The argument for Bitcoin
Why Bitcoin is likely to be the best risk return adjusted asset for the next decade.
Bitcoin is a fundamental innovation on par with the invention of the Internet, or Electricity. It’s the first implementation of digital property: a scarce, verifiable and easily transferable asset that is truly decentralized and cannot be stopped. Bitcoin has been compared to “digital gold”, but it will likely far exceed the market cap of gold, currently standing at 11 Trillion. While other crypto assets may appreciate more in percentage terms, Bitcoin is the “risk off” asset, and will continue to maintain a dominant share of the crypto-currency market cap for the foreseeable future.
Bitcoin versus forks of Bitcoin
For those who don’t own Bitcoin, the first stumbling block to buying it is the argument that it will be displaced by another “better” cryptocurrency. This idea has been around since the early days of Bitcoin, as the Bitcoin code is completely open source and can be easily “improved”.
Two early “tweaks” to this were LiteCoin, released in 2011 which reduced the block time from 10 minutes to 2.5 minutes to improve performance and DogeCoin in 2013 which further reduced it to 1 minute. Both of these coins are minute, surgical changes to the core Bitcoin code, but both now have market caps exceeding 10 Billion USD. In 2017 another fork, Bitcoin Cash appeared, which briefly held a 30% value versus BTC, but has gone steadily down to 1%
At this point, hundreds of forks of Bitcoin have now been attempted, and none have managed to maintain even a 5% market cap share versus the original crypto currency. So it’s pretty clear that Bitcoin can’t be simply displaced by a newer version of Bitcoin.
Bitcoin versus other, different cryptocurrencies
While the empirical evidence of the last 10 years strongly suggests Bitcoin can’t be beat by a mere derivation of Bitcoin, there are now plenty of other blockchains that are faster, cheaper, and more feature rich than Bitcoin. Could Bitcoin be the “Myspace” to a future “Facebook”? Possibly, but not likely.
The first and leading contender to Bitcoin by market cap is Ethereum, which went live in 2015. Ethereum offered Turing-complete smart contracts, a major advantage over Bitcoin, allowing (in theory) for truly programable money. But Ethereum is still expensive and slow — a serious drawback for a platform designed for applications.
Despite this, Ethereum has definitely found product market fit in two areas: as a platform on which to mint other tokens, and as a platform for decentralized finance. The size of the DEFI market is currently around 20 Billion, roughly 5% of the market cap of ETH, and ETH tokens. In other words, at this point 5% of ETH tokens are loaned out and put in decentralized contracts. It’s a significant achievement, but not earth shattering.
Post Ethereum, chains like Matic, Proton, Cardano and Solana all offer significant performance advantages. Could any of these these chains displace Bitcoin?
It’s unlikely. While Ethereum and its competitors are aiming to develop a platform for smart contracts and apps, the real killer app of crypto is decentralized property. Ethereum, with its proof of stake version 2, and all its competitors are at the end of the day far more centralized. They all have known VC backers and they all have committees that change their rules frequently. They aren’t in the competition for “digital gold” — they are trying to be new forms of programable money.
It’s unclear to me who will end up winning this battle for smart contracts. It might be one of the existing players, or it may be a giant such as Google, Apple, Facebook or Amazon who decide to throw their hat in the ring. Facebook is probably the furthest along of the four, but it’s no longer a question of if, but when these behemoths enter the fray. Without the approval from the Google and Apple app stores, the applications of crypto in apps is going to be limited. And if approval is opened up, you can bet that both Google and Apple will play in that area.
In summary, Bitcoin is going after the big market (digital property) and all the other coins are going after the smaller market (programable money). Because of the smaller market caps some of these may be amazing investments, far exceeding Bitcoin. But they are inherently more risky. And less likely to massively change the world.
The sheer size of the Bitcoin network
Comparing Bitcoin to any other cryptocurrency should not only consider the market cap, but also the sheer size of the mining power and energy deployed to maintain the network.
To get a sense of this, at the time of writing this is 112 Million Tera Hash / second. Thats 112 Million Trillion, or 112 Quintillion operations per second being used to secure blocks. Put another way, that is 1 Million S19 Pro miner rigs, costing 10,000 dollars each. So just in fixed cost of mining that is 10 Billion dollars in investment, and an investment with at most a three year effective life (hash rate increases obsolete older machines very quickly).
But even more importantly, Bitcoin consumes 80 Tera Watt hours annually. This would require 3 1000 MW Nuclear reactors producing energy full time if everybody was using state of the art miners. Because most mining is done with older miners, the number is closer to 6, and was closer to 12 as recently as April before the China crackdown. For simplicity, let’s think 10 state of the art nukes, doubling every 4 years. Cost of each nuke: 30 Billion dollars.
So Bitcoin is backed now by a 300 Billion USD plus investment in power plants and mining rigs. To put this in perspective, a crypto currency like Ripple, while having a 35 Billion dollar valuation has virtually no such a decentralized worldwide investment. Ethereum 1.0, which is proof of work like Bitcoin, has 0.5 MM Tera Hash / second, less than half of a percent of Bitcoin. Bitcoin Cash has 1MM Tera Hash / second, or under one percent of Bitcoin. There really is no comparison.
