Hey Guys,
Here's another repost of a work from my website. You can see the original here:
And my YouTube commentary on it here:
Thoughts and comments are most welcome. I hope you enjoy:
At the end of my last post I briefly gave my reasons as to why I believe Bitcoin could be undervalued. Yes, undervalued. That is, even at what are considered by some to be crazy prices, Bitcoin could still be worth considerably more. Click here and scroll down to the last paragraph of the post if you’d like to see what I’m talking about. If not, read on. 🙂
Before we can talk about why Bitcoin is potentially undervalued, though, we have to establish two points:
The meaning of value
What makes a currency, any currency, valuable.
POINT NUMBER 1: WHAT IS VALUE?
According to Merriam Webster’s Dictionary the meaning of the word valuable is the following:
1a : having monetary value
b : worth a good price
2a : having desirable or esteemed characteristics or qualities
valuable friendships
of great use or service
valuable advice
In the case of Bitcoin, and other cryptocurrencies like it, we can see that all four meanings of this definition are met. That’s because Bitcoin actually does more than just represent a currency, it is the currency. This is a subtle but fundamental difference between some (but certainly not all) cryptocurrencies and our old friends like the US Dollar and Co. This is part of what is driving the cryptocurrency wave and I’ll write about that further on in this post.
POINT NUMBER 2: WHAT MAKES A CURRENCY VALUABLE?
If someone were to ask you why gold is valuable or why the dollar or any other currency is valuable, could you answer? What would you say? Many of us would fall back on reasoning that probably boils down to something along the lines of “because it is”. Others would point to graphs and enter a kind of disconnected fit of jabbering at you. And others might be able to explain what’s actually happening in simple terms:
Here it is: there are three interdependent factors that generate “value” for a currency. Without all three, the currency is in serious trouble and it’s only a matter of time before this becomes a problem. The three factors are:
scarcity: a limited amount of the given currency. In the classic “supply and demand” equation, scarcity equals a limited supply. If an asset is either naturally or artificially scarce but useful it’s value will be quite stable and will increase in relation to an increase in demand for it. Think cigarettes in prison or a supply of freshwater when lost at sea.
use: a history of use of a currency and facility in doing so. Use equals the “demand” aspect in supply and demand. If demand for a given currency increases but the supply doesn’t the value will rise. However, if the supply also rises, value will either stay the same or decline i. e. inflation.
agreement/coercion to agree: a community which either agrees or is forced to agree on the validity of a given currency. This is probably the most subtle of the three aspects because most people are very much inclined to think only that “money is money” without really questioning why. The fact is that, without a community to support the circulation and use of a given currency, it would be effectively useless. This group attribution of value to currency has been an incredibly strong but entirely psychological factor in history. Generally, once agreement is established, it tends to persist more or less unquestioned. When agreement is challenged, the deeper currents of coercion involved in maintaining it tend to rise to the surface. This can range from talking heads on TV denouncing the challenge all the way to state sponsored violence on a national and/or international level.
Essentially, what all centralized kingdoms, governments, empires and countries have have historically done to ensure order and hierarchical control is to control what is and isn’t a valid currency. At times when control has been threatened, simply changing the national currency has effectively stopped any challenge short. This notion of a nationalized currency is probably one of the most subtle and powerful techniques of injecting value into a currency because it is so widely accepted and unquestioned. At the same time it also either encourages or inhibits activity among a population to a remarkable degree because exchange of goods and commodities is controlled by the currency it happens in.
This is not to say that nationalized currency is inherently bad or that we are slaves to our economic overlords etc. Indeed, their is an element of stability and liquidity maintained in having an agreed upon currency controlled by a trusted 3rd party (the government). And most importantly, until very recently, there has literally been no better way. Despite the incredible advancements in technology over the past 100 years or so, our money system has changed very little since the days of Isaac Newton. This is definitely something to consider.
So, basically, without these three factors: 1) scarcity (actual or artificial) 2) use and 3) coercion/agreement a currency is effectively useless as a currency. Conversely, as long as these three conditions can be somehow maintained in the population/geographic locale using a given currency, that currency could literally be anything. Take the list below as an example:
Cows
Rice
Gold
Clam shells
Copper
Blankets
Salt
Decorated belts
Beads
Fish
Yes, these items have all been used at some point in history as actual currency. And only one of them maintains any kind of “value” today: gold. But good luck trying to buy anything with it.
Let me ask you this: what, besides agreement, makes gold valuable? What, besides agreement, makes money valuable? The answer is very little if anything. Not to undermine the validity of the current economic system or the efforts of both those who make it go round and those who get up every day to go to work for it. But, what if there were a better way? Cryptocurrencies could very well be a better way. They are very likely here to stay and will most probably see prolonged, if volatile growth from here on out. In fact, with certain classes of cryptocurrency, they actually have the potential to accrue even more value than nationalized “FIAT” currency; particularly if they are decentralized.
