Bitcoin is beginning to make waves in the mainstream and more and more people are viewing it as a serious investment option or as a way to make quick money on the back of it’s volatility, alternatively to hedge against inflation and betting on the crypto’s continued bull run. As I’m writing this, a single Bitcoin is worth approximately US $5800 and has breached the US $6000 mark a number of times over the last few days.
The market has come a long way. To get an appreciation of how far wit has come, we need to look back to 2010 just after Bitcoin’s launch on the now defunct BitcoinMarket.com and traded between .003 to 8 cents. Whilst it made some early gains, it wasn’t until Feb 2011 until it took parity with the US dollar. The price has since gone through several ‘bubbles’ and corrections but on the whole it continued it’s steady rise to where we are today.
Before projecting further ahead, let us spare a moment for Laszlo Hanyecs who made the first real world transaction by buying two pizzas in Jacksonville for 10,000 BTC - which today would equate to a lazy $58M. The coin of course was not widely known or used at the time and viewed as a speculative investment at best. The lesson? Crypto assets were an extremely volatile monetary instrument with massive potential from the outset.
Fast forward to October 2017 and prices are setting new records on a daily basis. As I’m writing this, the market cap has hit $1B US as the price broke $6000 US. The media hype around this meteoric surge has certainly played a part, increasing BTC’s popularity and acceptance in the mainstream. At this point you could be excused for thinking that the best is behind us and decide to put your money elsewhere. After all there are a plethora of Alt coins, ICO’s and stocks where you could be making decent returns with less risk. In the short term the price should remain buoyant whilst we gear up for SegWit2x, but what is the outlook beyond that?
To really comprehend the forces driving the value long term, you need to look at Metcalfe’s Law as quoted by Tom Lee, a leading market analyst and managing partner at Fundstrat, in a recent interview with Business Insider. Metcalfe’s theorem was based on George Gilder, that stated “the value of a network is the square of the number of users. And so if you build a very simple model valuing bitcoin as the square function number of users times the average transaction value. 94% of the bitcoin moved over the past four years is explained by that equation.” In simple terms, with an increase in utility and users we should see values increasing in the long term.
Click here to see the full interview.
What about future value? He goes on to say,”All future great business are going to be digital, what we were trying to do is recognise that creation of value in the future is in the digital world.” In short, there is an absolute need for quick adaptation of blockchain technologies in order to meet the growing demand for quick, secure and decentralised methods of payment. “Bitcoin represents a store of value because it’s encrypted, and for seven years hasn’t been hacked. And if personal information is our gold, bitcoin is our digital gold.”
Bitcoin vs. Gold Lee then goes onto comparing generational habits to further support this argument, using Gold standard as an example and how it is one of the traditionally safest store of value for generations past. The market cap of gold is $9 trillion. Based on conservative estimates and current trends, should the use of BTC capture 5% of this market, it’s worth at least $US25,000 per unit.
So how does he come up with 5%?
“We explain this in our research. It’s a very — it’s actually the most conservative collection of elements to get to the 5%. Because number one, we assume that gold only appreciates essentially a nominal GDP. So there’s no inflation. And we assume that money supply grows at slower rates than it has historically. And then the 5% number, really reflects the assumption that investors will allocate in their blended portfolio only 5% to alternative currencies. Today, that allocation is much greater, it’s closer to 10% or 15% in some portfolios. So, but at a 5% allocation that would value bitcoin at $US25,000. You could easily get to $US100,000, $US200,000 numbers.”
Lee goes on to explain that the dominance of bitcoin being used as a means of exchange to almost all other tokens further bolsters the value. Essentially, the more tokens that are created, the more demand is driven to use bitcoin. Furthermore, since bitcoin does not enjoy widespread institutional support, it’s liquidity is limited. This can be a good thing for it’s value, because should a hedge fund decide to invest and apply your typical 5x leverage, it can easily drive a liquidity spike which would ultimately drive prices higher.
In conclusion
Bitcoin prices in the short term are expected to fluctuate. When the USD$ moved away from the gold standard, gold’s volatility for 4 years was about the same as bitcoin’s volatility today. It may not yet be accepted by the mainstream, but there are plenty of arguments to say it’s not going anywhere soon. Digital Tokens make more sense to an entire new generation of investors who have already adapted and are familiar with the technology from gaming/in app purchases and so on. As adaptation rates accelerate, so will the mainstream’s acceptance and perception of the value thus continuing to drive the value up for some time.
Disclaimer: This article may contain forward looking statements. Readers are cautioned not to place undue reliance on these forward looking statements. While due care has been used in the preparation of the information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside my control. Past performance is not a reliable indication of future performance.
Sources:
https://www.businessinsider.com.au/bitcoin-price-how-to-value-fundstrat-tom-lee-2017-10?r=US&IR=T
https://en.wikipedia.org/wiki/History_of_bitcoin
Images:
Metcalfe's Chart
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