The $5,000 Bitcoin: The Philosophy

The $5,000 value that I’ve used in my title is somewhat arbitrary. It serves only to capture your interest using a value which (I hope), appears both astounding and realistic. The true value that I assign to Bitcoin is infinite, not simply for its financial and monetary value, but also for its humanitarian value.

In large part, I attribute my Bitcoin mania to a simple juxtaposition between Bitcoin and our traditional system of fiat: Bitcoin rewards only good actors. Obversely, the current financial system rewards criminal behaviour with vast amounts of wealth. This may seem like a biased one-sided statement but the evidence is in plain sight. Wall street; lobbyists; cronyism; drug trade; arms trade; big oil; big pharma; the list is endless. To quote Leonard Cohen, “Everybody knows”.

All this being said I will try to avoid using my personal distaste toward established systems as an argument for value in Bitcoin. Rather I will focus on Bitcoin’s economic fundamentals and contrast these with the weak, unstable, unsustainable state of the global economy.

So, to elucidate my complete and utter infatuation with Bitcoin let’s begin by defining value.

Value

Value, plainly put, is the market’s collective perception – or delusion if you prefer – for what a unit of some object is worth. This delusion manifests itself in the form of willing buyers and willing sellers who come to an agreement known as price. Our perception is also based, somewhat, on probability: If $1 buys me an apple today, I can be quite certain that $1 will (probably) manage to buy me another apple tomorrow. Over time markets have developed and become increasingly complex; we now have forex markets, stock markets, bond markets, futures markets, etc.. yet, no matter how complex these may seem they are all primarily a reflection of the cumulative perception of its participants.

It should also be understood that value is completely subjective. I love Picasso paintings and would sacrifice more than just money to own one; you may find Picasso’s art to be odd, unattractive and altogether worthless. Hence, there exists no ‘true’ value to a Picasso painting, only subjective value. Money is slightly different because it is a medium of exchange. The value of money is reflected in its purchasing power. Money also has the illusion of being uniform and ubiquitous within certain borders, thus it appears that certain goods have a ‘true’ value. This, however, is also false, and can be proven simply by purchasing a can of Coke in Sandton then driving 45 minutes down the M1, into Soweto, and purchasing another can of Coke.

A more apt definition of value is: “the instantaneous price agreed between buyer and seller for any particular good/service”. Exchanges work to bring together buyers and sellers and reflects value using a spot price.

At this point I hope we can agree that:

  • Value is subjective.
  • Value is found by considering an infinite number of influencing factors.
  • The market’s value is reflected as a ‘price’.
  • Price is simply the most recent agreement between any buyer and any seller.

Bitcoin Fundamentals

How does value apply to Bitcoin and how has Bitcoin gone from unknown and worthless, to $1500+/BTC, and how will we get to $5000?

Growing up Crypto in a Fiat world – Year 0 to 8

Screenshot 2017-04-15 23.33.44.png

Year Start End Key Benchmarks
2009 $0 $0 No exchanges or markets yet.
2010 $0 ~$0.08 On 22 May 2010, Laszlo Hanyecz made the first real-world transaction by buying two pizzas in Jacksonville, Florida for 10,000 BTC (~ 228,000,000 ZAR or $17,600,000 in today’s value).
2011 $0.08 $4.46 Between Feb and March 2011 Bitcoin achieves a stable parity (1BTC:1USD) against the USD.
2012 $4.46 $13.17  Gains minor media attention.
2013 $13.17 $727.79 Nov – Dec 2013 period of massive volatility. Peaked to over $1000 in Nov/Dec.
2014 $727.79 $315.91 Over-excitement & crazy speculation sent the price to all-time highs in 2013. > 50% devaluation during 2014 reflects the market’s adjustment to a more reasonable price.
2015 $315.91 $427.04 Period of stabilisation.
2016 $427.04 $955.73 Consistent appreciation.
2017 $955.73 Current Price (14 May 2017) ~ $1760

Current Market Capitalization = $28 Billion. http://coincap.io

Bitcoin is no different from any other currency.  It will derive its value in exactly the same way that anything else derives value. But, the fundamentals which underlie the system is where Bitcoin vastly differentiates itself.

