Ever since a Florida programmer made the first commercial transaction using Bitcoin (COIN), when he traded 10,000 Bitcoins for 2 pizzas, the digital currency was launched. On May 18th, 2010, Laszlo Hanyecz posted on a Bitcoin forum that he would pay 10,000 BTCs for “a couple of pizzas, like 2 large ones so he would have some left over for the next day.” Well, as Laszlo’s pizza-related dreams came true that evening, an actual value for Bitcoin was born. A value of just $0.0025, or one quarter of 1 cent. However, as news spread around the internet of the now infamous pizza purchase, Bitcoin was soon officially trading at $0.06, an impressive 2,300% increase in just a few short weeks.
Fast forward to today’s world, in which Bitcoin is currently trading at around $13,500 and those 10,000 Bitcoins from 2010 used to purchase two large pizzas are now worth a whopping $135 million. Bitcoin itself is up a mind-numbing 540,000,000% since its first implemented purchase.
Bitcoin All-Time Linear Chart
I am not sure if there has ever been another asset that has returned over half a billion percent in a 7.5-year window. My guess is that there hasn’t. So, after such astronomical gains, I can see how Bitcoin could be perceived by many as being in a bubble. However, it is important to realize that Bitcoin is a unique asset, a groundbreaking concept, a revolutionary phenomenon, which still holds nearly limitless potential to reshape the entire financial global order. Therefore, its full value potential is far from being fully realized right now, and the digital asset’s price is going to balloon a lot further before Bitcoin eventually reaches its full worth.
Bitcoin has come a long way from being the largely unknown digital currency you could barely buy 2 pizzas with in 2010. Now Bitcoin is everywhere - it’s on the front pages of newspapers, reporters are discussing it on news channels, family members are debating it over Christmas dinners. The digital asset is seemingly becoming entrenched in the fabrics of our society, yet not a lot of people own it.
What’s essentially occurring is demand is being drummed up significantly, but a relatively small portion of the population is partaking in the Bitcoin phenomenon, while the vast majority of the populace takes a passive role by simply observing events unfold from the sidelines, for now.
Adoption Rate of Just 0.4%
There are currently fewer than 21.5 million blockchain wallets in use. While this represents a year-over-year growth rate of roughly 100%, the number still only accounts for around 0.4% of the 5 billion population that has access to bank accounts. Bitcoin is transforming into a lasting, worldwide trend that is likely to become a permanent staple of the new global order. Therefore, the trajectory of this trend will inevitably continue, and as demand for Bitcoin expands, so will its value.
The thing about Bitcoin is that there is no conventional way to value the digital asset. Bitcoin has no earnings, no cash flow, no P/E ratio, no growth rate, and no dividend. Essentially, there is only supply, demand, sentiment, and price.
Bitcoin’s Unique Supply and Demand Dynamic
So, let’s assess what we can. We know that supply is limited - only 21 million BTCs can ever be mined. Moreover, an estimated 4 million BTCs have been lost forever, therefore the real number of Bitcoins that will ever be in circulation is likely far fewer than 21 million, more like only 17 million.
Presently demand is robust, but is likely to intensify with increased popularity, widespread adoption, higher institutional ownership, and improved functionality. Moreover, demand will likely reach stupendous levels as peak Bitcoin inevitably approaches. Peak Bitcoin will occur when there are very few Bitcoins left to mine, and supply is forever capped at 21 million. Right now, fewer than 17 million Bitcoins have been mined, and the last Bitcoin may not be mined for decades. However, the consensus is that the clear majority of Bitcoin will be mined by approximately 2032. So, that gives BTC about 15 more years to appreciate.
When Sentiment Speaks, Price Listens
Naturally, sentiment plays an important role in BTC’s price. Ultimately, Bitcoin’s functionality is what the digital asset should derive most of its value from. Since we are still in the opening stages of the Bitcoin phenomenon, it is BTC’s perceived functionality properties that should drive the current price action, not so much the mania and the speculation aspect. Although it is difficult to put a price tag on the speculation and mania portion of BTC’s price, as sentiment strengthens in regard to Bitcoin’s future functionality prospects, the price should continue to increase.
Bitcoin is currently in the opening stages of competing for two major markets. One is the global store of value market, and the other is the worldwide medium of exchange segment. The global store of value market is currently dominated by gold, bonds, fiat currencies, stocks, derivatives, and other financial instruments. The global medium of exchange market is presently led by fiat currencies, controlled by central banks, governments, and multinational banking corporations.
Although Bitcoin cannot replace stocks, bonds, derivatives, gold, or even national currencies in the foreseeable future, it can offer a substitute form of value storing, as well as an alternative medium of exchange system.
The underlying global markets are greatly manipulated by governments, central banks, banking institutions, and other market forces. Moreover, the manipulation that takes place in the underlying markets usually benefits, the insiders, the rich, the few, and the privileged. Therefore, there is an inherent uneven playing field to begin within the current financial world order. Thus, by default, there is room and justification for an alternative, more efficient system to exist. Moreover, just like any superior form of technology, the new system is likely to prosper and capture market share from the old-world, corrupted system, riddled with faults and inadequacies.
