Bitcoin
From debt crisis to the big country game, why is BTC going to rise in the future?
How to value Bitcoin
It is relatively simple to evaluate bitcoin within a sufficiently long time frame. The market finds prices based on available supply and demand. When more people want to buy bitcoin, the price will rise, and vice versa. For most types of assets, rising prices encourage producers to invest more in assets, driving prices down. Similarly, falling prices have led to a decline in supply and a rebound in prices. Therefore, the price of most commodities tends to remain relatively stable around production costs.
Bitcoin has a fixed supply, with an upper limit of 21 million. The market can still try to create “alternatives” (other cryptocurrencies with similar characteristics) to increase supply. We fully expect this to happen (continue), but the currency has a huge “brand value” in terms of network effects, liquidity and the integration of existing financial infrastructure . Bitcoin supply is not a completely inelastic change in demand, but certainly not as good as other assets, so existing owners, not producers, can gain an advantage.
The sum of all bitcoins multiplied by the price is called the market value. The "market value" of assets such as real estate, stocks, or commodities allows us to see the value people store at any given time, compared to legal tender. The current market value of Bitcoin is $80 billion, which is smaller than the potential target market (value store) that we believe may be weakened:
US dollar bills held abroad: about 1 trillion US dollars, including more than 75% of the existing 100 US dollar denomination notes · Global base currency: 19.6 trillion US dollars · Gold held for investment purposes: privately held about 1.1 Trillions of dollars (excluding jewellery) and $1.3 trillion held by the central bank
As the supply of Bitcoin (and alternatives) reacts less to changes in demand, we expect an increase in demand to be reflected in higher transaction prices. We have seen three main sources of such future demand.
Demand for digital cash
Today 90% of the funds are virtual. It is created when someone gets a loan and does not act on the bank ledger until the debt is paid and the funds are destroyed or extracted into cash.
The growth trend from physical cash to digital payments is understandable. Cash has an annoying feature and you need to exchange it in the same place. Most of us pay in the form of digital payments. If you have to pay cash, you must keep it.
A country that completely renounces the use of physical cash is known as a “no cash” country. It can happen without coercion, just like Sweden. In other countries, such as India, the government has abolished larger denominations of banknotes. In China, digital payment is the backbone of China's social credit system.
Central banks around the world are attracted by the idea of negative interest rates. In a cashless society, the central bank can directly tax people's bank accounts to curb savings and encourage “total spending” in the form of consumption and investment.
Digital payment is efficient and convenient and is a new form of currency. Digital payments increase efficiency by including trusted third parties in each transaction, and this third party is responsible for maintaining the central ledger, making it easier to update as needed. This arrangement is not without its shortcomings: the intermediary agency oversees all financial activities, can reject transactions that it does not agree with, or even completely confiscate funds.
On the other hand, cash can be exchanged point-to-point between people. These transactions are unlicensed, private, and finally confirmed (no one can reverse the transaction afterwards).
As our reliance on financial intermediaries increases, it is increasingly important for us to control these intermediaries. Today, a small number of payment companies have a huge voice and actual influence in this regard. Money is the lifeblood of the economy - if a person is cut off by a payment processor to cut off digital payments, he loses autonomy and has little chance of running his own business.
Every year, the world is gradually moving towards “no cash”. We believe that the reason is that the benefits of digital payments are immediate and visible to the user, and are invisible until the shortcomings and disadvantages cause important problems. As a result, global physical cash supply will continue to decrease. However, this reduction does not accurately reflect the need to hold it. Governments, central banks, and large corporations all have the incentive to promote cashless societies (although not all institutions and companies do so), and there is no uniform coordinated commercial interest to support cash. As long as financial intermediaries can be fully trusted (although this is not guaranteed forever), the demand for cash will continue to decrease. Just like fire insurance, fire insurance seems to be unnecessary before a real fire.
Bitcoin is the first and only form of currency that provides similar cash attributes but can be digitally stored and transferred. When the government no longer provides physical cash, there may be a large excess of demand for assets with similar cash attributes - bitcoin can precisely meet this demand.
Demand for a global neutral settlement network
Digital payments are available to participants with trusted intermediaries. Since World War II, the United States has been a trusted middleman in most developed countries. Recently, the United States has indicated that they intend to turn the financial system into a weapon to achieve its political will (forcing SWIFT to cut off its operations with Russia and Iran as part of US sanctions against the two countries). American allies don't want to be at the mercy of others.