Most importantly Bitcoin is:

  • Decentralized.
  • Credit-based.
  • Scarce.
  • Transparent (with respect to the Blockchain not user identities).

These 4 qualities are completely juxtaposed to the central banking system of fiat currency. Fiat currency is:

  • Privately controlled.
  • Issued as debt.
  • Widespread.
  • Highly opaque. Filled with regulations, hidden rules and hidden fees.

These fundamentals work to give value to Bitcoin in three key categories: security, stability & liquidity.

Security

The Blockchain provides security. The Blockchain is an elegant and organic digital network that has sparked a revolution in governance and record keeping. It has achieved a decentralization that is unmatched in any man-made system ever created.

Bitcoin_Nodes.png

Live map (full nodes). > Live map (miners)

The Blockchain is immutable and incredibly resilient – thanks to its ingeniously devised incentive structure. To fully trust that Bitcoin is secure and immutable, requires a deeper understanding of the Blockchain and the underlying dynamics. Once you can appreciate the mechanisms at work and the cryptographic protocols that users, nodes, and miners must adhere to, to participate, only then can we fully recognize the strength and sovereignty of Bitcoin.

These protocols are precisely why it is near impossible to control, manipulate or centralize Bitcoin. Without widespread support and consensus (this threshold is currently set to ≥95%) no changes can be made to the Bitcoin protocol. This is precisely why it is near impossible for hostile actors to fork the network. This consensus needs to come from developers, miners, nodes, businesses and individual users, thus ensuring the well-being of all stakeholders and prioritizing the well-being of the entire ecosystem over and above any individual greed or desire. This assertion is being thoroughly tested by the current “block-size debates” and Bitcoin continues to teach us that we require consensus if we are to progress as a community.

(Later posts will dedicate more discussion on the possibility of a 51% network attack.)

Beyond the blockchain, daily security and the security of your personal digital wallet also requires some technical understanding to fully grasp the security of the system. With this understanding we will see that it is as safe, if not safer, than normal digital banking and paper money wallets.

The instances where coins have been lost can predominantly be attributed to human error (forgotten passwords, recovery phrases, storage error), or from destroyed hardware (fire, or some other method of loss). The instances where hackers have stolen Bitcoin have always been against unsecured centralized exchange servers – never the Blockchain.

Legality is another aspect that needs to be considered under the heading of “Security”. This is trending incredibly positively for Bitcoin. Japan, one of the largest economies in the world, has completely legalized Bitcoin where it is now recognized as legal tender. Australia has followed suit and as of July 2017 Bitcoin will be treated as legal currency and is no longer subject to double taxation. There are many reports that Russia will be the next major territory to follow in this vein.

Very few territories have explicitly criminalized Bitcoin (bar a few outliers). Predominantly, Bitcoin remains unregulated but is moving overwhelmingly towards legal recognition. A full list of the current legal status of Bitcoin in each nation can be found here (scroll to the bottom).

Stability

Stability is an interesting trait in the case of Bitcoin. Being so young, so revolutionary and technically difficult to comprehend it is understandable for it to have had a turbulent infancy and for it to continue to experience periods of high volatility. However, the emergent trend is that as adoption increases, understanding increases, then trust and acceptance increase, and with that comes greater stability. Bitcoin’s open-source nature plays an important role in garnering trust and understanding. Comparatively, how transparent is our central banking system? How many matriculants or even graduates know where our money comes from? How much say does the common citizen have to influence central banking decisions, as compared to big business, big banking and government?

This steady decrease in volatility can be likened to a newborn baby. Babies go from calm to screaming in a mater of moments. As the newborn grows and gains greater and greater control over their body, mind and surroundings they grow into a responsible and strong adult – a stable cryptocurrency.

