By Parke Shall
In the world of Bitcoin, the news last week was that a Florida judge had ruled that Bitcoin was "not money". This ruling was being passed around on Bitcoin related financial media (source, source, source) and in Bitcoin forums as a potentially negative development for the crypto currency, whose price relies a lot on the confidence of its users and its acceptance within mainstream society to hold it up.
We want to address this ruling and then look at the binary nature of Bitcoin going forward. What is a case where Bitcoin could be worth $1,000,000 in the future? What about $0.01?
We actually think the judge's ruling is a positive for Bitcoin. We will explain why, and then we will look through the two extreme pricing scenarios for Bitcoin in the future. This Miami Herald article stated:
A Miami-Dade judge ruled Monday that Bitcoin is not actually money, a decision hailed by proponents of the virtual currency that has become popular across the world.
In a case closely watched in financial and tech circles, the judge threw out the felony charges against website designer Michell Espinoza, who had been charged with illegally transmitting and laundering $1,500 worth of Bitcoins. He sold them to undercover detectives who told him they wanted to use the money to buy stolen credit-card numbers.
But Miami-Dade Circuit Judge Teresa Mary Pooler ruled that Bitcoin was not backed by any government or bank, and was not "tangible wealth" and "cannot be hidden under a mattress like cash and gold bars."
"The court is not an expert in economics; however, it is very clear, even to someone with limited knowledge in the area, the Bitcoin has a long way to go before it the equivalent of money," Pooler wrote in an eight-page order.
Let's address this first. While blockchain and Bitcoin certainly look for validation from government entities in order to go more mainstream (source), Bitcoin not being declared "money" is actually one of the better things that has happened to it. According the referenced Wired link, Bitcoin "needs to be regulated":
Because Bitcoin is a decentralized payment system that operates independently of any government or central bank, people can exchange value on a peer-to-peer basis, without passing through any financial intermediary. This means that the Bitcoin network does not reside in any given regulation, and can therefore be constructed to be agnostic to any jurisdictional rules. Given this current lack of a central regulatory authority, people can operate the network in a pseudonymous manner, without disclosing their identity to anyone. This provides opportunities for criminal activities, including tax-evasion and money-laundering.
Technically, it isn't really money, so much as it is a finite financial asset with a predetermined supply that can be used to transfer value from one person to another.
The diehards will argue all day that Bitcoin is money. And the label doesn't really matter. What matters is that this digitized currency has a value all its own, that it will likely sustain for years to come.
The Fed argues occasionally that gold is not money. Regardless of whether you think the Fed is right or not, it certainly doesn't take any of the value away from gold. Along those same lines we don't expect this commentary to take any of the value from Bitcoin. In fact, we expect that this will help add to Bitcoin's appeal, as those who own it do so because they want a financial asset that is not regulated by any government and not technically recognized in the mainstream.
Bitcoin will become mainstream in and of itself in coming years.
We believe that to be inevitable. We are not asking for the United States government to recognize it as legal tender. What we do think will happen, however, is that the government will try to put regulations in place around it and that this will lend it in air of credibility that will give the nod to more retail investors that it is OK to own Bitcoin. As we have said in the past, 99% of people still don't know how to own Bitcoin or what it is. There is a very long runway for adoption and growth for Bitcoin going forward.
As an investment, Bitcoin is the definition of a binary outcome. On one hand, if the crypto currency is widely accepted as a global reserve asset, there is a real argument for Bitcoin moving towards $100,000 or, as some have even speculated, closer to $1 million.
On the other hand, if our infrastructure collapses or if Bitcoin confidence amongst the public wears thin, the price will likely drop quickly and in short order, eventually going to zero dollars.
The road to $1 million per Bitcoin is one where inflation has rum amok, Central Banks lose control and people all over the globe are looking for an area to stash and preserve wealth. This is a distinct possibility, more so than most people think. All Central Banks are doing everything they can across the globe to try and keep the economy stimulated. If the Central Bank confidence game ends in one country, why would we believe that it would not end in other countries?
In a situation like this, drawn out over the course of 20 to 30 years, Bitcoin could very meaningfully appreciate in value. We can't say for certain that it will go to $1 million in a scenario like this, but this type of scenario paired with Bitcoin becoming available to everybody would certainly cause prices skyrocket.
And as we have said in previous articles, Bitcoin is only as good as the infrastructure that it exists on. Any type of event that shakes our digital infrastructure to its core would likely render the coin lower in value. If it is regulated upon in excess or eventually declared illegal by any Central Bank or government, it could move meaningfully lower. Finally, if Bitcoin loses the confidence of the public and its users, it could very well go to zero.
Until then, due to the limited supply and increasing influx of people that will soon be exposed to how Bitcoin works, we expect much more volatility going forward. We have a very small allocation of our assets in Bitcoin and our only plan is to hold these assets for one of the two binary outcomes discussed above. On any crash or sharp price move lower, we may add slightly to what we have.
Disclosure: I am/we are long BITCOIN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.