Before the Brexit vote, when the world seemed a safe and steady place, I put forward the theory that Bitcoin would surpass gold as the safe haven currency.
“What leads you to believe that Bitcoin will top £3K in 2017?” The answer does not lie in an analysis of macro-economic or monetary theory but in a more interesting understanding of human behaviour. An understanding of human behaviour and motivation, similar to that which lead Steve Jobs to develop the products he did and the digital marketing system of today. But first, let’s rewind.
Six months ago, before the Brexit vote, when the world seemed a safe and steady place, I put forward the theory that Bitcoin would surpass gold as the safe haven currency. While I pondered this theory, I realised that given the right conditions digital currencies can only trend up in value. The date was late April 2016, I had just been paid, so I went online and spent all that month’s wages on Bitcoins. I’m not a gambler and I’ve never invested in shares. But this was a sure thing.
The success of digital currency both in terms of value and popularity lie in its universality and ease of use, for the same reason telecommunications, and transport were sure bets, it allows people to do things in an easier way. The theory of success, originating from finding easier and more efficient ways of doing things, is the central theory behind Clayton Christensen’s book, The Innovator’s Dilemma. It is this concept that drove Steve Job’s insistence that iTunes should make any song available in three clicks. And this is what Bitcoin does. The bitcoin ecosystem significantly reduces the friction and opportunity cost of sending ownership of value from one person to another, anywhere with internet access.
However, just because it’s easy does not guarantee adoption by itself. There needs to be catalyst. A driver. The adoption of Bitcoin over the next year will be driven by those who experience the highest and most obvious impediments to value transfer – the grey economy. The next wave of value transfer underpinned by Bitcoin will be to move value across borders, to pay the plumber in cash without the tax implications, and for the plumber to make a purchase without touching real-world currencies.
To start using Bitcoin you don’t need any proof of ID, copies of utility bills or letters signed by solicitors. Getting Bitcoins is easy, and transferring them from one location to another is equally easy. This in and of itself satisfies all the conceptual requirements that made Apple into one of the world’s largest and most profitable companies.
Most currencies are valued in one of two ways; pegging the currency against a commodity; or by comparing its value against another currency.
Bitcoin however is unlike any other currency, as it wasn’t created by a sovereign state nor does it have an owning authority. Consequently, Bitcoin can only be valued by what someone is prepared to pay for it. As Bitcoin is not available on the forex markets its value is determined not by the money markets, but by trade. This is an important distinction from traditional currencies and the key strength of Bitcoin. For example, if you wanted to buy something on the international markets, then you most probably will do that trade in US dollars. However, what happens if, when you attempt to get your dollars (electronically) there are no dollars available? Normally, one of two things. Either the value of dollars needs to increase in order to allow space for your purchase, or more dollars are produced to cover the shortfall.
If the dollar value increases, it can cause goods, produced by the dollar, to become more expensive in other currencies. Alternatively, if too many new dollars are released, this may devalue the dollar as trades are completed and a surplus becomes available. In the real world, central banks will aim to balance the value and demand for their currency by printing more to encourage trade and removing it if the currency becomes too weak.
As Bitcoin supply is finite with no central authority controlling its value and no traditional markets trading in it, the value of bitcoin is determined by the value of products under in-flight trade taking place. When bitcoin was new, there wasn’t much trade and therefore there wasn’t much value; the value of a Bitcoin was low. Today, as bitcoin is becoming increasingly popular, the amount of in-flight trade in goods using Bitcoin as the value mechanism means that the only way there can be enough bitcoins available is via an increase in their value.
So the answer to the question “what leads you to believe that bitcoin will top £3K in 2017?”, is really driven by how much the value of trade will increase in 2017. We can understand this better by looking at a spot value in March since 2013 of transactions: $23, $271, $174, $282, $1000. This shows clear growth and traction. It would not be unreasonable to predict that the value of bitcoin will double this year. If we now look at the values of individual transactions then we find that all of the largest value transactions happened in the last 6 months, with the largest ever bitcoin transaction being on 12th March 2017 at $860K. Big money is on the move. Putting these two indicators together can only mean one possible outcome: Bitcoin has to expand its market value to meet the demands of higher volume and higher value transactions.
Bitcoins rose to fame by being used on the dark web (darknet market) as the unit of currency for sites like Silk Road which was best known as an online market for selling drugs. However, Bitcoin is now being adopted by many people who want to move money across borders and by those who want to hedge against hyper-inflation and currency restrictions, or as in India, banknote demonetisation. This is happening across the globe and is the new ‘grey’ market. As these activities become more and more mainstream, I would expect to see the use of Bitcoin further increase in popularity.
Putting it all together. When you have an ascending frequency and value of Bitcoin transactions, along with wider acceptance and awareness, underpinned by easy and simple access, we could easily see growth outstrip the original $3000 prediction.
Adam Davies, Solutions Architect and Technology Specialist, Altus Consulting