Bitcoin (BTC) has exceeded $11k per coin this week and I find this to be madness. Here is my prediction on the future of BTC, although I cannot predict timelines.
BTC is like any other good or service in terms of basic economic principles. The price is based on supply and demand. On the surface, the rising price of BTC over the last year (950% gains I believe) would mean that there’s a heavy demand of bitcoin and lots of people are buying it as a investment. I disagree.
BTC can be obtained either by buying it off an exchange or mining it. Over time, mining BTC becomes harder and more expensive in both time and electricity. Over the first few years of BTC, it was significantly easier to mine than it is today. Thus, over the last year, supply has been constrained relative to the first few years. This will push price up, even if there is no increase in demand, because flat demand with decreasing supply will result in higher prices. Thus, the the rising price does not necessarily mean lots of new people are “demanding” it.
BTC can be purchased for either short-term or long-term use. An investor would purchase for long-term whereas a casual user would purchase for short-term. As an example, suppose Mary wants to purchase something with greater anonymity than a credit card. She finds a seller that accepts BTC. The price of the good is denominated in US Dollars (USD) not BTC - primarily because there’d be no market if the seller denominated in BTC since the price would have gone up 950% over the last year and Mary wouldn’t spend $1,000 on a single pizza. The price of BTC does not impact the price of goods or services purchased with BTC.
Thus, Mary wants to buy the product and she converts her USD into BTC. It makes zero difference to her whether bitcoin is $11k a coin or $11 a coin. The conversion of USD to BTC occurs and she transfers the BTC to the seller. The seller receives the BTC and it doesn’t matter to him whether BTC is $11k or $11, he immediately converts it into USD. Neither Mary nor the seller are maintaining a long-term storage of BTC. Mary has no interest in it other than making purchases with anonymity, and the seller needs to hedge against BTC fluctuations since he uses USD to pay his rent, food, and to buy the underlying product that he sells. Assuming these transactions happen relatively quickly, we won’t see a net increase in demand of BTC because the BTC is immediately re-sold by Mary’s seller back into USD.
So why is BTC rising so high? I suspect there are a handful of early adopters of BTC who bought in at <$300 per coin and are manipulating the market through straw transactions with themselves. This gives the illusion of greater demand and artificially raises the price. As an example of how this might work, suppose I cornered the market on SNES Consoles that Nintendo put out this year. I was able to get 80% of all units.
I then go on eBay and list the consoles for sale and create shill accounts to bid them up. I complete auctions, selling the SNES consoles to myself, through shill entities, and make it appear that people are willing to pay $500 per SNES console that retailed for $100 before I bought most of them.
I might then be able to find some sucker to come in and tell him “I happened to get a shipment of SNES in. I’ll sell them to you for $300 and you can make a $200 profit. Look at all those completed auctions that sold for $500” And then I find a few hundred suckers to buy a few dozen consoles off me each at $300 for the purposes of reselling.
And I might even go in and buy some from them using my fake accounts, to make it appear demand is great for these consoles. I go to the suckers and say, “Wow, you just made $200 profit on the first few units! Good news, I got a new shipment in, and can sell you more, but I need to charge $400 this time, but don’t worry you’ll still make a $100 profit, or you can raise the price to $600 and still make the $200 profit.”
Of course, I lose some of my money by having to buy the consoles at an artificially high price from the first batch of suckers. And I lose money to eBay seller and PayPal fees (14% total) for every shill sale I make to my fake entity when I am initially pumping up the price. However, I make that back in multiples over time as I attract more suckers in to buy my SNES consoles to flip for profit.
Now imagine instead of SNES consoles which have a limited desirability and market, I pick something else that everyone in the world needs to live their lives - it’s a new form of money (BTC). Not every one of the 6 trillion humans on earth need BTC, but they all need money and BTC is a new form of money, so the target market is now every living human in the world. And imagine instead of 14% fees to eBay and PP to make shill transactions, imagine I could get those down to below 1% fees.
And also imagine that I’m best friends with Elon Musk (who founded PayPal) and whoever founded eBay. And I get them to give me special accounts where I pay almost zero fees, because they’ll benefit by me doing the ponzi scheme by increased traffic to their website.
The BTC exchanges were all started by early adopters who are friends with the big hitters, or are the big hitters themselves that are manipulating the market. So they’re able to make it appear that there’s a huge demand of people wanting BTC when it isn’t there. And it cost them almost nothing, since they make sham-sales of BTC to themselves at near 0 transaction costs. In the SNES example, it would be like if you had 80% of the world’s SNES consoles before Christmas and you were able to bid up your own auctions because your best friend is Ebay and you could even end auctions and show them as completed/sold at $500 each, but without paying a final value fee nor PP fees. There’s virtually no reason not to do it, since it costs you nothing and it raises the value of your inventory, at least in an illusory way.
Here’s how I predict this will shake out. BTC has gotten so crazy high over a short period of time which happens to coincide exactly with a stock market bubble and a real estate bubble and likely a bond bubble, which means there’s a lot of cash to go around. Stupid assholes will see this, and they will buy BTC at $11k, thinking it will go up to $50k. These are the suckers.
The heavy hitters will start cashing out their positions and selling to these suckers. Instead of selling the same BTC to themselves and pumping up the price, they’ll complete transactions to the suckers and over a period of time (perhaps a few months), the heavy hitters will be all out of BTC. And only the suckers will be holding.
Without the heavy hitters and their friends running the exchanges to manipulate prices, the price will stagnate and the suckers will be confused that their amazing investment isn’t going up 950% per year. Some of the suckers will sell, which will lower the price, due to supply and demand. This will cause fewer new suckers to enter the market, reducing demand further. And over time the rest of the suckers will sell.
If this coincides with a pop of the stock market, real estate and bond bubble, then the suckers will pull out much quicker, since they’ll see their 401k lost 30% and their house is underwater, and they’ll need to cash out of BTC, even at a huge loss, just to pay bills.
There’s another group of BTC investors that are relatively early adopters. They bought in at $300 to $1k per BTC. I have a handful of friends in this category and each one tells me, “I’m not selling, even at $11k because I want to see how high this can go. Let’s ride it out and either I become rich, or it drops to zero, but I paid relatively little so I don’t care”
I suspect these early adopter investors will watch BTC plummet 50% in a short period of time as sucker-based panic selling ensues, and these early adopters will possibly decide to cash out at well, triggering a further decline.
Meanwhile, governments will be stepping in to regulate BTC, impose taxes, and identify ties to drugs/terrorism. Large accounting groups will create forensic auditing capability to analyze the blockchain (which stores every single BTC transaction ever made, all in public record) and be able to identify people’s transactions based on new forensic tools. This will cause the casual users of BTC to flee to different cryptocurrencies that are lower profile. Remember that the casual user isn’t bound to BTC and doesn’t care what the value is. They are buying it, immediately transacting with it, and the person receiving it is immediately converting back to USD (or their local currency). There’s nothing keeping them to BTC and once the government targets the biggest cryptocurrencies, then casual users will switch to the other less known ones.
Ultimately, we’ll have a bunch of different cryptocurrencies on the market, none of them will be particularly valuable to buy and hold long-term, and the only people making money on them will be the exchanges that take a small percentage of each transaction between casual users.
In the long-term I expect a gold-backed cryptocurrency to exist whereby the exchange holds the gold in a vault in allocated storage. There’s a finite number of “coins” for this currency and all of them already exist. And the exchange pairs the coins to the gold at some fixed rate to start, and then the value of the coins floats with the value of the gold. If I ever see this occur in Switzerland, I’m jumping on it, since their privacy and banking laws are amazing.