UNDERVALUED? SERIOUSLY?
Yes, indeed. Talking heads on TV and the wizards of fractional reserve banking aside, Bitcoin could very well be undervalued. Here’s why:
REASON NUMBER 1: the scarcity of Bitcoin is guaranteed. There are currently approximately 17,000,000 BTC in circulation and there will never be more than 21,000,000, Further, the rate at which they can be unlocked is fixed and we will not see the last Bitcoin mined until 2040. Any attempts to duplicate or counterfeit a Bitcoin will be immediately detected by the blockchain and will be impossible to verify. This is not so much a case of someone catching attempted fraud as it is the technology simply following protocol.
As an analogy, consider a total supply of 21,000,000 bars of gold. All of which will be released in precisely calculated intervals based on requisite levels of applied effort to unlock them (crypto mining) being met. The gold bars cannot be duplicated and their amount can never exceed 21,000,000. They also contain a unique code which links them to an overall whole. Any attempt to somehow make and introduce another bar of gold without A) the requisite amount of (verified) work being met and B) the coded inclusion into the whole will not be accepted. End of story.
This may be somewhat oversimplified but shows the essential foolproof elegance of the blockchain: if it’s not a part of the blockchain, it’s not a part of the blockchain.
This kind of scarcity is actually unprecedented in the history of currency. Some may say “what about gold?”. Well, the truth is, there is more gold locked in the planet than we know what to do with. The only obstacle to getting it is the time, expense and, after a certain degree, technology it takes to get it. Gold can also be hoarded in secret, melted down, painted, hidden and otherwise kept from the knowledge of others. We actually may not know the total quantity of gold available on the markets to say nothing of how much more lies buried in the ground beneath our feet.
The exact opposite is true in the case of Bitcoin. Please consider what this may mean in regard to the scarcity factor so necessary to maintain and increase a currency’s value.
REASON NUMBER 2: the second factor in determining a currency’s value: use. There is a reciprocal relationship in the combination of a currency’s scarcity and use i.e. supply and demand. That is, the more people use it, the more valuable it will become. With Bitcoin it is actually limited in supply not just effectively limited (effective limitation being withholding large reserves or otherwise controlling the available supply in circulation). This reciprocity is fueled further not only because it is seeing accelerating use in spite of its limited supply but also because the technology itself offers multiple advantages over more traditional currencies such as:
transportability: Bitcoin, along with just about all other cryptocurrencies, has an unprecedented level of liquidity. It can be moved peer to peer (no bank or brokerage required) to anyone, anywhere, anytime on the planet in about 10 minutes
privacy: details of the transaction such as who is sending it, where they are sending it and why are exceedingly difficult to discern with cryptocurrencies. Unless you have a level of computing power comparable to the NSA, there is simply no way the average person could have any knowledge of the transaction.
security: the nature of the blockchain is security. This is one feature that is helping to drive the use and popularity of this technology. Bitcoin was the first platform to successfully implement and generate solid use cases.
convenience: again, peer to peer. That about says it all. All you need is an internet connection to have the same level of control over your funds and where they are going as any bank in the world.
historically unprecedented growth potential: current estimates say that less than 1% of the global population is involved with Bitcoin. Consider what this means in terms of potential for growth.
facility: this is a point that regular nationalized, fiat currency simply cannot compete with. Bitcoin and other cryptocurrencies function as a platform whose nature is fundamentally different from the traditional world of money and banks. So different, in fact, that cryptocurrencies could almost be thought of as a kind of “money 2.0”. This single point alone is enough, over time, to completely revolutionize finance as we know it.
REASON NUMBER 3: that oh so nebuluous element of coercion and/or agreement. But more so coercion. You see, Bitcoin is decentralized. There is no one individual, one institution or one government that has ultimate control over Bitcoin. It is, by it’s very nature, a distributed, communal technology. All Bitcoin transactions display equally on every computer on the planet. They cannot be altered, duplicated, deleted, bribed or otherwise subjected to any tomfoolery. This is absolutely not the case with what we have been using as money for the past few centuries or, more recently, since the demise of the gold standard.
So what does this mean? It means that Bitcoin and, very importantly, other cryptocurrencies like it, represent an as yet unprecedented platform for transaction. Yes, there will be further developments and new types of technology. Yes, the capacity of Bitcoin will likely be surpassed in terms of transactions per second and the adaptability of the blockchain. But, remember element number 3? Agreement.
HOW HIGH COULD BITCOIN GO?
Currently, the only thing really holding Bitcoin back from stratospheric valuation is the size of its market and a relative lack of use in comparison to the size of the global population. It is currently estimated that less than 1% of the global population is involved with Bitcoin. As a comparison, the internet which may well be one of the greatest inventions of the 20th century currently sees use by approximately 40% of the global population. This is actually a pretty impressive figure considering that the internet is still relatively young. It is also, by it’s nature a platform of nearly unlimited accessibility and expandability that is slowly but surely changing how human interaction happens across the planet.