Bitcoin's Superior Qualities
Firstly, the Bitcoin, blockchain, digital currency phenomenon is still in its infancy, and is only beginning to scratch to surface potential-wise. This new form of technology can conceivably enable numerous elements in a financial system, run smoother, more efficiently, be less complex, and much more transparent. Secondly, it is decentralized. Therefore, it cannot be manipulated by governments, central banks, and banking institutions like traditional store of value assets and central bank-issued mediums of exchange.
Bitcoin Vs. Gold
In the store of value segment, Bitcoin can be compared most fluidly to gold. Both are mined, have limited supplies, are widely recognized as having value, have medium of exchange properties, and are highly coveted assets on a worldwide scale. However, Bitcoin is far easier to transact with. For instance, I can transfer $1 million worth of Bitcoin to someone in another country, on the other side of this globe, in minutes and at a minimal transaction cost. If I wanted to conduct the same transaction using gold, this would be a far more complex and expensive procedure.
Bitcoin Vs. Fiat Currencies
There is one thing that has been universally true about all fiat currencies, and that’s that they all eventually return to their intrinsic value, which is zero. In recent history, we’ve seen this occur in Germany, Zimbabwe, several post-Soviet republics, we are currently seeing this occur in Venezuela, and even the mighty USD has lost about 95% of its value since the Fed took over the U.S.’s monetary system in 1913.
If you have a currency backed by nothing, with an unlimited supply, the dynamic is bound to be abused. Sooner or later, the participants, or victims, catch on to this scheme, that the money supply is perpetually increasing, which leads to diminishing purchasing power of the currency and ultimately culminates in a loss of confidence and a devaluation of the paper money.
Bitcoin does not share this problem, as the digital currency is decentralized and has a finite amount that can ever be mined. Moreover, BTC exhibits all the major characteristics indicative of a desirable currency. Bitcoin is durable, easily divisible, highly transportable, extremely scarce, widely recognizable, is impossible to counterfeit, and when it reaches its long-term value potential, BTC will become stable as well as consistent.
Essentially, Bitcoin performs all the functions gold and global currencies achieve, but it has the distinct potential to accomplish these tasks more efficiently, and in a much more cost-effective manner. Moreover, the Bitcoin, blockchain dynamic allows for a much more transparent, and less predatory, monetary environment.
Concerns have been expressed about Bitcoin’s rising transaction costs and scalability issues. Critics cite the recent spike in average transaction costs associated with Bitcoin, as well as the network’s relatively lengthy transaction times and inability to process a massive number of transactions.
Due to Bitcoin’s skyrocketing popularity, average transaction costs have surged from about $2 in early October to roughly $37 in late December. Therefore, you are unlikely to see it used to purchase pizzas today. However, the rising costs and lengthy transaction times are very likely to be transient issues in Bitcoin’s evolution process.
The Lightning Network is a protocol that creates an off-chain system by forming a network of payment channels that can be accessed by involved parties independent of the broader blockchain network. This is essentially an add-on to Bitcoin’s blockchain that solves scalability and cost issues by taking transactions off the main network and onto a more private network amongst the users of the underlying payment channel.
The Lightning Network can process thousands of transactions per second, compared to the current limit of under 10. Moreover, transactions are conducted at a fraction of the current cost, which makes the upgraded Bitcoin payment system cheaper than the current mass payment processing system, and capable of conducing millions of transactions per day much like Visa (V) and MasterCard (MA). The Lightning Network is scheduled to be launched sometime in mid-2018.
Some skeptics say that they like the blockchain technology behind Bitcoin but not BTC itself. This is peculiar, because while blockchain technology can be implemented for just about anything, as it is largely a decentralized database ledger capable of recording transactions pertaining to anything, there is only one original Bitcoin blockchain. In essence, a blockchain is only as valuable as the product it is coupled with and the service it provides.
What makes Bitcoin’s blockchain so unique and so valuable in the first place is that it is inseparable from Bitcoin itself. Bitcoin has a significant (at least 5 years) head start on most of its adversaries. In addition, Bitcoin’s blockchain has by far the most extensive, best-established, and most valuable multi-billion dollar infrastructure network capable of withstanding the test of time.
Bitcoin is the gold standard of the digital world, and is widely accepted as the predominant digital currency, despite some of its transitory shortcomings. It has been legitimized by the advent of BTC futures trading in the eyes of the entire financial world. Thus, people have become conditioned to recognize Bitcoin as the leading digital currency of the world. Some countries are even starting to officially recognize Bitcoin as legal tender. Japan was the first to do so, and others will likely follow in time.
Therefore, saying that “blockchain technology is great but Bitcoin is not that special” is akin to saying something like “social networking is a great phenomenon, but Facebook is not that special”, or that “Internet search is a useful technology, but there’s nothing great about Google”. Consequently, just as Google is synonymous with search and Facebook is with social networking, so is Bitcoin and blockchain technology.
