Bitcoin as a peer-to-peer electronic cash system cannot be allowed to survive. The destablizing effects of this currency on capital markets threatens to be enormous.
At the time of writing, one bitcoin is already worth over $2000, and it just keeps growing. What’s worse is that it’s clear, from observations of the currency over the last 8 years, this growth in value is exponential in character. To those of us that understand the effects of this growth, it’s clear that Bitcoin will become impossible to stop in just a few short years unless something is done about it right now.
For many hundreds, even thousands of years, one simple secret has been effective in subjugating individuals and even whole countries to the force of those who understand how to leverage other people’s money to gain powerful capital positions. Obviously, as an enlightened individual, you will understand that this secret is merely the inability of the human mind to appreciate the impact of exponential growth, or more specifically, compound interest.
What’s fascinating is that most individuals will usually reject the reality of this impact even if they are presented with the hard numbers showing its effects. This curious reality accounts for the fact that we can use a relatively small interest rate to get others to pay for a loan twice or three times over if we are able and prepared to wait, and will be able to use the capital return to multiply itself again by simply selling more loans.
A modicum of initial capital, patience, and a firm trust in the exponential effect is really the key to it all.
Let’s apply our understanding to the problem at hand. We now have over 3000 data points on the price action of bitcoin, in the form of daily closing price.
Broken down by year, the average value and average growth per day looks like this:
- 2009: $0.00/0.00%
- 2010: $0.06/+0.88%
- 2011: $6.54/+1.23%
- 2012: $8.47/+0.34%
- 2013: $188.79/+1.43%
- 2014: $525.33/-0.17%
- 2015: $271.83/+0.16%
- 2016: $588.76/+0.25%
- 2017 (to date): $1211/+0.650%
If we calculate the average daily change in the value of bitcoin since its inception in 2009 up to the present, it has been a staggering +0.52126%.
It’s clear that given the current value of bitcoin, and its apparent capacity to maintain positive daily growth, we can use the above numbers to project forward to the emergence of a bitcoin which has a value of $1,000,000.
Without making any further assumptions, the million dollar bitcoin will arrive on or around August 13, 2020.
Given current evidence, the end-of-year value of bitcoin for this year, and going forward a further 5 years will be:
- 2017: $6,906.60
- 2018: $46,068.41
- 2019: $307,285.77
- 2020: $2,060,343.08
- 2021: $13,742,910.71
- 2022: $91,668,031.51
It also shows that in 5 years time, if nothing is done, then we can expect Bitcoin to be more important than any other payment mechanism on the planet; By end of 2022 there will be over 19 million bitcoin in the money supply, with a potential market capitalization approaching 200 trillion dollars.
Even if we were to reject the evidence before us and assume that bitcoin is currently overbought, and that it cannot maintain the historical level of growth, this conservatism is only delaying the inevitable for a few short years:
- Estimate value $2,000, expect growth 0.4%, $1M bitcoin: Aug 30, 2021
- Estimate value $1,500, expect growth 0.3%, $1M bitcoin: Jun 5, 2023
- Estimate value $1,000, expect growth 0.2%, $1M bitcoin: Nov 13, 2026
Unfortunately, the characteristics of this system isn’t what we’d want at all. It’s ultimately deflationary; It empowers casual adopters with capital control; And, worst of all, it denies leverage by third parties of the value they hold.
What can be done to avoid this catastrophe? We obviously need to retain the ability to benefit from their holdings by the traditional method of exercising capital advantage. After all, it’s important that control of capital remains in the correct hands.
Well, the first thing to do is to constrain throughput. If you can’t transact, then bitcoin can’t possibly work as a currency at all. Fortunately, this is easy to achieve as the current software enforces a trivial 3-4 TPS throughput and has maxed out the network at levels way below those necessary for continued growth. This is greatly assisted by the inability, or unwillingness, of any of the system actors to remove this limit. The Bitcoin community appears to be in an interminable deadlock, so this constraint could by itself, be sufficient to achieve our aims. Fortunately, there appears to be support for a solution called “Segregated Witness” that would ensure that the network throughput will continue to grow slowly and stay below 10TPS for quite some years to come.
However, all this may not be a sufficient or fully reliable way to stop the Bitcoin system.
Another related approach, and one that would be recommended in addition to throughput constraints, would further ensure the desired outcome. This would be to kill general adoption. This is easily achieved by leveraging these throughput limits to price out the lower end of the market by using fee schedules. Ideally, these fees would be sufficiently high to eliminate low value transactions, but be beneficial to those of us that wish to move large capital volumes. Fortunately, in Bitcoin, fees are calculated by the transaction data size and not by the value being transferred. This, of course, plays perfectly with the requirement that capital leverage becomes the key factor and is able to destroy any remaining “currency” aspect of this system.
There is also a great opportunity here, if we are able to use the above strategies to effectively commoditize the token in this system as a traditional asset. We merely need to build a more traditional financial second layer on top of the commodity. There’s already a foundation with a proposal called the “Lightning Network”. This has great acceptance in the community, but crucially requires that the value is backed by assets on the Bitcoin network. So, initially, we have to mobilize the working capital to back that up. This is necessary to properly centralize the ownership of user accounts and provide the appropriate capital controls. We can then simply repeat the history of a gold-backed, commodity-based currency and create a global fiat currency that remains in the right hands.