New thinking on Bitcoin

Amidst all the noise about Bitcoin, I went back to my first Bitcoin article in 2015. I meant to remember that I predicted Bitcoin to rise to 1 Mio. USD. But I didn’t write that. I calculated USD 100 000 per Bitcoin.

Surprised by the differences between my memory and the digital facts of my article, I decided to re-assess.

In 2015, I thought of Bitcoin as a means of exchange and expected it to replace the expensive credit card business. Today, I see Bitcoin as a tool for storing value with properties far better than traditional tools like money, gold, real estate or art.

Often, people criticize Bitcoin for being a Ponzi scheme because Bitcoin has “no intrinsic value”. But anything with a value that is higher than the work needed to recreate it, is a Ponzi scheme by that definition. Real Estate is a Ponzi scheme for all its value that exceeds the cost of building. That’s a big Ponzi scheme, just think of the high street real estate prices around the world. Money and gold are pure Ponzi schemes. They only have value because other people will exchange goods and services for it. Art is a Ponzi scheme for all its value in excess of faking it.

There is nothing bad about Ponzi schemes if they just describe the fact that people pay for something unique more than for a mere copy.

If you look at Bitcoin as a tool for storing value, it is safer and much more convenient than most of its competitors such as money, gold, real estate or art. So the case for Bitcoin is a strong case.

Let’s re-assess Bitcoin as a technology to store value

It is fair to assume that a digital currency will assume a share of the world’s value storage. If that digital currency is Bitcoin, the total value has to be compared to the “Ponzi-value” part of money, gold, real estate and art.

In a recent publication, MarketWatch values all the assets in the world as follows in USD (FT similar, all in USD):

Cash and bank accounts = 90 trillion

Gold = 7.7 trillion

Real estate = 217 trillion

Art sold in 2017 = around 50 billion, assuming this is 5% of the total worldwide value = 1 trillion

Where could Bitcoin stand among these value storage devices?

Maybe somewhere between art and gold at around 3 trillion? Or closer to a third of the value of all money at 30 trillion? At 3 trillion, one Bitcoin would be worth 142'000 USD, at 30 trillion, it would be worth 1.4 Mio.

A third of the world’s cash and bank account value seems high, except if the world’s cash isn’t as safe as we perceive it today (in case of inflation). That may change — or stay the same. The effect on the Bitcoin price could be one order of magnitude.

There could also be technologies built on Bitcoin to make it far more efficient and convenient than money. For instance, I envision individual digital wallets maintained by service organizations, ideally cooperatives, that are backed in Bitcoin (or gold for that matter) but allow you to pay between wallets in any currency you want and without currency exchange fees. You are not purchasing and selling Bitcoin, you exchange actual real world currencies through the wallet platform of the cooperative. They are just immediately converted to the backing currency Bitcoin.

A price could be stated in Swiss Francs and you pay for it in Swiss Francs. Your wallet displays the Swiss Francs price or the price in any currency you want at its current exchange rate to Bitcoin. You immediately see the Swiss Francs price in Dollars, Euros, Yen, any currency in effect. Bitcoin is just the „backing“ value, like the gold standard in the good old days.

The cooperatives could be financed through subscriptions which pays for the work of running the clearance and backing all the wallets with actual Bitcoins. You never have to worry about Bitcoins again and still, all you own is Bitcoin — in the wallet expressed in any currency you want. You don’t have to trust someone else, except mankind as a whole and the cooperatives for not cheating.

Do you think this is hard to pull off? Maybe for you and me, but for Facebook, Google or Apple, it’s a piece of cake. If something like this hits the market, the Bitcoin total value could easily get close to the total value of money.

In addition, most of the world’s wealth isn’t even valued. I became aware of that when Credit Suisse published it’s wealth report. They estimate the world’s wealth at 280 trillion. But, as you can see from their world map, that’s mostly the US and Europe. There is a simple reason for that. The US and Europe have markets that put values on things, Afrika doesn’t and India and China aren’t that good at it yet. But does this mean, they don’t own anything? Far from it. For a starter, each one of them own more real estate than the US and Europe combined. It’s just impossible to value their assets because of a lack of a market. If Europe and the US are worth a quarter quadrillion (1 000 trillions), you can easily imagine that the world should be worth a full one. When markets are established worldwide, and they are on the best way to get there, then 21 trillion (one million USD for one Bitcoin) are just 2% of the world’s wealth of one quadrillion.

All this depends on three assumptions:

• Bitcoin is the technology of choice for the world to store digital value (versus storing it with another technology)
• Bitcoin stays safe (versus being successfully hacked as has happened to other value storage technologies)
• Bitcoin stays legal (versus regulators outlaw it on a global scale)

I don’t see a compelling reason to outlaw it

Bitcoin is similar to gold, except it is not physical, just digital and thus more efficient. Like with gold, there is little reason to pay such a high price, except for the fact that one can expect to sell it to someone else. So it is only slightly more harmful than gold (as it is more efficient), and gold has been around for a long time without causing major regulatory backlashes. However, the sheer magnitude of Bitcoin’s applications may scare governments into regulations.

There is a strong incentive for each country, not to outlaw Bitcoin. Because if they do, they will miss out on a big technological wave of innovation that could just as well mean “live or die” for an economy. Last but not least, there is no global power that could truly outlaw it globally. If the Chinese outlaw it, the Americans will laugh and benefit — and vice versa. Russia has backtracked from their regulation attempts; maybe just for that reason. Last but not least, the freedom oriented Europeans are also unlikely to outlaw it. That’s enough of a save harbor for Bitcoin. Switzerland is already proud of its “krypto valley” Zug.

Will Bitcoin stay safe?

Parties with stakes in Bitcoin have a high incentive to insure the technology stays safe. At the current prices, I don’t worry about this anymore. But it remains a risk, albeit a distant one.

Will Bitcoin stay the technology of choice for digital value storage as it currently is?

There are a lot of competing digital asset technologies and each has a strong incentive to outpower Bitcoin, like Bitcoin has an even stronger incentive to outpower them. The war has definitely started. We can’t say what will happen in respect to the future adoption of Bitcoin. Anything can happen.

Until that “anything” happens, it is safest to assume that Bitcoin will win the race. Because, for something to have a high value, the most important thing is that it stands out as the Economist has shown for Mona Lisa. Bitcoin certainly stands out and may as well benefit from the historical “accident” of being the best known digital asset. It certainly has the privilege of the largest momentum; and that isn’t unimportant for winning technology wars.

For the time being, I stay put.