Bitcoin is an unusual financial phenomenon in the respect that it was not invented on Wall Street. Most financial instruments, trading vehicles, derivatives, and anything else that could be speculated on are usually engineered on Wall Street or in some other highly centralized financial center. Therefore, the insiders are usually the first in, but not this time. Most institutional investors appear to be late to the party; however, that doesn’t mean they won’t jump in.
In fact, the next wave higher is likely to be propelled by an influx of institutional funds as futures, ETFs, and other trading vehicles capable of betting on the price of BTC begin to flood the market over the next few years. Mohamed El-Erian recently mentioned that Bitcoin is facing a crucial test right now, and if it is to continue with its upward trajectory, institutions would need to step in around this level and bid the price up.
While this is likely true, mainly from a price action perspective, it’s extremely important to remember that the point of Bitcoin is not to continuously have its price appreciate. A rising BTC price should ultimately be a byproduct of the increased potential in its functional capabilities as a universal store of value and a global medium of exchange.
Recent price action suggests that Bitcoin has gone through a healthy correction process and is now going through a constructive consolidation phase. BTC recently declined by roughly 45% in 5 trading days, dropping from its high of around $20,000 to a level of under $12,000. Since then, it has been trading in a consolidation style trading range of roughly $12,500-16,500.
Bitcoin 10-Day Chart
As long as BTC doesn’t fall decisively below $12,000, the long-term trend stays constructive, and BTC is likely to break out to new highs in the near future. However, if it dips below $12,000 conclusively, a test of the $10,000 region becomes inevitable and a possible drop to $5,000-6,000 becomes very possible. Nevertheless, significant long-term price appreciation remains likely regardless of short-term price swings.
Bitcoin and blockchain technology is still a relatively new phenomenon, not that many people (relative to the world’s population) understand what it is, how it works, and the revolutionary functionality properties it offers. It is still looked on by many as a “novelty”, something that’s neat and interesting but has little real world worth to offer. In addition, an extremely small percentage of the populous are directly involved with digital assets right now. So, before you classify Bitcoin in the bubble category, please take the time consider a few crucial elements.
Yes, Bitcoin is a highly publicized phenomenon, but have you ever seen a bubble that so many people heard so much about but so few were actually involved in? Moreover, have you ever witnessed a bubble in which institutional investors were largely absent from, or one which was predominantly decoupled from Wall Street? Finally, have you ever seen a bubble that had so much “bubble” talk surrounding it, and that so many individuals were adamantly sure was in fact a bubble?
My answer to all three questions is "no", therefore Bitcoin is likely to greatly increase in adoption, institutional ownership, popularity, understanding, functionality, and value before its true worth is achieved.
To attempt to put an objective value on Bitcoin let’s look at BTC's competitors, and other popular asset classes along with their respective market values.
Bitcoin’s market cap is extremely miniscule right now, even though the digital asset has immense market share potential. I am not claiming that BTC is going to take over the world’s derivative markets or take on the global stock market, but it can certainly capture some market share from gold and the M1 money supply going forward. It represents a legitimate alternative store of value and spearheads what is becoming an optimized medium of exchange system.
Therefore, BTC will likely continuously carve out share from the roughly $40 trillion medium of exchange and store of value market comprised of gold and the world’s M1 money supply. The higher BTC’s functionality as a worldwide store of value and a digital global currency becomes, the more its price is going to appreciate.
Bitcoin doesn’t need to replace the current leaders in this market, i.e. gold, the dollar, euro, etc. It just needs to effectively compete with them, and there is no indication that it will not. In fact, BTC is superior to its adversaries in many respects and should continue to carve out an ever-larger portion of the $40 trillion pie.
A mere 10% share of this market would give Bitcoin a market cap of about $4 trillion and a price of around $250,000 per Bitcoin, a 25% share would increase BTC’s price to roughly $600,000, and a 50% share of this market would give BTC a price tag of approximately $1.2 million.
Naturally, it’s not going to be a straight ride to $1,000,000, and this price is not likely to be achieved in the next few years. But by 2030, with peak Bitcoin approaching, in a global landscape of increased adoption, improved functionality, and worldwide acceptance, I could see Bitcoin at $1 million. Can you?
Disclaimer: Despite my very optimistic view on Bitcoin, it remains a very speculative and risky investment. There are a number of inherent risks associated with Bitcoin that could detrimentally impact its price. Personally, I would not allocate more than 10% of my portfolio to digital assets. Please don't take out a mortgage to buy Bitcoin.
This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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This article was written by
Hi, I am Victor Dergunov! It all goes back to looking at stock quotes in the old Wall St. Journal when I was 16. What do these numbers mean? I thought. Fortunately, my uncle was a successful commodities trader on the NYMEX, and I got him to teach me how to invest. I bought my first actual stock in a company when I was 20, and the rest, as they say, is history. Over the years, some of my top investments include Apple, Tesla, Amazon, Netflix, Facebook, Google, Microsoft, Nike, JPMorgan, Bitcoin, and others.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Additional disclosure: I own Bitcoin.