Bitcoin Investing in the 2020s
Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
As we cross the threshold into the next decade, what truly is in store for crypto investors?
Will Bitcoin be many times more valuable by the end of the decade?
Or will it be mostly dead?
Will it be replaced by cryptocurrencies with more advanced technology?
If so, will those cryptocurrencies have begun to replace most fiat currencies?
Before I can answer these questions about the future, let’s first look back at the past ...
When Bitcoin was born ten years ago, the world was torn by financial crisis.
It was 2008.
Major governments had piled up massive debts.
Lehman Brothers failed, triggering a chain reaction of even greater failures in the banking system.
Governments responded by printing unlimited quantities of money.
And Bitcoin was born as Satoshi Nakamoto’s indignant response to the mess they created.
The dream: To create a peer-to-peer system of electronic cash, killing three birds with one stone:
One: Bitcoin would unshackle money from the control of those who created the financial crisis.
Two: It would replace their behind-the-scenes deliberations and manipulations with the first-ever form of money that has a built-in monetary policy.
Three: The monetary policy would be stable, predictable and completely transparent — visible to everyone.
That was the dream. But it has not been the reality.
Bitcoin will more closely resemble a store of wealth (like gold) than a system of electronic cash.
Here’s what actually happened ...
When Bitcoin creators looked at fiat money, there was little desire to sort out the good from the bad. Instead Bitcoin’s specs were deliberately designed to be the exact antithesis of every critical aspect of existing monetary policy.
Specifically, in these four ways ...
1. Fiat money supply is unlimited and forever expandable. So, the creators designed Bitcoin’s money supply to be strictly capped and immutable.
2. To enforce that cap, they established a strict rule: Approximately every four years, the supply of new Bitcoin being created will be slashed by 50%, until ultimately any new Bitcoin creation becomes negligible. The next halving is expected in May of 2020, and should help to kick off what could be the next big leg in the current Bitcoin bull market
3. Access to fiat digital money is dictated by banks. So, they designed Bitcoin to be free for everyone and anyone to use as they see fit.
4. The fiat money system is made up of multiple gatekeepers and custodians who are regulated by a central government and trusted by the people. In contrast, Bitcoin’s code stipulates that there are NO gatekeepers, NO custodians, NO regulators and NO governments in the mix.
This was the theory. But in practice, these strict design choices have taken a heavy toll on the Bitcoin network over time:
- Since Bitcoin is scarce, most people are usually reluctant to spend it. Instead, they simply hoard it in the expectation that, with time, its value will always go up ...
- Since there is no formal authority, an oligopoly of miners has emerged who control the minting of most new Bitcoins ...
- And since Bitcoin lacks adequate governance to select custodians, certain groups of developers have seized control over most of the network’s development.
So, with the benefit of hindsight, it’s very possible that …
Bitcoin was an overreaction to the financial crisis and to the monetary system that allowed the crisis to occur.
But today, instead of functioning as an efficient peer-to-peer system for transferring cash, Bitcoin is evolving into a store of value like gold.
We don’t really see a lot of changes being made, so “store of value” will likely end up being its only function by the end of the next decade.
Not that there’s anything wrong with that, but it does leave the door open for other projects to pick up the slack and take on the mantle of “peer-to-peer electronic cash”.
The good news is stores of value are in high demand in today’s world of geopolitical and financial uncertainty. Like gold, Bitcoin still retains the potential to rise dramatically in value.
Moreover, the fact remains that Bitcoin introduced the first public, open, digital asset the world has ever seen. Bitcoin was the first successful experiment with Distributed Ledger Technology (DLT). And in recent years, that revolutionary technology has evolved rapidly.
So, what comes next? Looking ahead to the next decade, we can see how ...
DLT could contribute not only to the evolution of money and the stability of monetary policy ... it could also enhance economic productivity, political governance, social cohesion and more.
DLT could revolutionize democratic elections, transform the world of lending and massively disrupt social media. So, the potential for cryptocurrencies to change the world is big, much bigger than originally expected ten years ago.
In fact, whether or not Bitcoin can deliver on its original promise is now a moot point. Other cryptocurrencies are rising to the occasion to fulfill the original dream ... plus much more.
