It’s time for a retrospective on Bitcoin, released 11 years ago this
January. What have we learned? What are the prospects for the future?
I was a slow convert to the very idea that Bitcoin could work. This
is because I had seen so many failed attempts in the 2000s to create an
independent money for the Internet. I had concluded that it could not
work, so when Bitcoin came along I had already ruled out the idea that
it would amount to something. What I had overlooked is that previous
attempts had failed for specific technological reasons – fixable
When I came around, the exchange rate of dollar to Bitcoin was $14 to
1BTC. It was upon using it – the speed and awesome power of ownership
of money outside the government and banks – that I saw that it was
likely undervalued. If this was real, the value could be much higher.
Thus did I enlist among the early bulls. That was then, and times
have changed. For nearly two years now, we have not seen much in the way
of upward movement of this currency, as glorious a technology as it is.
The “to the moon” doctrine of the early adopters does not seem to be
happening, which is not to say that it won’t happen in the future. Maybe
the HODLers are right and they will all be rich in the future.
However, there are five solid reasons to think that the doctrine
needs some adjustments in light of changes to the technology and to
market conditions that have gradually unfolded over 10 years.
Consider the core data.
Transactions per day are at 2016 levels.
Exchange volume is at 2017 levels.
Wallet use is at an all-time high but most new users come in through exchanges and keep their money there, which belies the hope of disintermediated money.
Some additional considerations follow.
1. Underpriced market assets are grounded in information asymmetries.
Profits come from possessing valuable insight that others do not share,
and acting on that insight. These asymmetries can be large or small.
They were very large in Bitcoin from 2009 to 2015 or so. Some of us were
convinced while vast numbers of even highly sophisticated people were
sure that it could not, and the results were impressive for those who
took the risk.
We are now eleven years into this, and the skeptics are now in a
small minority. That blockchain technology is awesome is a given. If
there were vast asymmetries in knowledge in the past, those have
dissipated over time. The process of price discovery might have settled
into a confident equilibrium: this stuff is cool, and useful for some
purposes, but it cannot be a money for the world. It’s a given that
there is no “true price” for Bitcoin but it is also true that the days
of astonishment that it worked at all are now settling into the
widespread awareness of why it works today.
2. At the same time Bitcoin was launched, so too were released some
other impressive payment technologies designed to reduce the price of
transactions and make accepting credit cards vastly easier. Back in the
day, small merchants had a very hard time accepting credit cards. Thanks
to technologies like Square, even a lemonade stand can accept them
using a smartphone, which was also launched around the same time. The
near-universal use case for Bitcoin was once obvious; apart from
specific demographics and interests, the case for broad public adoption
is no longer clear. To be sure, there remain vast and important uses for
crypto for permissionless remittances and for allowing the unbanked to
move money (one of the booming facets of the crypto-asset sector are
ATMs), but that will remain true regardless of market valuations.
3. The old pitch for Bitcoin – that it made payments fast, cheap, and
permissionless – had been dramatically changed as adoption increased
and the portals couldn’t keep up. Permissionlessness still survives but
that is not true of fast and cheap. By 2017 it became very obvious to
the world that though Bitcoin is wonderful, it is not very practical for
payments as compared with legacy systems that had vastly improved.
Forks emerged to fix that problem but because the crypto sector is so
vast, none could develop the network that Bitcoin obtained as the first
mover in the space. Among those crypto innovations have been stable
coins that operate as settlement banks. Those in the market for
stability will find these more useful than old-fashioned crypto. And let
us not forget the greatest lesson of monetary history: it’s the use
value of a currency that is its value (there is no such thing as
4. Bitcoin came into a banking world that was dilapidated and
anachronistic. But banks and processors felt the heat and adapted in an
unusually quick period of time. Now we have peer-to-peer payment systems
working within the regular banking systems. We have Venmo, Zelle,
Apple, and Google, and many other systems, and, for all their
limitations, they are getting better by the day. For that matter, the
Fed itself has announced its own plans for a blockchain-like P2P payment
system. Competition works. Bitcoin made a major contribution to
lighting a fire under the mainstream industry. But that innovation
necessarily affects Bitcoin’s prospects.
5. Let’s just say – as many industry experts say to me in private –
that the days of endless price increases of Bitcoin are over, and that
it settles into a stable price and even gradually falls to 2014 or 2013
levels. That is not beyond the realm of possibility. Nothing about
markets are perfectly predictable, and there is nothing baked into the
nature of Bitcoin that guarantees any particular future. A major problem
hits the essence of money itself: the use case is everything and
adoption is the path toward making any money mainstream. The trends here
do not look brilliant for Bitcoin.
My own belief is as follows. We now know that a new global currency,
privately produced and managed, is a technological possibility. That is
not going to change. Once the knowledge is there, no one can make it go
away any more than anyone can make algebra go away. These private
currencies have proven themselves superior to legacy systems. In time,
they will be competitive, and probably within our lifetimes. Which one
of the tokens it will be is impossible to say. But it is not beyond the
realm of possibility that it will not be any of the existing tokens
listed at CoinMarketCap. It could be something else entirely – an Amazon
coin, for example.
The great lesson of Bitcoin is the need for humility in market
prediction about money. No one knows enough to say what will and what
will not work, what will and will not become dominant or even viable.
There is no substitute for looking out the window and using whatever
knowledge one has to make the best possible interpretation of events.
Bitcoin could still go to the moon. But there are plenty of reasons to believe the opposite too. The most likely immediate future is that Bitcoin will continue brilliantly to service a special type of need. Based on the feeling I get from existing market conditions, I’m ever more convinced of the need for humility here as everywhere in economic affairs.
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