A technology is called “disruptive” if it creates a new market that first disturbs and then displaces an earlier technology. Bitcoin is potentially such a technology and much more. The fact that it can disrupt the largest and most interconnected marketplace in the world—money, banking, and finance—makes it perhaps the most promising investment opportunity of our age.
Unlike our current increasingly unstable and unpredictable financial system, Bitcoin has 21st century technologies at its very core. The digital currency and clearing network is open source, mobile, peer-to-peer, cryptographically protected, privacy oriented and native to the Internet. The fusion of these technologies allows for a level of security and efficiency unprecedented in the world of finance. These are some of the areas in which Bitcoin-oriented technology can directly compete:
- $2 trillion annual market for electronic payments,
- $1 trillion annual e-commerce market,
- $514 billion annual remittance market,
- $2.3 trillion hedge fund market,
- $7 trillion gold market,
- $4.5 trillion cash market,
- $16.7 trillion offshore deposit market.
Indeed, Bitcoin has been noted in glowing terms by industry moguls such as:
- Microsoft Founder Bill Gates (“A technological tour de force.”)
- SWIFT CEO Gottfried Leibbrandt (“Don’t see why we could not send transactions in Bitcoin as a currency.”)
- Entrepreneur Marc Andreessen (“Personal computers in 1975, the Internet in 1993, and I believe, Bitcoin in 2014.”)
- Legg Mason Portfolio Manager Bill Miller (“If it becomes 10% as popular as gold, you can make 120 times your money.”)
- Fortress Investment Co-CIO Michael Novogratz (“Put a little money in Bitcoin, come back in a few years, and it’s going to be worth a lot.”)
The core value proposition of this network is the fact that, in the words of IBM executive architect Richard Brown, “Bitcoin is a very sophisticated, globally distributed asset ledger.” What Brown and others hint at is that Bitcoin will in the future be able to serve not only as a decentralized currency and payment platform, but also as the backbone for an “Internet of money.”
This entails a decentralized global platform, smartphone- accessible, on which companies and individuals can issue, buy, and sell stocks, bonds, commodities and a myriad of other financial products. The effect will be to remove much of the current bureaucracy and barriers to entry, presenting a huge opportunity for the world’s 2.5 billion unbanked people.
This raises the question: why Bitcoin, and not some other cryptocurrency? The answer may lie in the network effect: of all the cryptocurrencies, Bitcoin is the one with the highest adoption rate and the strongest security. The combined computing power of the Bitcoin mining industry serves as a protective firewall around the payment network, with a replacement cost of at least $1 billion— and it is growing quickly. In short: no other cryptocurrency is as secure as Bitcoin. This attribute in itself attracts more capital, which in turn makes the network even more secure and performant.
Because of its robustness, the Bitcoin network is now the reference protocol for the new paradigm in finance. And just like TCP/IP became the mainstay for the Internet of information, the Bitcoin network will likely become the value anchor for the Internet of money and finance. Speed may be provided by off-chain or side-chain transactions, but for the high-value transactions of tomorrow, Bitcoin could very well become the security-providing reference currency.
So, how much of all this potential is already realized?
Well, since inception of Bitcoin in 2009, its market cap has grown by a minimum of 10 times every year. It now stands at over $8 billion, with an annual turnover of +$50 billion. According to Coinometrics.com, this makes the Bitcoin currency stock more valuable than that of 108 national currencies, including Panama, Macau, Ghana, and Malta. Currently over 80,000 merchants accept Bitcoin as payment.
Enticed by its great potential, venture capital is also warming up to Bitcoin. In 2013, 40 deals were made that raised a total of $74 million, and the 2014 run rate for the year is currently US $250 million. To put this into context, investments in the Internet of 1995 were an inflation-adjusted $387 million— which is why many Bitcoin investors believe we are at a stage similar to the Internet in 1993 or ’94.
Furthermore, the Bitcoin price has been rising at an exponential rate of +1,000% annually. This can be explained mostly by the fact that it is a scarce commodity (maximum supply is 21 million) with a rapidly growing user base. Here are a few possible scenarios for the future value of one bitcoin:
The scenarios projected above are, of course, not cast in stone. Bitcoin faces several risks going forward. These include:
- Compromised security of the major exchanges,
- The emergence of a much better digital currency that steals its market lead,
- An undetected bug in the system,
- A sustained attack by an organization with substantial computational resources,
- A coordinated clampdown on Bitcoin by a multi-national entity such as the G20.
How serious of a risk do these challenges pose? Let us examine them.
A better currency is possible, but experience shows that disruptive protocols—such as SMTP for email and TCP/IP for Internet—have proven to be very resilient once adopted by a critical mass of the population.
An organized attack on the network is possible but expensive, and there are many potential defense mechanisms.
As with any software application, the discovery of bugs may destabilize the system, but the open source nature of Bitcoin allows for many eyeballs to help track problems, and many brains to help figure out a solution.
That leaves government clampdown as the most likely risk to Bitcoin. However, with many regulators implicitly or explicitly already accepting Bitcoin, and the robust, decentralized nature of its network, such a move would have little long-term structural impact and is thus unlikely.
Because of its strong network effect, the outcome of the Bitcoin story is likely to be binary: either it will experience a downfall as it is superseded by a vastly superior technology, or the value of bitcoins will rise dramatically over the coming years as an increasing share of the global population adopts the currency.
In any case, to me it’s exceedingly clear that the technology of the cryptocurrencies is here to stay. Bitcoin does not appear to be a fad or bubble, nor merely a one-off hedge against gold. With a risk-reward proposition this attractive, holding a small percentage of bitcoins in one’s portfolio as a speculation on increased adoption may be one of the wisest investment decisions of our age.
This article originally appeared in yBitcoin magazine.
January 30, 2015 at 10:45PM
