Cryptocurrency: Fashionable Fad or the Future

by: Chris Mulkey, COO & Head of Research

Is Bitcoin really here to stay? Renowned macroeconomist Kevin Dowd says “no”. I think he’s silently eating his words right about now as Bitcoin topped $30,000 to end 2020*

*now above $35,000 as of this writing.

For the uninitiated, per Wikipedia, Bitcoin (BTC) “is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Bitcoins are created as a reward for a process known as mining.”

In 2015, Dr. Dowd wrote that BTC’s value must eventually drop to zero. BTC still being widely unknown at the time, I would have believed it. However, Dr. Dowd doubled-down on this hypothesis in 2019 here and I have to now disagree. To argue the eventual worthlessness of the benchmark cryptocurrency, his two main points are that (1) BTC mining is a natural monopoly, based on (2) an inferior product. The premise is that an inferior product placed in commerce by a natural monopoly cannot succeed due to inevitable superior competition.

These underlying premises are, IMO, faulty. First, regarding BTC mining, while it may be true that the required computing (and hence electrical) power required to make mining profitable will (and has) shifted to the hands of the few, monopolizing the discovery of the remaining BTC should bear little effect on the much larger amount of BTC already in existence. As of today, about 18.5 million BTC have already been “discovered” and are currently being used in commerce, held as investments, or permanently lost due to negligent access-keeping (nearly everyone I know including myself has horror stories of lost BTC). That leaves a total of 2.5 million BTC not yet discovered. How exactly could mining be the lynchpin of this monopoly with a maximum control of 2.5/21 (or ~12%) of the future market cap? The math doesn’t add up.

Second, Dowd’s second premise calls BTC an inferior product, and that all inferior products in a market with no regulatory barriers to entry inevitably are taken over by superior technology. Well, it is arguable that the BTC platform is not the best solution to decentralized currency, though it holds its own quite well – so no strong refutation to BTC not being the “best”. The problem lies in treating BTC as a product – it’s not. There’s no assembly line, no CEO, no warranty division. It has no true head figure or internal marketing. It’s an asset, not a consumable. Comparing it to a failed product like Ford’s obsolete Model-T (as Dowd does) makes little sense.

Cryptocurrencies currently have an eye-popping $843 billion market cap, of which BTC owns a 68% share. True, BTC started at a 100% share (as did the Model-T), but this forbodes neither its assured replacement nor its eventual obsolescence. Some downward trajectory of market share is practically inevitable. But BTC acts more like a currency than a product (imagine that!), albeit a massively volatile one. Further, this isn’t a zero-sum game. Ownership of BTC doesn’t preclude ownership of any other cryptocurrency, unlike how some families might choose to own one and only one car to the exclusion of all other cars.

Bitcoin Cryptocurrency Facts

But enough hypothesizing, here are some interesting facts and milestones of BTC:

- The value of Bitcoin in early 2010, a year after its launch, was 2 cents per coin.

- The first merchant transaction using Bitcoin was made on 22 May 2010 by Laszlo Hanyecz, who paid 10,000 BTC in exchange for two Papa John’s Pizzas (ouch!)

- As of November 2017, Bitcoin transactions worth $2 billion were being processed on a daily basis.

- As of April 2019, the total number of Bitcoin transactions reached over 400 million.

- Unlike fiat currencies, Bitcoins cannot be printed but they have to be mined on a Bitcoin network.

- Bitcoin is accepted by a number of prominent merchants and businesses worldwide, including Starbucks, Virgin Galatic, Purse.io, Tesla, Peach Airline, Overstock.com, Microsoft, Namecheap.com, Shopify, among others.

Finally, 2020 saw institutional money absolutely piling into cryptocurrencies with BTC easily leading the pack (see here). If all this means that BTC is still headed toward zero, well, we should be just as worried about the US Dollar.

So, is BTC here to stick around at non-zero value? Sure seems like it to me.

#relentlessresearch

#limestonereport