Yes, the invention of Bitcoin broke the ice ...
It unleashed teams of developers and thinkers who are passionate about a decentralized digital cash system. They are fixing the deficiencies of Bitcoin and fine-tuning their algorithms to create a currency for the masses.
More recently, it has also unleashed a parallel trend of a very different kind: Regulators and gatekeepers of the traditional financial system see the writing on the wall.
They have become increasingly aware of the powerful advantages that DLT could bring to the table. And they are already looking for ways to adapt, adopt — or co-opt — the new technology to modernize the existing system.
Depending on which of these prevails, there are two possible scenarios on how cryptocurrencies evolve over the next decade:
Scenario A: Decentralized DLT
Public open ledgers and their native cryptocurrencies begin to replace the fiat currency system. Instead of saving, spending or investing dollars, euros or yen, people begin to do all those things with cryptocurrencies like Bitcoin, Ethereum, Cardano or EOS.
A growing share of the population transitions from government-issued currency to public cryptocurrencies. They are attracted to crypto by handy, practical distributed applications (dapps), powered by free and open cryptocurrencies.
This activity is not controlled by government or government-regulated institutions. It’s governed by the consensus of each community.
Initially, governments resist. But eventually, they accept the new reality. They realize they can no longer control the monetary system the way they used to. Instead of bucking the trend, they begin to recognize these new forms of money as legal tender.
No currency emerges as the sole winner. Rather, a select group of cryptocurrencies becomes dominant, thanks to superior technology, the most practical applications and the broadest mainstream acceptance.
Scenario B: The Centralized DLT Scenario
Governments and corporations of the world’s largest economies — the U.S., the European Union, China and Japan — lead the way toward adopting Distributed Ledger Technology.
They realize that digital money is the wave of the future. And they see that the single, most-efficient form of digital money is based on DLT.
BUT instead of creating open, decentralized systems, they focus on digital money systems that mimic the fiat system already in place.
Yes, the technology is similar. But the governance is not: The new kinds of money remain under the direct control of central banks.
For political and business leaders who crave more power and control, it’s an upgrade: Government and corporate agents gain the ability to directly monitor every single transaction in the system. They are empowered to freeze accounts with a few clicks of a mouse.
And once various kinds of property are digitized, a government or company decree to confiscate assets of targeted groups can be executed in seconds.
The technology is still distributed ledger. But instead of opening the network to everyone (a permissionless system), those who wish to join must first get the okay from some type of entity (a permissioned system).
Facebook’s Libra is a good example of the latter. Bitcoin, the former.
And instead of relying on the rules embedded in the code to ensure fairness (a trustless system), participants must accept the authority of the rulers (a trusted system).
In a country with strong democratic traditions and judicial protections, this would not be of immediate concern. The government is expected to act in the best interests of the people. It’s assumed it will use its new digital superpowers strictly against rogue actors.
But in countries already leaning toward autocracy or with no independent judiciary to speak of, the picture goes from dark to darker: Those governments will use centralized DLT to snuff out whatever individual freedoms remain.
And what about companies that don’t exactly have a pristine record when it comes to handling your personal data? Think Facebook and Cambridge Analytica here.
How can two starkly different scenarios be enabled by the same technology?
Remember: All technology is inherently neutral. It can be tool of evolution or a weapon of destruction; a blade for harvest or for war.
DLT is a prime example. It’s one of the most revolutionary technologies on the planet. It can help enhance individual freedom, guarantee property rights and build wealth.
Or, it can be used by authoritarian governments and companies to install a draconian surveillance state.
Ten years from now, which will it be? A lot will depend on which scenario prevails: Decentralized DLT or centralized DLT?
My guess is that, for now at least, we could wind up with an unholy mix of both. But in the longer term, decentralized DLT will always have two major advantages:
First, DLT derives its greatest power from voluntary mass participation. But centralized DLT represses that mass participation. It’s contrary to the essence of what DLT does best.
Second, even if private entities can create their own form of cryptocurrency that’s fully under their control, it will be almost impossible for them to ban decentralized DLT networks.
In the end, the same dynamic that ultimately makes democracies stronger than dictatorships will also make decentralized DLT stronger than the centralized alternative.