"The actual trouble is that profit is identified entirely with money, as distinct from the real profit of living with dignity and elegance in beautiful surroundings.”
~ Alan Watts
Our fixation with the Dollar price of Bitcoin is one of the leading hinderances to mass adoption. As free thinkers trying to build safe and free communities we should focus on the architecture of Bitcoin which will allow us to be financially free and teach future generations the importance of value.
Yet, price is still an important sign post. An easy signal to interpret. Thus, it is worthy of our attention and analysis, so, in this post, I will call on the Bitcoin God(s) to guide and assist me in locating an accurate prediction for the year 2018 AD.
The Trouble with Infinity
“Two things are infinite: the universe and human stupidity; and I'm not sure about the universe.”
~ Albert Einstein
Let's consider a simplified example:
- A hypothetical market where only 1 resource exists.
- It is a necessity for survival, so let's say that the resource is water.
- There is 1 supplier with a complete monopoly.
- There are 2 buyers.
- Ignore ethics and any other surrounding factors.
- The market participants can only derive value (survival) from water and utility from money.
Given that our 2 buyers cannot obtain water from anywhere else other than the monopolist supplier; and the supplier will seek to derive maximum utility from selling his excess water, we can estimate (with a high degree of certainty) that the price of water will be the maximum payable between the 2 buyers.
In the above example we posses all the information, so an accurate prediction is possible. To now predict what a real-world market will do, would require all the information therein. Not simply the goods involved but also the investment theses of each participant, their time preference and every minute detail of their personal lives since everything affecting an individual will inform their trading habits and decisions.
I hope that I've made it clear, especially in our modern, complex, digitised, high-speed financial markets that there are an infinite number of variables to account for. It should thus be clear that all any person can offer is a glorified guess.
So, if our task is actually impossible, what is the use in trying?
The Use in Planning
“Only those who have cultivated the art of living completely in the present have any use for making plans for the future, for when the plans mature they will be able to enjoy the results.”
~ Alan Watts
We've established that it's impossible to know and quantify all the variables at play and we're just making guesses. What, then, is the point of these guesses? The point is that we are trying to create the ideal present moment by taking actions now, which will mature and create value at some future point.
If we don't plan and adapt then the world will progress without us, and we will be poorer for it - not simply in a monetary sense.
Investment Thesis
"The stock market is filled with individuals who know the price of everything, but the value of nothing."
~ Phillip Fisher
When I analyse markets (& people) I tend to favour a long-term view and focus on the fundamental properties of the system.
I also tend to think that humans are driven to act by belief. Whether it is belief in religion, presidents, enemies, science, charts, facts or voodoo this informs their action.
So when venturing a guess for the price of Bitcoin I first need to identify my beliefs - economic and computing fundamentals - and then I need to assess the prevailing beliefs held by every other participant. My beliefs will allow me to value Bitcoin for myself; the price which reflects a fair value from my perspective. Then, by aggregating and extrapolating everyone else's beliefs (mostly by pure assumption), I can make a guess of where the market price might move towards.
Underlying Fundamentals
"As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
– boring grey in colour
– not a good conductor of electricity
– not particularly strong, but not ductile or easily malleable either
– not useful for any practical or ornamental purpose
and one special, magical property:
– can be transported over a communications channel
If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it."
~ Satoshi Nakamoto
Bitcoin is a data network which can be used to securely transmit messages. A logical application of this is the instant transmission of value to anywhere in the world.
Similar centralised networks exist, such as WhatsApp, traditional Banking networks and services like PayPal. Each of these are simply facilitating the transmission of information. So why should we value one particular network over another? Because each possess varying properties.
Speed, accuracy and cost are the obvious metrics but many more aspects also come into consideration; privacy, reversibility, insurance, censorship, trust.
Herein lies the purpose of a blockchain. In order for a network to allow trust-less, immutable and censorship resistant features it must be decentralised. Decentralisation cannot be claimed lightly. It implies that there is no single point of failure and no entity that can be coerced into manipulating the rules of the system - Bitcoin has proven itself robust against 9 years of continuous attacks against it. Blockchain achieves decentralisation by sacrificing computing efficiency for social scalability (ever wondered why Satoshi chose 10 minute intervals per block confirmation?). Also, notice that without Bitcoin (the value token allowing for transacting) there is no blockchain. Nodes and miners would never voluntarily join the Bitcoin network, at their own cost, without a profit motive. Issuing the block reward plus transaction fees to the successful miner is a vital game theoretic feature of Bitcoin.