In addition, political sentiment in many countries is turning to isolationism, whether in Europe (British Brexit, France's "yellow vest" movement) or the United States (a trade war with China, withdrawing from a nuclear weapons treaty signed with Russia). US-led soft power institutions, such as the World Bank, the International Monetary Fund, and the World Trade Organization, are gradually losing influence. These institutions are the main tools for projecting the power of the United States abroad, and the weakening of these institutions will lead to power vacuum and uncertainty. We believe that the world is currently transforming from having a trustworthy protector and intermediary to a multipolar world order.
As friction between the world's powers increases, the willingness to trust financial infrastructure controlled by others will diminish. This creates a need for a financial network that is not controlled by one party but is politically neutral. Even on the current Internet, the review is increasing.
Bitcoin meets the conditions of neutrality and anti-censorship. Although there have been some controversial activities in the past bitcoin network (such as Silk Road and WikiLeaks), the world may feel that anti-censorship is a positive feature and is no longer just for criminals.
Need to hedge existing financial systems
Many people are worried about the excessive leverage of the world economy and our financial system . Consumer and sovereign debt water is at an all-time high relative to GDP, while interest rates, especially in Europe and Japan, remain zero. When the economy slows down, the central bank has little room for monetary policy to drive economic development.
In addition, demographic changes have created a huge gap between future government debt and tax revenue . For example, the US government not only owes $20 trillion in sovereign debt, but also assumes $200 trillion in domestic debt in the form of an entitlement program. Many people believe that the only way to pay is to depreciate the dollar and depreciate it to at least pay the nominal debt.
Given that this is a doomsday scene, it is not very interesting to think about, but it is a reality that any investor must deal with today. Gold has always been the safe haven of choice when investors fleeing fiat money, but it is also highly regulated by the government, making it difficult to ensure security and sometimes difficult to extract – as some countries (Venezuela) have experienced today. We believe that Bitcoin can become the gold of the Internet's native generation for a long enough time to hedge the government and the central bank.
The saying that "bitcoin is a doomsday insurance" is triggering more and more sense of identity. Now, even skeptics like Ken Rogoff often use it as the main use case for bitcoin. As more and more people worry about systemic risks, the demand for Bitcoin as a limited “insurance ticket” may increase accordingly.
In fact, in Venezuela and other South American and Central American countries, Bitcoin can be used as an exit path for local currency, and Bitcoin is increasingly being adopted as a substitute for the US dollar. A recent study of global data from the peer-to-peer exchange LocalBitcoins found that the fourth quarter of 2018 was the highest-volume quarter in 23 countries on LBC. Almost all of these countries are developing countries.
The dollar remains the most sought-after black market currency, but bitcoin is better in some respects, making it an attractive option for people in developing countries. Bitcoin can be prevented from being confiscated and can be transferred digitally – especially cross-border transfers. Bitcoin skeptics often overlook the fact that currency competition is like a few people escaping under the bear's catch-up – you only need to run faster than your slowest friend. Bitcoin is still immature and can only compete with the weakest legal currency, not with the dollar, euro or yen. Despite the huge fluctuations in bitcoin prices, it is still able to compete with the French currency.
Is the volatility of Bitcoin a problem?
I am often asked if price fluctuations in Bitcoin will hinder the adoption of Bitcoin. There are two reasons for the volatility of Bitcoin. First, the supply of Bitcoin is fixed and does not respond to changes in demand. Second, as a young currency, it is currently used mainly for speculation. Its price is delayed growth expectations (as well as others desired expectations and other) functions , all of which have been modified. The best way to consider volatility is to use it as a temporary transaction cost. As the market value of Bitcoin grows, the value from speculation will decrease and the value from basic uses will increase. This will reduce the volatility of Bitcoin and make it cheaper to use.
To sum up
Bitcoin is a new financial network with tokens and is currently in the monetization stage. At this stage, its price is largely determined by expectations for future growth – making it appear to be unstable in anticipation. Although bitcoin transaction costs are high (taking into account volatility) and are complex, many people in developing countries are still using bitcoin. The more people use it, the less volatility it will encourage, allowing for further adoption and a positive cycle.
Since the supply of bitcoin is fixed (it is hard to come by alternatives), the price depends largely on the demand for holding it. We identified three major trends in the world that could lead to large demand. This demand may create huge room for growth for existing holders.
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