argue is “this will force prices up” — and they’re right.
What I don’t hear any of them talking about is — this will have a deflationary effect undermining the real utility value of the system.
If I have a coin today worth $1000 and I figure there’s a good chance next year it will be worth $2000 — why would I pay with the coin as opposed to regular cash?
I would be insane to do so.
It would be insane for business owners to ever spend theirs, they might as well horde them as they grow ever more expensive. The more they rise, the more the incentive to hold them increases, until no one wants to sell or at least not in great value — and it grinds the whole system to a halt.
Is this likely anytime soon?
No, this is a pretty extreme long-term event but the basic mechanics are very probable.
If you even look today, the volatility of Bitcoin is coming from very low volume compared to the overall supply.
Of course, following the principle of reflexivity, this has further consequences.
As Bitcoins become more and more valuable, the security key for people’s wallets become more valuable and there’s a greater incentive to hack or rob them.
It doesn’t take long to think of a whole host of potential ripple effects from this as well.
There’s one other very major concern.
This is the technological limitation on transactions and transaction processing speed.
For those who aren’t aware, because Bitcoin is decentralized, the whole blockchain effectively has to verify transactions before they are completed.
This means there’s a lag between when you initiate a transaction and when it’s verified.
The bigger the blockchain becomes and the more transactions on the network the more processing power it requires to verify and potentially the more the network slows down.
If transactions are too slow, it’s going to undermine the ease to doing business for businesses and they are less likely to accept it.
There are plenty of technological solutions available to address these concerns, such as payment networks built on top of the blockchain, processing much faster than settling those transactions periodically and the use of large powerful data processing hubs.
But all of these come with their own challenges and deterrents.
Potential Solutions For Blockchain?
First, at the moment miners are paid in newly issued Bitcoin to process transactions, but what about when there is no new Bitcoin to mine?
At this point, the incentive needs to be charging transaction fees and these could become prohibitively high.
Second, if you create powerful more centralized hubs on the network, it undermines much of the decentralized nature of the network and therefore its advantages.
Third, if you build a processing network on top of the blockchain you’ve now introduced many new challenges to security you were trying to avoid by operating on the blockchain.
Does all of this mean Bitcoin won’t be used for a significant transaction volume long term?
No, certainly not.
What it does mean is, it’s very ripe for disruption and very open to competition long term through other more competitive services.
Perhaps most interesting to me is the concept limiting the number of Bitcoin within the system (Ripple has a similar limitation of 100 billion XRP).
An optimal monetary system isn’t deflationary.
It breathes expanding the contracting in response to the overall supply and demand within the economy.
This is a complexity most cryptocurrency designers don’t seem to recognize and potentially one, which might prove to be a fatal flaw, or alternatively might drive adoption to the point of functionality.
As far as I can tell, it doesn’t seem likely Bitcoin will end up as the dominant system in 50 years.