Bitcoin has achieved organic decentralisation while assuming every participant to be hostile. It spawned from the bottom up. Decentralisation cannot be achieved from a top down structure. All other cryptographic projects claiming to be decentralised is false. https://www.coindesk.com/worst-crypto-networks-will-biggest/.
Fundamental indicators for assessing the health of the Bitcoin network are:
- Hashing power;
- Number and geographical reach of nodes;
- Economic activity & merchant adoption;
- Hardware producers;
- Developer activity and BIPs (Bitcoin Improvement Proposals).
A short analysis of each:
- Hashing power grows at approx. 0.45% per day. This is incredibly bullish as it indicates that incumbent miners continue to see long term value and new miners entering the market are investing resources into Bitcoin and not elsewhere. The current hashing power dedicated to Bitcoin makes it infeasible for any individual or even a nation state to successfully perpetrate an attack on the network. This literally means that your money is safer in Bitcoin than it is in a bank. https://blockchain.info/charts/hash-rate
- https://bitnodes.earn.com this map excludes nodes running on Tor or hidden behind a VPN.
- https://blockchain.info/charts/estimated-transaction-volume-usd?daysAverageString=7
- Historically there has only been 1 producer of ASIC chips, namely Bitmain. Recently Halong Mining has produced a superior competitor and provide a crucial counterbalance to Bitmain. As a result of Bitcoin's steep ascent last year many big players have also taken notice and plan to enter the ASIC chip market. Samsung and Nvidia being the two biggest names.
- Twitter is a great resource to get direct information from the developers working and contributing to Bitcoin. For the more technically able GitHub is where you will be able to read the source code and evaluate the latest contributions and BIPs.
Economic Fundamentals
“Money is the bubble that never pops. It's a consensus hallucination.”
~ Naval Ravikant
Knowing that Bitcoin is effectively 100% secure from a data networking perspective, we can now assess its utility, application and value to our everyday lives.
Bitcoin has been called a security, a commodity, a fraud, a ponzi, and even the libertarian dream for apolitical money. The market seems to have adopted "digital currency" as the accepted definition but this is not really "what" Bitcoin is and more "how it is used". We should be hesitant in trying to corner Bitcoin and define it as a singular function. For more detailed discussions on the nature of Bitcoin follow these links: https://hackernoon.com/bitcoin-is-and-that-is-enough-e3116870eed1 https://medium.com/@beautyon_/hello-again-david-274d5a99c57
The greatest use case for Bitcoin is as money which has three distinct functions. A Store of Value (SoV), a Medium of Exchange (MoE) and a Unit of Account (UoA).
This post is already getting very long so without delving into too much detail I will simplify the economic argument for Bitcoin: Bitcoin is a superior form of money than any alternative which currently exists.
Future posts will go into detail about Nash's theory of Ideal Money and the specific properties which give a money its utility. If you would like to read a superb assessment of Bitcoin's ascent to money, with proper historical context, see The Bullish Case for Bitcoin. https://medium.com/@vijayboyapati/the-bullish-case-for-bitcoin-6ecc8bdecc1
Over time, more and more people will come to realise the superiority of Bitcoin over other forms of money. This will create a continuous natural demand for Bitcoin and wealth will be sucked out from the legacy financial system and be swallowed into the Bitcoin economy. Numerous estimates abound, but a favourite calculation is to take M1 money supply (all cash and coins in circulation plus cheque accounts) and to divide that by 21,000,000 (BTC supply) to get an ultra-long-term estimate of price. This assumes that most or all economic activity will eventually migrate to Bitcoin which is a bit extreme but still a possibility to keep in mind.
M1 Money = $25 trillion
USD/BTC = 25trillion/21million = $1,190,476.19
Unlike bonds, stocks and even real estate where demand comes and goes, the demand for money is continuous.
