What’s the Future of Bitcoin?

Jacob Harper  |

Equities.com started covering bitcoin extensively in the wake of the Silk Road breakup on Oct 1, when the digital cryptocurrency was trading at around $110 a bitcoin.

Over the next five weeks, we detailed what it’s like for the average investor largely ignorant of bitcoin’s workings to learn about, invest in, and ultimately sell a bitcoin.

We though, initially, that would be that, and the currency would stay more or less an interesting, albeit obscure phenomenon. But since we “got out” of bitcoin investment, the value increased even more, on Nov. 6 breaking $300 a bitcoin, and media coverage of it has increased exponentially. Not tethered to pesky physical realities, as long as speculators keep pumping it there is really nothing to stop bitcoin from appreciating even more.

The anti-inflationary feature of bitcoin (the amount is fixed, and “mining” has slowed to a relative crawl”) keeps the price from deflating. And in the last few weeks that deflationary tendency has kicked into full gear. Some say bubble, some say just the beginning.

Bitcoin is a vastly interesting phenomenon, or, as Equities’ Michael Teague put it, “an experiment so experimental that we don’t even know what it’s about yet.” But bitcoin’s lack of historical analogue hasn’t stopped prognostication on the matter.   

Specifically, now that bitcoin has nearly tripled in value in less than two months, what can we expect going forward?


The Optimists

Like any hot commodity, as long as people are interested in paying the premium, bitcoin will keep rising. It is, as Business Insider said, a “perfect bubble.” The question is, of course, how hard any correction will be.

I asked bitcoin expert Trace Mayer about the recent volatility in bitcoin in the scope of bitcoin’s history. He responded, “Bitcoin seems to have periods of consolidation with intermittent periods of significant volatility. This is most likely due to fickle human action,” or, the age-old bubble making spun from the cycle of exuberance and panic. He does predict a slight correction, but that this recent uptick will “lay the foundation for an even larger rise in a year or two.”

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In five years he predicts bitcoin’s market cap will have been adopted by a “significant portion” of internet users and exceed a market cap of $100 billion. Past that, he expects competition to heat up considerably, whether that be from Litecoin or some other yet-undiscovered currency, but for bitcoin to still have significant use value.

Even members of the “establishment” have expressed their admiration for the concept. Federal Reserve Bank of Chicago Senior economist François R. Velde called bitcoin a “remarkable conceptual and technical achievement, which may well be used by existing financial institutions.”

In short, for the foreseeable future bitcoin is here to stay, and in the scheme of things to continue increasing in value. And that’s just what notable bulls like the Winklevoss Twins are expecting, who are working to set up the first bitcoin exchange traded fund (ETF) and famously said bitcoins are “better than gold.”

With a market cap at $1.47 billion and counting, the idea of a universal currency even better than the world’s oldest universal currency is certainly an attractive idea.


The Pessimists

Of course, bitcoin has detractors, notably established economists. Nobel Prize recipient and New York Times columnist Paul Krugman referred to the “dubious economics” of bitcoin during the cryptocurrency’s April 2013 bubble, saying the economic design of bitcoin is “retrogressive” by needing real resources to mine them, and thus are not practical for facilitating transactions.

It should be noted Krugman is opposed to anything resembling a gold standard, which, down to its mining element, bitcoin closely mimics. To him, bitcoins are a commodity, and not suitable as a currency.

Krugman asserts that an economy built on bitcoin would be vulnerable “to money-hoarding, deflation, and depression.” Due to its deflationary tendency, bitcoins progressively become more valuable, thus disproportionally making early adopters rich. Krugman says this is the exact opposite of what is desirable in currency, and that “what we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich.”

And Velde, while extolling bitcoin, also presented some skepticism concerning its governing body, or, the few programmers who truly understood its complex mathematical framework. He wrote, “Although some of the enthusiasm for bitcoin is driven by a distrust of state-issued currency… it is hard to imagine a world where the main currency is based on an extremely complex code understood by only a few and controlled by even fewer, without accountability, arbitration, or recourse.”

Like Business Insider’s opinion that what would bring bitcoin down isn’t some internal miscalculation, but rather being outlawed by governments or “broken” by a hacker, Velde guesses that bitcoin, though decentralized to an extreme degree, still ultimately answers to some human authority - and is thus corruptable.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


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