Another metric of the size of the Bitcoin network is number of users. Its estimated that 80 Million people worldwide now hold bitcoin. This is largely just held, and not used monthly in transactions. That’s the current use case: a long term store of value, not a better version of visa. By comparison, its estimated that there are 5 million Ethereum users, and less than 50,000 of these use the network on a daily basis (mainly to trade other ERC-20 coins on UniSwap). Again, there really is no comparison.
Beyond the reach of governments
No government has a spare energy supply of 10 Nuclear reactors and 1 million mining machines. That would be the requirement to get 1/2 the current mining power of Bitcoin. Even a radical move like China banning Bitcoin mining 2 months ago had minimal effect on the Bitcoin network. The hash rate, which bottomed at 80 has already climbed back to 110 in a month.
Wrapped Bitcoin and Lightning for small transactions
An often repeated critique of Bitcoin is that is far too slow and costly for small transactions. Let’s dive in deeper here and see how this argument holds up.
First of all, it is true that ultimate settlement on the Bitcoin network takes 6 confirmations, or about an hour (except in exceptional times where the network is overloaded). For larger transactions ($10,000 or more) this is still much much faster than international or domestic money wires. But clearly, its not competitive with conventional credit and debit cards or apple pay / paypal etc..
Does this mean it is somehow inherently defective as Nouriel Roubini often states? No. Wrapped Bitcoin, which now represents 1% of all Bitcoin (over 7 Billion dollars worth) can be sent in speeds of several minutes (on ETH) to seconds on Proton, Solana, Matic and other third generation blockchains. Ordinary Layer 1 Bitcoin can be moved in this way to a fast wrapped chain, for ultra fast transactions and programability, maintaining the core value proposition of Bitcoin: its immutable finite supply.
The lightning network is also a viable, although still emerging network for Bitcoin transactions. Every Bitcoin node can become a lightning node and Bitcoin can be locked and transferred in channels with very, very low costs. There are certainly usability issues, but the growth potential is clearly there.
Bitcoin Versus Gold
Gold, with its 11 Trillion market cap is probably the single best benchmark as to where Bitcoin will probably go. At 11 Trillion cap, with 21 Million coins, you get a price of roughly $500,000 per Bitcoin — about 10 times the current valuation.
Could it go much higher? I definitely think so. Unlike gold, where the supply is currently increasing at 3% per year with mining, Bitcoin has a hard cap at 21 Million, which will be effectively reached in 20 years. This argument is strengthened by the fact that gold mining activity will almost certainly increase if gold reaches $3,000 an ounce or higher — but again, Bitcoin supply is fixed. Bitcoin possession is also verifiable immediately. Gold bars held in storage might not be pure, or may not exist 1–1 for the certificates held against them. Gold is hard to move, difficult to divide, and expensive to sell. Bitcoin is moveable, divisible and highly liquid. There really has never been anything like it.
The Plan B analysis
How far and how fast can Bitcoin go? Plan B, a Bitcoin analyst group, has produced a compelling report that compares Bitcoin, Gold and Silver as a function of the remaining ultimate scarcity. Essentially, every 4 years Bitcoin becomes twice as hard to mine, meaning that the “flow” of new Bitcoin decreases by a factor of 2 versus the “stock” of existing Bitcoin. This 2x increase in stock / flow tends to produce a 10x increase for each 4 year period, and maps extremely well to the Gold and Silver data. This analysis would suggest 100 Trillion as the ultimate end point for Bitcoin — or roughly 5 Million per coin.
The effect of Fed money printing
Note that none of the previous discussion of Bitcoin relied on any argument of massive inflation due to Fed or other central bank money printing. Simply put, Bitcoin as a better form of scarce digital gold has historically been the best asset class of the last decade, and may very well continue in the next decade. But if you add on to this the extraordinary, absolutely unprecedented increase in M1, you now have the perfect storm for Bitcoin
The Fed, the ECB, The Bank of Japan and the Bank of China are all dramatically increasing money supply and national debt, while artificially keeping interest rates at 0. Inflation has already started to significantly increase. This is the perfect storm for hard assets — with Bitcoin being the hardest asset of all.
Bitcoin has gone from 0 to 1 Trillion in 10 years. You don’t do that without tremendous volatility. And if we are correct, we are still 10–20 years or so from getting close to peak Bitcoin. But in the process, the growing adoption of this new digital gold as a reserve asset by individuals, companies and countries will replace the dollar and Euro.
Twenty years from now, it’s likely most things will be purchasable in Bitcoin, and many if not most people will start to think in Bitcoin first and in fiat currencies second. This is going to constrain central banks and governments from the massive deficit spending and money printing we have seen in the last 50 years, with the culmination of “quantitative easing” of the last decade, debt buybacks, share buybacks and other ways of central banks artificially trying to prop up the economy.
With Bitcoin as the final standard, we will move to a deflationary world where purchasing power always goes up, as technology delivers higher and higher productivity. Contrary to Bernanke’s view, this deflationary world is a highly desirable one, and in any case, is where we are heading once the fiat / central bank standard goes bust.
The macro-economic implications of a Bitcoin world are staggering. They far exceed (in my opinion) the technological benefits of a better means of payment.
Bitcoin is not just another crypto. It is the clear dominant store of digital property on the planet, and it could have planetary consequences in a few decades once it reaches its full potential. There are clearly other blockchains, which may present excellent investment opportunities and great technological breakthroughs, but Bitcoin is the coin that will truly change the world.