Bitcoin, on the other hand, is not a a platform of unlimited accessiblity or expandability; although it does allow a high degree of divisibility (1 BTC can be divided into 100,000,000 units called a “Satoshi). Bitcoin is a platform that guarantees a rise in value the more it is used. With this in mind, imagine what would happen to the price of Bitcoin if it were to see use by even 10% of the population? To see where this is going we need to keep one thing in mind:
Bitcoin and cryptocurrencies in general are still in their infancy.
To continue the internet analogy, we could say that Bitcoin and cryptocurrencies are roughly where the internet was in the first days of America Online. There is A LOT of room for expansion. This is especially true when we consider that the nature of cryptocurrency technology allows it to extend to areas of the planet that are essentially cut off from global finance at the present time. That is, not only do cryptocurrencies inherently have more utility than their Fiat counterparts, they also offer more accessibility. This could drive their value even higher and even faster than we’d like to admit.
So, back to how high it could go. Personally, I believe that if present trends toward cryptocurrency persist even at 10% of their current fervor, it would be very realistic to expect to see Bitcoin at $500,000 USD within the next 10 to 15 years. And that is a conservative figure. There are some who would say $1,000,000 or more in far less time.
One thing is for sure, though. Bitcoin has not yet reached its full value. How far it will actually go up and where it will stabilize is really hard to say but it will be interesting to watch the ride.
ARGUMENTS AGAINST BITCOIN’S CONTINUED RISE IN VALUE
Ok. So what about the naysayers? Of course there must be some possibility of Bitcoin losing its value just as there is with any currency. But I believe the likelihood is probably less than with traditional currencies. That is, in a very real sense, Bitcoin is likely a more stable platform than something like the US Dollar or British Pound and other national currencies. This may no be immediately obvious. And some may call it a totally wrong opinion. So, for those who would disagree, let me explain the reasoning behind my opinion.
WHY BITCOIN’S DOMINANCE WILL BE DIFFICULT TO CHALLENGE
- the total number of Bitcoin cannot be increased except through mining and the total number that will ever be available is absolutely fixed. This is not true with fiat currency or even with gold for that matter. With the US Dollar, the Federal Reserve can simply just print more money or the banks can use fractional reserve banking to literally create funds out of thin air; and then charge interest on it. This is what causes inflation and, eventually, terminal instability in an economy. It keeps everyone happy and things running smoothly for a time but the currency inevitably loses value to the point where it becomes useless (too much supply, not enough demand). And so “pop” goes the bubble etc.
Because the number of Bitcoin cannot be artificially increased it means it is actually quite difficult for inflation/devaluation to happen; probably even more so than gold. Actually, if anything, deflation is more likely. That is the value is far more likely to rise than to fall provided the three factors of use, scarcity and agreement on it as a medium of exchange persist.
Bitcoin is a far more secure platform. It essentially cannot be hacked or manipulated. However, it can be lost or stolen. And there is no way to replace it. This means that, even if the banks wanted to, they could never either A) control Bitcoin the way they do fiat currency or B) play the same kind of games they do with fiat currency. This means that even the banks have to play by the rules.
the Bitcoin blockchain is distributed. This means that no one single entity, institution or government has control over Bitcoin. The nature of the network itself requires a large number of “nodes” that function in an interdependent way. Bitcoin has no centralization so there is no single point of failure and no single point of control. This is a simple but highly ingenious way to guarantee a transparent, almost egalitarian structure to the network. And, again, ensures that even the banks and financial institutions of the world involved with Bitcoin have to play by the rules.
essentially, the factors of scarcity, use, and agreement are just too strong with Bitcoin to see it simply go away as a platform of exchange. It is so well designed and increasingly so well built into the emerging new system of global finance that it simply wouldn’t make sense to do away with it. It would require an ever increasing number of people and institutions to suddenly and simultaneously abandon the network for Bitcoin to crash. And it is difficult to think of any reason why this would happen.
WHAT COULD POTENTIALLY DEVALUE BITCOIN?
history is full of exceptions so let’s talk about what could possibly carry the potential to devalue the economic tank that is Bitcoin. What could cause Bitcoin to lose value or “the Bubble” to pop?
SCENARIO 1:
Probably the most likely cause would be a superior and somehow more popular technology taking over. Ethereum has come close to this and has seen an amazing ascendancy since it was first introduced in late July of 2015. Ethereum does have its advantages over Bitcoin but is still no where near as valuable. And that is probably because it is newer than Bitcoin and has not received the same amount of investment and use i.e. there is not as much precedent of agreement upon its value. Some have compared Bitcoin to “the gold” of the cryptocurrency world and Ethereum to “the oil”. And these comparisons are quite accurate and useful.
