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Much of the investment case for Bitcoin rests in its limited supply. There are currently
18.6 million bitcoins in the market and a total of 21 million can ever be created, which
will not happen until 2050. Therefore, as income and Gross domestic product grow faster
than the Bitcoin supply, each Bitcoin will be worth more in real terms. Theoretically, you
will be able to purchase more goods and services, with the same coin so its price has to keep
going up. In that regard, it functions like gold, but Bitcoin is much easier to store, exchange
into regular currency, or transact with. The problem with that logic is that virtually
everything in the world has limited supply. The Law of Conservation of Mass says mass is
neither created nor destroyed, ever. The key on the supply side (we will get to the demand later)
is how easily substitutable a good or an asset is. The service Bitcoin offers is store of value,
exchange into fiat currency, and transactions. There are over 5000 cryptocurrencies, many with
limited supply, that offer the exact same service. In fact, many are better.
Bitcoin is by now old technology, it is slow, expensive, difficult to scale and
its electricity consumption is preposterous (apparently Bitcoin consumes more electricity
annually than the entire country of Argentina). Therefore, while the specific currency Bitcoin
might be of limited supply, the services it offers are actually of unlimited supply, since
creating cryptocurrencies is incredibly easy. To give you another analogy, the supply
of eggs from any one farm can be limited, however, since all eggs have the same use-value to
consumers, the price of any egg in the store will be roughly similar.
Just because your particular
farm will only ever produce 22 million eggs, it does not mean anyone will ever pay more for them.
We all know that fiat money has no value on its own, it is just paper or worse bytes on the
cloud. What makes the Dollar or the Euro valuable, is that there are goods and services that you can
only buy with that currency. If you want a German car or a Pfizer vaccine, you need to hold euros or
dollars, respectively. The value of the currency in real terms is directly tied to how many goods
and services are produced in a certain economy. The value of Bitcoin is similarly entirely
dependent on what I will call for short the “Bitcoin Economy,” or the amount goods
and services bought using Bitcoin. Bitcoin is mostly used in a limited number
of transactions, sometimes illegal, in an effort to circumvent regular payment channels
that are closely monitored by authorities. As far as payments are concerned, Bitcoin
is incredibly inefficient – as it is slow, expensive, highly volatile, and most importantly
not recognized by authorities in any country. There is a huge cost to businesses of
constantly converting back and forth to the fiat currency and experiencing
massive price swing in the meantime. Also, as we discussed, in the supply section,
there are numerous other alternatives to Bitcoin, that are actually more efficient and
there is no switching cost for users. Therefore, the Bitcoin economy is destined to stay
small and even shrink.
In fact, that is exactly what is already happening. Usage of Bitcoin peaked
in late 2017, as you can see in the chart below. People then quickly realized, there is very
little use value of Bitcoin as a currency. So our theory tells us if there is
little use or demand for the currency, the price should track that.
In 2019 when the Bitcoin hype was largely forgotten and demand was more
closely based on the use of the currency, you can see the price tracked
transaction volume very closely.
In the absence of speculators bidding up the
price of the currency, its price is entirely determined by how many goods and services are
being sold in Bitcoin. As you can see that price seems to have been a little below $10,000.
Note, I am not saying BİTCOİN is worth $10,000, I am convinced it is worth $0 in the long run,
as no one will have use for it. However, the chart tells us that given how many Bitcoins there
were and how many services were sold in Bitcoin, the clearing price at the time was $10,000 in
the second half of 2019. This is much like the oil price, which is determined by how much
oil we are currently using. However, as the world economy transitions away from fossil fuels,
oil prices fall, and may one day be close to $0. Starting in 2020, people again convinced
themselves Bitcoin has unlimited value and created a bubble, helped by social media hype.
I cannot forecast how high the BİTCOİN price will go or when it will crash.
