Bitcoin Possibilities

I understand that discussions about bitcoin can be polarizing. Before we move on I ask that bitcoin believers consider that there are many unknown vulnerabilities that bitcoin may have. There are challenges that it will face in the future. Some of these challenges it may not survive unscathed, or survive through at all. To the bitcoin sceptics, I ask that you do not dismiss the possibilities of this amazing new technology, and realize that it truly may be revolutionary. There are those who scoffed at groundbreaking innovations throughout history, not because of a lack on intelligence, many of the perpetrators were brilliant, but because of a stubborn refusal to open their mind to change.

There are a couple prominent theories about the creation of bitcoin, but the truth is the greatest known experts such as Gavin Andresen don't truly know the identity of the developer. Who developed the technology and why is vitally important, but even not knowing for sure, we can look at the most likely origins and drill down the implications of each. Evaluating the possible outcomes and the likelihood of each can help us in how we treat the crypto-currency.

The first origination possibility is that a brilliant private individual or group of individuals developed bitcoin. He/She/They may have done this purely for the cryptographic and programming challenge or to change the world. The goal of this private developer whether limited or ambitious frankly doesn't matter much to the outcomes. In this scenario bitcoin could completely fail due to unforeseen vulnerabilities, continue to have and expand success in niche markets, or take over vast swaths of finance and commerce.

The second possibility of how bitcoin came about is that it was developed by a government, most likely the US. Government development can then be split into two sub categories . The first is that it was created by a malevolent government in an effort to curtail liberty and gain even more power. There are many crypto-believers that think that bitcoin cannot be manipulated but it may be naive of those who dismiss future manipulation off hand. If a malicious government is responsible for bitcoin, again the fork splits and it could become widely used or crushed based on that government's needs. We'll call this one the 'Evil Greenspan' theory. Here is a post discussing a possible Evil Greenspan plan.

Bitcoin could have also been developed by benevolent powers in the government; we'll call this one the 'Good Greenspan' theory, for more information click here. Below is a video of an economist that has my admiration, Milton Freedman, discussing a system very similar to Bitcoin back in 1999. Again if this is the development it could still fail, see limited use, or become wildly successful.

Now let's drill down and look at the possible returns that each outcome could see, comparing each to a money supply of similar size economies. I will not put a likelihood of each possibility, which is for you to decide.

If bitcoin was privately developed but fails, you will lose all of the purchasing power invested.

If bitcoin was privately developed and is used in niche markets it could remain at its current market cap up to we'll say the market cap of Belgium's M1 Money supply. We are using M1 Money supply because M2 money supply includes some forms of debt that are not suitable as a medium of exchange. If we consider total bitcoin that will be produced, less lost bitcoin, that gives us a total of about 20 million. Belgium's M1 Money supply is equal to 186 billion dollars. This divided by 20 million equals $9279 per bitcoin or a 3400% return.

Using the same methodology if bitcoin was privately developed and manages to take over large portions of commerce it would have the possibility of rivaling the M1 money supply of a major nation. We'll use Germany who has a money supply equal to 1.85 trillion dollars. Divided by 20 million equals $92,400 per bitcoin a 34,200% return.

If bitcoin was the brainchild of bad actors in the government, even if it shows further positive returns, the worth hopefully reflected in the price would eventually be zero. This could be by design, I doubt the government wants to make the Winklevoss brothers trillionaires, or revolt.

The final and I think the most interesting of the possibilities is if good guys in the government are behind bitcoin. Bitcoin could still fail because of unforeseen flaws, but with this support it has the ability to become very successful. Under the 'Good Greenspan' theory we can conclude that bitcoin could become a major world currency. With the farfetched M1 money supply of the US, 3.007 trillion dollars, we would come to a bitcoin value of $150,350. I'm no fan of government but this scenario could remove some of the obstacles bitcoin could face.

Notice that even in the rosiest of scenarios there isn't a million dollar price tag. Also, we are focusing on current purchasing power so a devaluation of fiat currency doesn't count. I will admit that there is the ultra slim possibility that bitcoin could replace more than the market share of the US dollar. It could also produce an economy that is much more efficient than our current flawed system. A more efficient economy would be even more deflationary, and the purchasing power could rise further. Looking again to the negative, depending on your vantage point, bitcoin could also face a superior crypto currency competitor that could make it obsolete. To prevent getting burned it would require an investor nimble enough to get the upgrade while the gettin's good.

Based on our simple baselines, which you can prescribe your own possibilities to, we can see there are more possible failures than successes. That said the return possibilities alone make for an intriguing speculation. I am still firmly in the sceptic category, but as outlined here, a small weighting is warranted.

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