Another facet of stability which is important to consider, is that Bitcoin is largely immune to real world shocks (meaning political, environmental or socially destabilizing events). In fact in many cases its value is inversely affected. Governments and leaders can institute draconian laws (like India implementing demonetization) or act unilaterally against the interests of their people (such as Zuma firing an entire cabinet’s worth of ministers) or blindly destroy people and planet (like Trump dropping MOABs), or financial institutions stealing from the many to enrich the few (like the Troika burdening Greece with predatory loans). All these events will only serve to drive more and more people out of fiat currency and into Bitcoin.

As these ‘shocks’ take effect investors will seek alternatives. If but a tiny fraction of the world’s capital flees traditional investments vehicle and adopts crypto, the market cap is set to rise dramatically. A $1-trillion market is considerably more stable than a $25-billion market.

Take a look at the size (as of December 2015 – the article is slightly dated but still relevant) of every financial market in the world – all the world’s money and market’s in one visualization. If a mere percentage of those markets divert their capital into cryptocurrency it will result in a significant uptick.

Liquidity

Bitcoin is new money, and money only has value insofar as the goods and services that it can purchase, its ease of use and whether or not it can be a safe long term store of value. Bitcoin is certainly not yet the worldwide instantaneous currency that it could potentially become, but, by all measurements of liquidity, Bitcoin is trending upwards. Constant improvements and efforts are being made to improve the Bitcoin protocol to see Bitcoin reach its full potential, to become the chosen worldwide currency.

Entry into Bitcoin is now easier than ever before and is possible with almost any fiat currency on earth. There are many exchanges and OTC dealers continuously buying and selling Bitcoin. Trade volumes are at all time highs.

Development and innovation is another factor. User friendly wallets, exchanges, simple payment solutions are all continuously being improved, upgraded, made more secure, more user friendly and simpler to understand. This leads to increased adoption and makes merchant acceptance possible on a large scale. Soon we’ll be able to buy our groceries as easily as we do with Cash or Card today.

Predicting the Future

Just as it appears inconceivable that the moth will one day metamorphose into a butterfly or that the acorn will grow into an oak tree, Bitcoin – as improbable as it may seem now – will certainly usurp all fiat currencies to take its rightful place as our worldwide currency.

Bitcoin offers us a total paradigm shift, however, I believe that it is critical that the two systems operate in parallel with one another for the foreseeable future. If our current system suffers a major collapse then instead of a gradual and civilized transition into crypto we will likely be thrown into some form of mayhem and humanitarian crises. Gradual, educated adoption is a far better route than market panic and uncertainty.

Fiat currency must act as our on-ramp into Bitcoin. It is still necessary for the vast majority of daily worldwide economic activity and can operate very productively alongside cryptocurrencies. Bitcoin cannot exist in a vacuum and requires old money in order to give it context as our new money.

As economies shrink, capital will flow out of traditional investments and into cryptocurrencies. The slower this transition, the better educated new participants will be, resulting in a more stable crypto market. More time also allows for better 2nd layer applications to be built, making the entire ecosystem safer and easier to use.

Unfortunately, one still needs to assess the global climate when making predictions on a macro-economic scale.

By my evaluation the probability of sudden long lasting shocks tends toward certainty. Impending war (take your pick: USA vs China, India, Russia, Syria, Korea) coupled with existing wars (overt: Iraq [oil] & Afghanistan [opium] & covert: Latin America, South America, The Pacific, Africa, Middle East) will create massive inflationary pressures on the US$, not to mention the humanitarian, social and environmental destruction that these wars leave in their wake. All this instability will accelerate the pace at which capital flows into crypto.

Faced with uncertainty, when seeking safety and stability, the world’s investors will turn their attention and commit their resources to Bitcoin. Structurally, the Blockchain is 100% secure, however, the market itself is not immune to irrational behaviour. Market sentiment and investor panic are human traits that can override the fundamentals in any market. As evidenced by the 2013 bubble, if price appreciates too quickly Bitcoin becomes vulnerable to entering another short-term bubble. Despite this (and I predict many more Bitcoin bubbles), Bitcoin will ride the wave and emerge stronger as it has always done throughout its young life.

