I have been thinking this for some time now, but it was good to hear my same thoughts echoed out loud in the national media by Aswath Damodaran.
Who the heck is Aswath Damodaran?
I'm glad you asked!
Aswath Damodaran is a finance professor at NYU and is known in trading circles as;
"The Dean of Valuations."
When he speaks, people listen, or else they get the dunce hat. (just kidding about that last part)
Aswath declares himself as neither a bitcoin bull nor a bitcoin bear as he thinks both sides have a valid arguments.
However, much like me, he thinks there will ultimately be 3 paths for bitcoin to go down down. Ironically, only one of them is bad in my opinion.
Path #1
Bitcoin becomes widely accepted as a means of transaction.
This is the dream scenario for the biggest bitcoin bulls out there. However, it has a long ways to go to reach this stage. It will have to become much more stable than it currently is, it will have to be accepted globally by governments, and the technology will have to be improved to scale to this kind of wide spread usage.
If this were to happen to the point where bitcoin was actually competing against other generally accepted currencies, a much higher price would be justified, especially given its limited supply.
Path #2
Bitcoin becomes akin to digital gold for the younger generation.
In this scenario bitcoin is seen as a store of value for those that don't trust the central banks, governments, and fiat currencies. It can also be seen as an uncorrelated asset that doesn't track many other investments, a perfect way to hedge.
This was the path mentioned by Tom Lee and his team as their basis for bitcoin reaching $25k per coin within the next 10 years, and that was only talking about capturing 5% of the gold market.
If this scenario were to play out, one would expect bitcoin to behave much like gold does currently. Seen as a safe haven when times are shaky and falling in price when times are good.
Path #3
Bitcoin turns into the modern day Tulip Mania.
This one would obviously be the least desirable outcome for bitcoin bulls.
In this outcome, bitcoin would be like a shooting star attracting new capital far and wide as it shoots up in value. However, once the easy money stops being made traders leave and look for something else, letting the price drop even faster than it ran up.
Keep in mind that money could just shift to a different cryptocurrency in this scenario.
My thoughts:
Personally I think we are still too early in the game to have an educated opinion on which path it ultimately chooses, however, it still can be fun to postulate never the less.
I think Path #2 is the most likely path for bitcoin in my opinion. I don't see Bitcoin replacing major currencies or competing with them mainly because I don't see governments giving up that kind of power.
Bitcoin might be used in niche markets much like it is now, but ultimately I think it will mostly just be used akin to digital gold. An alternative investment that isn't really correlated with any other assets and widely held by the younger generation.
The younger generation already believes in it, so it won't take much convincing to get them to consider it as an asset class.
Like Tom Lee says, if Bitcoin just takes 5% of the gold market in the next 10 years, it is worth $25k per coin. In that context it doesn't really have to do any currency replacing to be a wildly successful investment, even at current prices.
What about you guys, which one do you think is the most likely path bitcoin ultimately chooses?
Let me know in the commment section below.
Sources:
https://twitter.com/AswathDamodaran
http://www.marketwatch.com/story/bitcoin-could-take-three-paths-from-here-and-only-one-of-them-is-disastrous-2017-10-25
Image Sources:
https://presencematters.wordpress.com/2015/01/16/3-paths-to-get-what-we-want-which-one-do-you-choose/
https://twitter.com/AswathDamodaran
http://www.lunadais.com/career-path-align-life-purpose/
