Stocks, bonds, and real estate assets generate cash flows and can be valued based on them, the thinking goes. Things started to change when George Bis sell had a breakthrough in the 1850s: He wondered whether “rock oil,” as it was called, could be processed and be used as an illuminant (replacing “coal oil” for kerosene lamps) and as a lubricant for machines.
Very few saw the potential of the “new light” early on, but those who did, like John Rockefeller, were responsible for some of the largest examples of value creation to this day. Bitcoin today is analogous to oil after the development of the kerosene lamp, but before cars, planes, and the rest.
Individuals use it today to store savings outside the fiat currency system (“digital gold”), to move money across borders, and to settle large transactions quickly and in an irreversible fashion. In certain countries, it provides a release valve for citizens concerned about oppressive regimes, and a way to expatriate money with limited physical risks.
Kerosene lamps were a proof of concept; oil’s real value lay in being a store of energy that could be transported easily and released in an intense fashion. Those numbers may sound extreme, but it is worth remembering that digital versions of analog goods are often met with skepticism initially.
People didn’t think digital media would replace newspapers, didn’t believe that digital advertising could compete with print and TV, and were hugely skeptical that online retail could compete with physical stores. Storage : One can hold bitcoin for years at a low cost, waiting for demand to arrive.
And unlike oil, with bitcoin, you’re in no rush, because as a digital asset, you can store it cheaply for years while demand builds. It’s not about simply hoping for a greater fool, but rather buying a scarce asset before demand is fully developed.
Bitcoin offers an efficient means of transferring money over the internet and is controlled by a decentralized network with a transparent set of rules, thus presenting an alternative to central bank-controlled fiat money. There has been a lot of talk about how to price Bitcoin, and we set out here to explore what the cryptocurrency's price might look like in the event it achieves further widespread adoption. In many societies throughout history, commodities or precious metals were used as methods of payment because they were seen as having a relatively stable value.
Still, the reason many examples of minted currency were usable was because they were reliable stores of value, having been made out of metals with long shelf lives and little risk of depreciation. In the modern age, minted currencies often take the form of paper money which does not have the same intrinsic value as coins made from precious metals.
Some types of currencies rely on the fact that they are “representative,” meaning that each coin or note can be directly exchanged for a specified amount of a commodity. Many governments and societies have found that fiat currency is the most durable and least likely to be susceptible to deterioration or loss of value over time.
Image by Sabrina Jiang © Investopedia 2020 Aside from whether it is a store of value, a successful currency must also meet qualifications related to scarcity, divisibility, utility, transportability, durability, and counterfeit ability. A money supply that is too large could cause prices of goods to spike, resulting in economic collapse.
Monetarism is the macroeconomic concept which aims to address the role of the money supply in the health and growth (or lack thereof) in an economy. In the case of fiat currencies, most governments around the world continue to print money as a means of controlling scarcity.
Many governments operate with a preset amount of inflation which serves to drive the value of the fiat currency down. In order for a single currency system to function as a medium of exchange across all types of goods and values within an economy, it must have the flexibility associated with this divisibility.
The currency must be sufficiently divisible to accurately reflect the value of every good or service available throughout the economy. This is a primary reason why currencies developed in the first place: so that participants in a market could avoid having to barter directly for goods.
Coins or notes made out of materials that can easily be mutilated, damaged, or destroyed, or which degrade over time to the point of being unusable, are not sufficient. Note that changing the protocol would require the concurrence of a majority of the computing power engaged in Bitcoin mining, meaning that it is unlikely.
The global fiat money supply is often thought of as broken into different buckets, M0, M1, M2, and M3. M0 refers to currency in circulation. As part of their monetary policy, most governments maintain some flexible control over the supply of currency in circulation, making adjustments depending upon economic factors.
So far, the continued availability of more tokens to be generated has encouraged a robust mining community, though this is liable to change significantly as the limit of 21 million coins is approached. What exactly will happen at that time is difficult to say; an analogy would be to imagine the U.S. government suddenly ceased to produce any new bills.
Fortunately, the last Bitcoin is not scheduled to be mined until around the year 2140. Generally, scarcity can drive value higher. 21 million Bitcoins is vastly smaller than the circulation of most fiat currencies in the world.
This is possible thanks to an elaborate system of checks and verifications which is central to the maintenance of the ledger and to the mining of new Bitcoins. Thanks to cryptocurrency exchanges, wallets, and other tools, Bitcoin is transferable between parties within minutes, regardless of the size of the transaction with very low costs.
The process of transferring money in the current system can take days at a time and have fees. Thanks to the complicated, decentralized blockchain ledger system, bitcoin is incredibly difficult to counterfeit.
Doing so would essentially require confusing all participants in the Bitcoin network, no small feat. This refers to a situation in which a user “spends” or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record.
A so-called 51% attack, in which a group of miners theoretically control more than half of all network power, would be necessary. However, such an attack on Bitcoin would require an overwhelming amount of effort, money, and computing power, thereby rendering the possibility extremely unlikely.
Bitcoin has exhibited characteristics of a bubble with drastic price run-ups and a craze of media attention. This is likely to decline as Bitcoin continues to see greater mainstream adoption, but the future is uncertain.
Bitcoin's utility and transferability are challenged by difficulties surrounding the cryptocurrency storage and exchange spaces. In order to place a value on Bitcoin we need to project what market penetration it will achieve in each sphere.
The predominant medium of exchange is government backed money, and for our model we will focus solely on them. At an estimated current price of $1,200 per troy ounce, that amount of gold is today worth upwards of 2.1 trillion U.S. dollars.
In aggregate, our estimate for the global value of stores of value comparable to bitcoin, including savings accounts, small and large time deposits, money market funds, and gold bullion, come to 47.1 trillion U.S. dollars. If Bitcoin were to achieve 15% of this valuation, its market capitalization in today's money would be 10.8 trillion U.S. dollars.
Another view on this though would be that velocity of money is not restricted by today's payment rails in any significant way and that its main determinant is the need or willingness of people to transact. Therefore, the projected velocity of money could be treated as roughly equal to its current value.
Series written by Maxwell Foley, Software Engineer at Certain Now that you have read the previous posts, you understand how Bitcoin works as a currency system created purely out of code. Since then, the price has gradually risen (with a lot of wild ups and downs along the way).
Some argue that Bitcoin shouldn’t be worth anything at all and that one day it will crash entirely and become worthless. Demand for Bitcoin has gradually risen as people have speculated on the currency and its applications, but the supply is limited.
The rate at which new Bitcoin are created is nearly completely predetermined, because it is coded into the software. Specifically, as we previously discussed, there is a certain amount of Bitcoin that each miner is allowed to credit himself.
At that point, miners will not be allowed to credit new Bitcoin to themselves, and thus they will be paid only with transaction fees. After that initial rush, people will start having to mine longer and harder in that area in order to find any gold.
Gradually, the tap will run dry until all possibility of extracting any more gold is gone completely. With government-issued currency, however, the government can simply print more of it at any time and create inflation which could adversely affect your holding.
Peter Thiel, a major Silicon Valley venture capitalist, famously said that for one technology that involves connecting people through a network (e.g. Facebook, Twitter, Instagram, etc.) To conquer Facebook, you would have to invent an alternative so staggeringly superior that everyone switches over at once and brings their friends with them.