Email of the day on why bitcoin can only go up
Comment of the Day

December 15 2017

Commentary by Eoin Treacy

Email of the day on why bitcoin can only go up

I think it's easy to lose sight that Bitcoin was never intended as an investment vehicle but rather a digital currency. Hard money advocates should appreciate the cap on the total number. Certainly, until there is a much wider acceptance as a currency and more people own it, there will continue to be extremely high volatility. However, since there is a limit on the total number of bitcoin and more people will want to own some, isn't it natural for it to rise in price? The pace has been astonishing but maybe we are really only in the early stages. By nature, it must go higher IF it is to be an alternative currency whose supply can't be increased (like fiat currencies are)

Eoin Treacy's view

Thank you for this email which I suspect will be of interest to many subscribers. Once upon a time a unicorn was a fabled animal with quasi-magical properties, today it is a fast-growing company with valuation of $1 billion. Friends used to be people you shared time and experience with, today they are people you show photos of yourself to. A snowflake used to be something that fell from the sky, now it is a pejorative term for sensitive people. A trigger used to be associated with guns, now it is an excuse for histrionics. Miners used to be hardy souls who engaged in back breaking work to extract ore from the earth, today they dust-off and fix computers solving puzzles. There was a time a currency was something you could rely on as a medium of exchange and my how that definition has been stretched.

Words have power and it is important we are not blind to the effect they have on our comprehension of a question. Precious metal investors have long highlighted the difference between currency and money. Money is a store of value while currency is a medium of exchange backed by governments. The difference between the two suggests proponents of the limited supply argument should refer to crypto-money instead of cryptocurrency. However. the problem with thinking of bitcoin and other cryptocurrencies as hard money is the low barrier to entry.

If bitcoin for example where the only immutable cryptocurrency, the limited supply argument would hold but the barrier to entry in the digital world is so low that anyone can create a cryptocurrency, as the splurge on ICOs this year highlights. For example, if Hermes were the only producer of handbags in the world and there were only ever going to be 1000 of them we could anticipate the price of these commodities would rise in much the same way as a Da Vinci painting. The sheer number of ICOs this year and their dependence on already existing platforms coupled with the numerous forks, which double supply of existing cryptocurrencies, make a nonsense of the limited supply argument.  

Cryptocurrencies were arranged as a payment mechanism for miners so they would have an incentive to continue to sustain the system. Therefore, cryptocurrencies reflect faith in the sustainability and value of the network, nothing more.

Let’s take a real-world example, the majority of my income is denominated in Pounds and I spend US Dollars. I was unhappy with the exchange rates I was getting at banks so I opened an account with a peer to peer currency trader; Currencyfair. Spreads are considerably tighter than available at banks and I pay $4 per transaction regardless of size. There is no need of a blockchain, or cryptocurrency, no more volatility than in the regular FX markets and the system has served me well for years. Today execution times for processing bitcoin ranges from hours to days and costs are considerably higher than $4. Where exactly in the value for aboveboard conventional transactions?

Blockchain is certainly useful for managing supply chains where there is still a lot of paperwork with bills of lading and customs etc. This is still in the very early stages and the near certainty attached to the growth of the market suggests a lot of good news has already been priced in. what happens to cryptocurrencies when private blockchains predominate?

The bottom line is that every mania is characterized by a contradiction which defines the bullish argument. The belief that bitcoin can only go up because of limited supply is the contradiction that defines this market. Nothing only ever goes up.

Nevertheless, these are academic arguments as long as Bitcoin’s price continues to rise. It hit a new high today and upside follow through next week would reassert the uptrend. 

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