2021 Outlook For Bitcoin
Written Oct. 1
The history of Bitcoin is interesting, rapidly evolving, and essential to understanding its future. The first Bitcoin block was mined on January 3rd, 2009. Back then, Bitcoin was a toy that computer scientists and cypherpunks would tinker around with in hopes of establishing a decentralized, global monetary system. The first time bitcoin was traded on the exchange was in March 2010, at a price of $0.003 USD per coin. A couple of months later the first real-life purchase took place — two dominos pizzas, for a price of 10,000 bitcoin. Ten years later bitcoin has seen multiple bull and bear markets with millions of new users, miners, developers, and entrepreneurs entering what can be called ‘the Bitcoin ecosystem’.
This ecosystem is made up of all the markets and traders, all the bitcoin miners who secure the blockchain and obtain new bitcoin, as well as merchants and bitcoin service providers. Perhaps the most important part of this ecosystem is the decentralized group of bitcoin developers. These are researchers who solely focus on improving Bitcoin’s software so that it is a scalable, global monetary system that can be used and further built upon for hundreds of years. Bitcoin’s code is continuously being upgraded. In fact, every aspect of the bitcoin ecosystem is measurably increasing at high rates. New bitcoin users, more accumulation of bitcoin, more bitcoin security, more supporting services show a continuously growing and strong Bitcoin ecosystem.
One of the things that makes bitcoin extremely unique and powerful is that it successfully operates and coordinates millions of people into supporting the ecosystem without any central power, like ahead of a government or a CEO of a company. Bitcoin achieves massive global coordination and security with an uptime of 99.985%, a better uptime than Facebook, Google, or Amazon. Without a central source of power, you don’t have a single point of failure. Like the internet itself, bitcoin is not controlled by anyone and it is practically unkillable. One of the key aspects of this is that no one can thwart the system to enrich themselves with extra bitcoin. Another consequence of no central oversight is that no transactions are censored on Bitcoin. If one pays the right fee the transaction will be approved and settled. Major system changes, such as coin stealing or supply changes, must be agreed upon by nearly all participants, and since such actions only benefit malicious actors, the network will never agree to it. Thus, as per the design, bitcoin cannot be stolen. In fact, it gets harder and harder to get as time goes on. This introduces the concept of the bitcoin halving.
The bitcoin halving is an event that occurs once about every four years where the block reward, the reward miners get for securing the bitcoin blockchain on ~10-minute intervals, is cut in half. The first block rewards were 50 BTC, then 25 and now it is 12.5 Three and a half years from now it will be 6.25 then 3.125 four years after that, and so on until the 21,000,000th bitcoin is mined — no more new bitcoins will ever be mined after this point. Billions of dollars have been spent on bitcoin mining and no one has been able to cheat the system, this underscores bitcoin’s infringeable scarcity.
Halving and bitcoin cycles coincide with bitcoin’s largest financial gains. Shortly after each halving period, a gradual then sudden price increase can be observed. Bitcoiners expect this trend to continue. The simple reason for this is, the demand for bitcoin continually rises over time and the newly added supply lessens periodically. Due to the decentralized nature of bitcoin and its well designed economically enforced ruleset, the only way to acquire bitcoin is to fairly mine it or buy it. Also, unlike gold, when the price of gold rises gold miners can mine more at a higher cost yet still be profitable, this type of increase in the supply is impossible with bitcoin. Essentially, the only thing that can change to reflect increases in demand for bitcoin is the price of bitcoin.
Bitcoin’s third halving took place in May 2020. Contrary to skeptics, there was not a measurable decrease in mining as the reduction in the block reward made mining relatively more expensive. Since the halving bitcoin mining has actually seen a large measurable increase. Unlike the price of bitcoin, mining has basically only gone up. Aside from a couple of small dips associated with sharp drops in the price of bitcoin, Bitcoin’s measurable hashrate has continuously risen. This means bitcoin is continuously getting more secure, more decentralized, and harder to stop.
What does all this mean? In summary, we have a global, digital, un-censorable money system that is decentralized and achieved scarcity in the digital world. The price of bitcoin is hovering around $10,600 during the writing of this article. Proponents of bitcoin argue it has the potential to overthrow Gold and even the US Dollar as a store of value and unit of account, respectively. With a total market capitalization of just under $200 billion USD, this is equal to only 10% of Apple’s market capitalization. So why is the price low? First, let’s discuss the Efficient Market Hypothesis (EMH). The EMH states that assets are fairly priced given all information that is public. Bitcoin skeptics argue that business is constantly evolving, thus stocks incur changing information thus changing prices. They would argue that since future supply information about bitcoin is fully transparent, there is no reason for the price to change much if at all, nor react to the bitcoin halvings. While Bitcoin’s supply issuance information is transparent it is misunderstood by many. Simply put, many people are skeptical of Bitcoin’s resilience, inability to be shut down, banned, or changed and are simultaneous of the opinion that, despite being the best performing asset of the last decade, bitcoin will not continue to outperform the majority of assets.
I believe the price of bitcoin will rise dramatically over the next couple of years. This will repeat bitcoin’s past two cycles. Some analysts that have modeled bitcoin’s price specifically on its scarcity have suggested a price upwards of $300,000 in the next several years. The case for this has been described by the constantly growing adoption, usage, and accumulation of bitcoin as bitcoin gets more scarce and more desirable.
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