Lesson 5: How much will Bitcoin be worth in ten years time?
The cryptocurrency market is beset by sharp and sudden changes. Logically, the more people that want to buy cryptocurrencies, the more their price will rise. And vice versa. But it’s not that simple: reputation, trust, use and capacity to adapt also count.
One of the recognitions of fiat money —that regulated by the central banks— is derived from the trust that society places in regulatory mechanisms such as central banks. But in decentralized cryptoassets, such as Bitcoin (BTC), there are other ways of conferring perceived value. We will look at some of these factors below:
Scarcity and supply-demand.
If a good is scarce and in demand, its value is perceived as higher. This is the classic example of precious metals such as gold, considered a safe haven asset. Direct competition is another factor.
Bitcoin is a scarce commodity by definition, since there will only ever be a maximum of 21 million divisible tokens in circulation. There are currently more than 19 million tokens in circulation. Scarcity is undoubtedly one of its strengths from a future perspective. As with any other type of asset, its price will go down or up depending on demand.
In the cryptocurrency market, more alternative currencies (altcoins) have emerged, causing a distribution of investments. This competition may have an impact on price suppression.
The reputation of the asset to be valued. All assets have a certain reputation associated with how society perceives them. For example, the “barrel of oil” asset is affected by awareness of the climate crisis. In cryptocurrencies, the use of the asset usually contributes to that reputation.
Bitcoin has gone through different reputational phases, from a worthless asset to a hit, followed by the focus on the impact of its technology. Now that it is being regulated, it seems that it will become more stable.
The network effects of cryptoassets.
Large networks are more valuable than small ones, says Metcalfe’s Law, and with cryptoassets supported on blockchain technology, this way of valuing the asset works very well. The two factors that follow are closely related to this.
Almost all people who have cryptocurrencies have BTC, which in turn is one of the networks with the highest trading volume. According to mathematical models such as that of Chun Wei and You, their expected value is high.
Token adaptability and use in decentralized applications.
The more versatile an asset is, the higher its value. This is clearly seen in the use of decentralized applications on the Ethereum network, in which the token is used for a multitude of environments.
Unlike ETH, Bitcoin is not highly adaptable, and no applications are built on its network. At this point, the relative value compared to ETH is somewhat poorer.
People holding that token.
Likewise, the more people that use an asset, the more stable it is. Partly because there are more exchanges and according to the classical Quantity Theory of Money, the faster the movement the higher the value. But also because there is a certain shared social value that provides stability, which Yuval Noah Harari calls “shared fiction”.
Bitcoin is undoubtedly the most widely held currency and the most accepted for payment. Furthermore, its market value is more than double that of Ethereum (ETH), the next most common currency.
Can a comparison be made with the digital economy?
When the world made the leap from the analogue to the digital economy, an enormous amount of value was created that did not exist before. The value emerged from a systemic change at all levels. Might blockchain networks support new growth, as digitization has already done? It is certainly a possibility. Bitcoin has a series of unique and very interesting properties with a view to becoming a future global store of value, with properties similar to those of gold, although better:
- To start with, as a cryptocurrency it offers an alternative based on the digital economy, where value is created and transferred directly, without any intermediaries or restrictions.
- Bitcoin is also divisible, portable and fungible, which makes it an efficient and universal medium of exchange.
- Finally, and probably most importantly, the worldwide reserve of bitcoins will always have a limited number of tokens (21 million units).
These three general characteristics make Bitcoin a possible global store of value, and therefore stabilize its perceived value, which could even increase over time in the same way that gold does.