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.
From the inception of Bitcoin in 2009 until January 2011, its market cap grew to $1.5m. From there, it rocketed to $145m in January 2013, to reach an average of $3.5 billion in 2015
These are some of the areas in which Bitcoin-oriented technologies 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.
Bitcoin’s potential is not going unnoticed. After it had been praised by tech moguls such as Bill Gates (“A technological tour de force.”) and Gmail founder Paul Buchheit (“Bitcoin may be the TCP/IP of money”), the money started speaking. We saw investments in Bitcoin by top venture capital brass such as Marc Andreessen, Reid Hoffman, Fred Wilson, and PayPal co-founder Peter Thiel; by billionaires such as Jeffrey Skoll (eBay co-founder) and Li Ka-shing (by all reports the richest person in Asia); by iconic executives such as Vikram Pandit (Citigroup), Blythe Masters (JPMorgan Chase), and Tom Glocer (Reuters); and most recently by large cap companies such as Google, Qualcomm, NYSE, Nasdaq, USAA (American bank and insurer), and NTT Docomo ($75b Japanese phone operator). Finally, several academic and government heavyweights have also affiliated themselves with Bitcoin companies: Larry Summers (ex-Treasury Secretary, World Bank Chief Economist), James Newsome (CFTC and NYMEX), and Arthur Levitt (SEC). 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 property.”
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.
Which 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. To give an idea of its size, as 21 Inc. CEO Balaji Srinivasan has pointed out that “all of Google today would represent less than 1 percent of mining.” 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, from the inception of Bitcoin in 2009 until January 2011, its market cap grew to $1.5m. From there, it rocketed to $145m in January 2013, to reach an average of $3.5 billion in 2015.
Despite a steady decline in price in the 12 months following the fall 2013 rally, year-on-year adoption trends markedly point upward: as of Q2 2015, there are 11 million bitcoin wallets (+100%), Bitcoin is accepted by 106,000 merchants (+100%), there are 475 Bitcoin ATMs (up from 238, and the hashrate of the network is 484 pth/s (+100%).
Enticed by its great potential, investments in the Bitcoin ecosystem are taking off rapidly. In 2013, little over 40 VC deals were made that raised a total of $96 million. That number nearly quadrupled over 2014, with $335 million invested. For 2015, the current run rate is almost three times that, $800 million.
The value of bitcoins in circulation has been rising steadily. This can be explained mostly by the fact that it is a scarce commodity (maximum supply is 21 million) with rapidly growing utility. 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:
• The emergence of a much better digital currency that steals its market lead.
• An undetected bug in the system.
• A hard fork (what happens when some nodes in the network start running a Bitcoin software upgrade that is incompatible with previous versions) causing the Bitcoin payment network to split in two.
• A sustained attack by an organization with substantial financial resources, such as a government.
“Bitcoin does not appear to be a fad or bubble, nor merely a one-off hedge against gold.”
How serious 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.
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.
A hard fork creates competition between two versions of Bitcoin, and after a period of fear and doubt, eventually the value will flow to the version deemed most useful by its users—not a long term threat in other words.
An organized attack on the network is possible but expensive, and there are many potential defense mechanisms: miners can refuse suspicious transactions or raise fees, vulnerabilities in the code can be fixed, and so forth. From the perspective of the government, approaching the robust, decentralized Bitcoin network with an outright ban is nigh impossible. Therefore taxation, regulation and acceptance seems the more likely outcome.
In any case, it seems 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.
1) Source: http://tinyurl.com/HFresearch2013
2) Source: http://tinyurl.com/argentine-USDcash
3) Source: http://tinyurl.com/GMabovegroundgoldstock
4) Source: http://tinyurl.com/worldbank2012remittances
5) Source: http://tinyurl.com/ecommerceglobal
7) Source: http://mises.org/content/nofed/chart.aspx
8) Source: http://tinyurl.com/HKMAoffshore