BackBitcoin is more like gold than a currency
If Bitcoin becomes economically unviable, another cryptocurrency will take its place, or fiat money may continue its reign
Premium
In the seven months since Bitcoin’s price peaked, it has fallen by about two-thirds. But it’s still almost three times more valuable than it was a year ago. So what does the future hold for Bitcoin? There are three scenarios:
One, Bitcoin replaces the dollar (and probably other currencies as well) as the economy’s main unit of exchange (Bitcoin trumph). Two, currency remains the main unit of exchange everywhere except in a few extremely dysfunctional economies like Venezuela’s, but Bitcoin’s market capitalisation remains substantial, and it rises in value over time, occasionally experiencing large bubbles and crashes (Bitcoin as gold). Three, Bitcoin is abandoned, crashing relative to the dollar and never being useful as a payment method for daily necessities (Bitcoin bust).
I have long believed in the middle scenario. Since the total number of Bitcoins that can be created is finite, it is inherently deflationary, meaning it has a positive expected return, like gold. Finance theory implies that an asset with a high expected rate of return should also be volatile, which makes it not very useful as money. No one wants to see the value of their paycheck get cut in half between payday and grocery day. But it also seems unlikely that interest in Bitcoin will ever die out, given its usefulness in the black-market economy. So Bitcoin will stick around, experiencing repeated bubbles and busts, but gaining in value. That is why I still own some Bitcoin.
So far, the Bitcoin as gold scenario has been borne out by data. But Bitcoin is only superficially similar to gold. There are arguments for the Bitcoin bust scenario. One such argument is made by University of Chicago Booth School of Business economist Eric Budish in a new working paper, titled The Economic Limits of Bitcoin and the Blockchain.
All money works via trust. Banks, which certify fiat money transactions, have built up trust over time, so each new transaction is very cheap to perform—to pay someone $1, you just have a bank mark your account down by $1, and the other person’s up by $1. But Bitcoin runs on a decentralised network, so there’s no trusted bank—trust has to be re-established each time there’s a transaction.
The weakness Budish has identified—the inherent cost of repeatedly re-establishing trust under constant thread of sabotage—may make Bitcoin economically unviable. If so, either another cryptocurrency will take its place, or fiat money may continue its reign.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