Fundamentally, Bitcoin is safer than any other asset, commodity or currency, and with each passing day stability & liquidity are improving exponentially. It makes logical sense that citizens will gradually make the switch away from fiat and into Bitcoin. This will be our future, we should embrace it today.

Approximately there are only ~15 million holders of Bitcoin. What do you think will happen to price when 100-million people demand Bitcoin, or 1-billion, or 7-billion?

Why Bitcoin and not some other Crypto?

I often get asked: “ok, I like the idea of crypto, but why Bitcoin? Why won’t another crypto overtake it one day?”

Two vital reasons: Bitcoin’s Blockchain and its use-case.

Firstly, Bitcoin is money, a worldwide currency. Alternate cryptos are all derivatives of Bitcoin which now acts as the unofficial reserve currency of the entire crypto landscape. It is the most liquid, has the most real-world utility, is the most well-known, the most contributed to, most mature, the most tried, the most tested, and the most stable crypto in the world. New cryptocurrencies should be referred to as tokens and not as currency.

Secondly, Bitcoin has the most secure Blockchain and has achieved the greatest degree of decentralization. Bitcoin’s organic propagation is unlikely to ever be replicated. Starting with Satoshi’s single CPU, and spreading to thousands and thousands of nodes worldwide, Bitcoin flowered completely naturally. The result of this is an incredibly robust decentralization unmatched by any other crypto.

The simplest indicators of Bitcoin’s dominance is market capitalization & price. Alt-cryptos pale in comparison.

This is not to say that all other cryptos are completely useless. Many have created some incredible systems and will be around for a very long time. Be vigilant when considering the 1000’s of alt-cryptos. For every useful token there are another nine looking to scam naïve investors. Always consider this: what use-case do they offer? And, what events could possibly transpire that could lead it to surpassing Bitcoin as the #1 cryptocurrency? My answer to the second question is unequivocally, “nothing!”.

A Final Thought

Hindsight is our gift and our curse. The incredible rise of Bitcoin could not have been seen by many (regardless of the underlying fundamentals – markets rarely react fast on fundamentals). Through its early years in obscurity to the insanely volatile periods, few would have had the guts to buy early and hold out for the $1000 mark. Yet here we find ourselves and $1500/BTC seems self-evident. Similarly so, a $5k, $10k, $100k and even a $1-million Bitcoin will suddenly appear self evident.

Again, I believe the nominal value is somewhat arbitrary when compared to the social value of Bitcoin, however, price is still very important because it acts as our scorecard in the game we play known as ‘the economy’. The broader point that these price prophecies are trying to convey is that we will eventually reach a tipping point – a total systems shift. The timing of this is impossible to predict but it certainly will come, and will come as a result of a psychological shift in society’s thinking and its understanding of money. As a social construct, Bitcoin is the most fair and democratic money ever created. Our tipping point is simply the moment when the people of the world decide to choose Bitcoin over the Dollar.

Tracy Chapman sings prophetically of this tipping point in her song “Paper and Ink”.

The lyrics read: “money is only paper, only ink, we’ll destroy ourselves if we can’t agree”. Government money has pushed us to the brink of destroying ourselves – Bitcoin offers salvation. Bitcoin is a system of money contingent on consensus. Without agreement we will not progress.

Chapman’s genius extends to other social issues beyond money. She has a remarkable ability to succinctly, and beautifully convey social attitudes with a compassionate understanding of the psyches of both the oppressors and the oppressed. Chapman’s parable on gun violence, “Bang Bang Bang”, is a stunning example of this.

Old money is a divisive force. It is dishonest & corrupt, its value diminishes over time and it needs to be violently and forcefully imposed on us. It never brings out the best in human nature, only our worst.

Bitcoin is a public consensus. It is where we debate, argue, develop, innovate, collaborate and finally agree as a community. Bitcoin offers us fast, transparent verification from an incorruptible, immutable ledger – the Blockchain. The world will soon awaken to these facts. When it finally does, we won’t need an ‘expert’ to guess the effect this will have on price.

 

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