People have already made
(and lost) fortunes paying the Bitcoin lottery so it is not always a losing bet. All I am saying
is, the intrinsic value of Bitcoin is very low, much like dot-com stock in 2000 and houses in
2008. You can always try your luck, but you have to understand the price you would be paying
now is entirely divorced from any economic value. Seasoned financial analysts know that the most
dangerous words in finance are “This time is different,” which people of course told themselves
during the dot-com bubble and the housing crisis. The excuse for Bitcoin this time is that
the current rally is driven by institutional investors and not just crypto enthusiasts.
To start off, it turns out institutional investors are not piling into Bitcoin.
There is an
excellent article on Forbes that goes into detail on who actually is buying Bitcoin. In short,
no reputable institution or pension fund has a Bitcoin investment strategy. There are, however,
very wealthy individuals and institutions, most notably Tesla, which have put money into
Bitcoin, evidenced by the fact there are more and more accounts with over 1,000 Bitcoins (currently
representing around $35 million in value). These are mostly speculators and misguided
souls who think they can ride the bubble and not traditional investors who have found intrinsic
value and are holding the asset in the long term. No one's pension money is invested
in Bitcoin, and rightfully so. Some Bitcoin supporters recognize Bitcoin is
currently extremely volatile, a poor substitute for currency, and has little use-value.
However, they claim the market will mature, the investors will see it as a stable store
of value, and everyone will end up investing a portion of their portfolio in Bitcoin, much like
in gold. In fact, a JP Morgan analyst recently published a research piece with a $146,000
BİTCOİN price target. The hefty JPM price tag mostly hinges on the idea that Bitcoin will
become widely seen as a substitute for gold and claim similar size of investors’ wallets.
of course, has uses – in jewelry, medicine, technology etc., which is why gold is valuable
in the first place. Bitcoin has limited-to-no unique uses, which is why it is worthless.
But let’s put that aside and play out the scenario where everyone allocates a portion of
their assets to Bitcoin. Allegedly there is $250 trillion of savings in the world, according to
Credit Suisse's Global Wealth Report. If even 1% of that were channeled into Bitcoin that would
mean $2.5 trillion invested into 22 million coins. If everyone decided to allocate 1% of their assets
in Bitcoin, $114,000 should be the market-clearing price.
In fact, it could be higher, depending
on how much supply there is for any given trade. However, once the dust settles and everyone
has their 1% invested in Bitcoin (no matter the buying price), the price action is over. The only
remaining use for BİTCOİN is the Bitcoin economy. And according to the prior chart, the price of
BİTCOİN was $10,000 in the beginning of 2020. If another technology supersedes it
in the future, then it's closer to $0. Just because someone bought Bitcoin at an
outrageous price, it does not mean someone else will come along and offer the same price
for it. Investors in GameStop learned that very lesson the hard way. In short, even if everyone
bought Bitcoin and the bubble took the price into the hundreds of thousands or even millions,
the price will always come back down based on how much demand there is for Bitcoin goods
And there isn’t much as we saw. More generally, for a financial instrument
to be considered an asset it either needs to have future cash flows (like stocks
and bonds) or it needs to have use-value (like gold and oil). Bitcoin has neither and
therefore has no place in asset allocation. Professional institutional investors know that,
and widespread adoption is not on the horizon. Finally, possibly the most rational investment
case for Bitcoin is – “I am happy to lose my money.” This encapsulates reasoning such as – “It
is only a small portion of my net worth,” “It has higher upside than downside,” or “It is just a
gamble.” Now, if you have accepted that you are gambling, that is fine, but you have to understand
that is the complete opposite of investing. When professionals invest, they expect a positive
return over and above what a risk-free investment can yield. By now, you hopefully realize that
the price of Bitcoin cannot be anything but $0 or very close to that. Therefore, the expected
value of a Bitcoin investment is 0$ or -100%. There is a higher chance that you will win the
lottery, since there at least someone wins, than realizing value from BİTCOİN in the long run. Subscribe to our channel and open
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