However, again, this would still require a unanimous kind of abandonment of Bitcoin by a lot of people invested in it. Given such factors as the cost of mining a Bitcoin and its growing precedence as an accepted and fungible means of exchange, the likelihood of this happening seems increasingly remote and, well, bizarre. It would literally be the same as everyone in the world involved with gold suddenly and simultaneously agreeing that it wasn’t useful anymore. Yes, it could happen but remains very unlikely.
People may make comparisons to other transitions in technology like the Blackberry to the Smartphone or the LP to the CD to the MP3 in regard to the potential threat of superior technologies to Bitcoin. However, these types of comparisons aren’t really accurate because we are not talking about an improvement in a consumer technology. We are talking about an improvement in a system of money. And the parameters and requirements are quite different. Until the inception of Bitcoin, money had not fundamentally changed in centuries save for President Nixon taking the US Dollar off of the gold standard in 1973. The achievement of what money does is actually an extremely simple thing: complete a transaction of exchange where two parties can agree that the transaction has happened and are satisfied with its results. Nothing more, nothing less.
To be fair, however, there are many cryptocurrencies available even today which have undeniable advantages over Bitcoin. Faster transaction times, more transactions per second, “smart contract” options, blockchains that are open source and can be modified and improved upon. The list goes on. And we can only imagine what will come about in the years, decades and centuries to come in the way of innovations in this field. But still, Bitcoin dominates as the top cryptocurrency. Just as gold dominates as the top physical store of value. Why?” We may ask. I would say it is because of agreement on the value of a Bitcoin. Nothing less and nothing more.
SCENARIO 2:
A second possibility would be the governments of the world imposing strict regulations on Bitcoin or even making it illegal. North Korea was successful in doing this by simply changing its national currency almost overnight and rendering the older version totally useless. This is something that can very easily happen to a centralized currency with one point of control. As James Madison once said: “History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it’s issuance.”
But, given the private peer-to-peer nature of Bitcoin, trying something like this would likely prove exceedingly difficult to effectively enforce. It would probably take a level of effort approaching that of the ludicrous expenditures of “The War On Drugs”. And it would probably share a similar level of futility. To really put an end to Bitcoin, whoever trying to do it would literally need access to and control over every single computer on the planet. Not a very likely scenario.
So it would seem that there is no realistic challenge to Bitcoin’s dominance as the most highly valued cryptocurrency. Save for possibly a change in trend more so than in a failure of Bitcoin as a platform for distributed, secure digital transaction.
Despite the many “netizens” opinion otherwise.
WHAT THE FUTURE OF BITCOIN WILL PROBABLY LOOK LIKE
Given that there are an increasing number of new cryptocurrencies coming out all the time it would be hard to say that the status and/or utility of Bitcoin will stay the same; most especially the utility. You see, honestly speaking, as a means of worldwide global transaction Bitcoin is just not up to the job. In the early days the case was very different but suffice to say the Bitcoin of today is nowhere near as convenient or cheap to work with as it once was.
And there are a huge number of technologies that can do what Bitcoin was intended to do better, faster and with more options.
However, good ol’ BTC still holds immense value and has all of the signs to continue accruing more. So what will the future of Bitcoin look like?
Many seem to agree with the idea that Bitcoin will move increasingly away from use as an everyday currency and more toward use as a store of value. That is: an investment vehicle just like gold. The same reasons that make Bitcoin an arguably better form of currency than just about anything else we’ve come up with in the past 10,000 years also make it an amazing platform as a store of value.
So, the future of Bitcoin probably won’t see many people using it to buy a cup of coffee or something off of Amazon. It will most likely be approached as something like gold is today:
highly valued: as outlined above there are far more reasons for Bitcoin to gain value and stay that way than there are for it to lose value. Gold has this quality, too. But it is actually somewhat artificially controlled. Given the nature of the Bitcoin technology, artificial control of it would be extremely difficult.
difficult to attain: as Bitcoin’s value continues to increase while its availability decreases, it will invitably become ever more difficult to attain. Gold has seen waves of buying sprees and historical rises and falls in value but the truth is that, while it is admittedly difficult to attain, there is always more of if in the earth.
a wise investment regardless of the times: in times of political and economic strife many revert to gold because it has historically been the go to currency for store of value and longevity. Why this is so is somewhat difficult to understand unless we go with the explanation that everyone else thinks so, too. In the case of Bitcoin, provided no unprecedented bizarre event somehow wipes it off the planet in one fail swoop, it is likely to be seen as a go to store of value for far more logical reasons than gold: namely ease of transport, concealment and exchange.
If this does indeed become the case, it is likely the price of Bitcoin could see a valuation that would seem ludicrous today. Only time will tell.