Many may still prefer the USD or their local government currency. If so, consider these fundamental differences:
US$:
- The Federal Reserve (or equivalent central bank) reserves the right to endlessly print currency. (NB!! Most central banks are private entities and are not beholden to any democratic procedures).
- Governments can seize, tax, and limit the movement of your assets as they deem appropriate. Link: https://www.reddit.com/r/Bitcoin/comments/84yij0/the_government_seized_nearly_everything_i_owned/
BTC:
- Mathematically coded diminishing supply. Ensures scarcity and prevents counterfeiting.
- Private Keys (Bitcoin) cannot be seized, stolen nor accessed without the owner's permission and is practically impossible to enforce taxation.
The effects of the above are hugely significant: Fiat currencies have already been debased since fully abandoning the gold standard in 1972, allowing for endless money printing which inflates away any stored value. Milton Friedman aptly notes, "Inflation is taxation without representation".
Depending on the attributes that each individual prefers they are free to adopt USD or BTC. Sound economic theory chooses Bitcoin. I choose Bitcoin.
Knowing the Players
"The only true wisdom is in knowing you know nothing."
~ Socrates
I have laid out my beliefs about the economic and computing fundamentals of the Bitcoin system. However, value cannot be decided upon individually. Price can only be determined when there is a willing buyer and a willing seller.
So my valuation cannot be attained unless there is a significant portion of the market who agree with me. So we are faced with two new questions to assess:
- What proportion of the market agree with my valuations?
- What is the prevailing sentiment of the market? Will new entrants veer toward different valuations or will they adopt a similar outlook to my own?
This is the most difficult variable to judge/quantify. There are different use cases for Bitcoin in Venezuela when compared to users in India, Russia or the United States. Penetration in Africa is still low and it remains to be seen how Africans will prefer to use Bitcoin. Cultural differences towards money, technology and law need also be considered, bearing in mind that trading volume is largest in the far east. This is a truly global network.
My guess is that a significant proportion (>~50%) of the market consists of day-to-day speculators; the remainder are users, merchants/businesses and hodlers. This is natural for a 9-year-old monetary phenomenon and I expect high volatility to continue over the next 5-10 years. I also expect the market to incrementally shift towards long-term hodling. Once the value of Bitcoin stabilises at a perceived fair value and becomes easier to use as an MoE, then holders will transition into daily users.
To some extent, price is a reflection of the continuous propaganda war being fought between the nocoiners (governments, bankers, Nobel Economists, mainstream media) and the Bitcoiners. The side which manages to effectively spread their narrative (whether fact based or not) will have a greater influence over the short-term price movements.
Bitcoiners preach truth and freedom; nocoiners spread FUD, bitterness and hatred. Just take a look a Nouriel Roubini's tweets to get a sense of his vile attitude towards Bitcoin. You will seldom find a calm and logical argument lodged against Bitcoin, which is odd because it is not devoid of flaws and inefficiencies.
Now Bitcoin is again below $8K. Down 60% from its December peak. You HODLers : feel free to jump over the cliff to your financial meltdown...
— Nouriel Roubini (@Nouriel) March 15, 2018
I expect Roubini to compose another flurry of vindictive tweets, in approximately 12 months or so, when Bitcoin goes through another corrective cycle. At that stage the price will be so high that Nouriel's credibility will have been expunged.
Prediction
"1 bitcoin will be worth $100,000 during 2018."
~ Cryptoavli
Even though it may appear improbable at this moment, considering the sharp decline in recent months, I still believe Bitcoin will pass the $100,000 threshold this year. It may not hold there very long and will likely be followed by another mini-crash (see Gartner Hype Cycles) but it remains my mark for the year.
The Bitcoin ecosystem is healthier than it has ever been since inception and all signals point to continued strengthening. On the social front education, adoption and usability of Bitcoin continues to spread - these factors will perpetuate the network effect and drive demand which will put intense upward pressure on price.
Factoring in these macro indicators it becomes easy to envision another buying frenzy equivalent to what we saw from August to December 2017. $100k/BTC might actually turn out to be a really conservative guess.
[DISCLAIMER: If my prediction materializes, it would be pure luck; if wrong, it's because all predictions in a chaotic universe are wrong.]