Will Bitcoin become a tool for storing value? How much will the global demand for Bitcoin be in the future?

Original source: Medium

Compiled by: Masaka

Editor's Note: The original title is "How much demand will there be for Bitcoin in the world in the future?"

When it comes to the topic of whether Bitcoin will become a tool for storing value, we only need to clarify one thing: how great will the global demand for Bitcoin be in the future?

For an item to have store-of-value properties, its supply must be limited and demand must be strong. Bitcoin clearly meets the former condition, but its demand side is still a huge unknown.

Yes, you can say that there is demand for Bitcoin today, but how confident are you that there will be strong demand for Bitcoin in 10 or 50 years?

Before we predict the future world demand for Bitcoin, let’s first think about why there is a demand for Bitcoin now, or to put it another way: why do you buy Bitcoin?

Because you are confident that you can sell it for a good price in the future?

This reason is not sufficient. You have to know that everyone who bought junk stocks during the Internet bubble and everyone who bought houses at high prices before the subprime mortgage crisis also believed that they could sell them at a good price in the future.

As long as you have a fundamental thesis that explains why it will appreciate and is not affected by other irrational exuberance, you can buy it for profit, which is what this article pursues. Let's find out how much global demand for Bitcoin will be in the future.

1. Will Bitcoin replace part of the demand for gold?

About 2,500-3,000 tons of gold are mined every year. Although the supply of gold is not as stable and predictable as Bitcoin, the impact of gold supply is so small that its fluctuations have little effect on the price of gold.

The price of gold is almost entirely determined by demand. The demand for gold is determined by income levels, interest rates, inflation levels, and several other macroeconomic and geopolitical factors. A good rule of thumb is that when people get hammered in the stock market, they seek refuge in safe havens like gold.

1. How big is the gold market?

Of all gold demand, jewelry accounts for about 50% of global gold demand, mostly from India and China; gold bars and coins account for about 25% of demand; electronics, other industrial uses and dentistry account for another 15% of demand; and central bank net purchases account for about 5%.

At the same time, demand for gold is soaring through gold ETFs, gold-backed funds and other financial instruments that allow you to invest in gold without the hassle of holding and protecting it.

At first glance, about half of gold demand comes from jewelry, but a little research into the price sensitivity of the jewelry market will show that for every 1% increase in the gold price, jewelry demand only decreases by 0.5%.

If most people who buy gold consider it as a purchase similar to buying a new pair of jeans, then they should be more sensitive to the price of gold.

In fact, more than 80% of gold buyers choose to buy gold because they believe it is a safe investment. In other words, gold is mainly used to preserve value and fight inflation.

When inflation gets out of control, people are willing to pay more for gold. When the market crashes, they are willing to pay more for gold. When people lose confidence in stocks, they turn to gold for protection, even though gold itself has no security. This is worth repeating - gold is not guaranteed or backed by anything.

Gold has strong demand, is well-positioned to absorb temporary oversupply, is not affected by inflation, and offers some protection against volatility. Even though the vast majority of people who invest in gold do not typically expect huge returns from it, demand for gold still exists.

Over the past 20 years, gold prices have risen 400% (an average annual return of about 8.4%); over the past 10 years, gold prices have risen at an average annual rate of about 3.5% - in other words, under normal circumstances, investing in gold is just to protect against inflation.

If Bitcoin achieved similar returns in the next 10 years, would you invest in Bitcoin today? If you don’t live in an area where hyperinflation is a reality, you’d probably answer “no”.

2. Is Bitcoin digital gold?

While Bitcoin is often referred to as digital gold, the average investor's expectations of Bitcoin are very different from those of gold.

Few people will admit it - the vast majority of people today are speculating, and they want a huge return on their capital in the short or long term. They are certainly not looking for something that simply stores value.

At current valuations, all gold ever mined is worth about $9 trillion. At the time of writing, Bitcoin’s market cap is about $185 billion.

However, the expectation that a certain percentage of the value of gold will be transferred to Bitcoin, making it more valuable, is completely irrational, and it is also wrong to use such a fantasy as a reason to invest in Bitcoin.

To be honest, the digital gold metaphor is not convincing at all. Bitcoin is not a digital substitute for gold at the moment, nor is it likely to be in the near future.

As an asset that can both preserve value and resist inflation without excessive volatility, the best digital alternatives to gold are gold-backed exchange-traded funds (ETFs) and stablecoins.

Yes, this “digital gold” is centralized.

Yes, you have to rely on middlemen.

Yes, independent audits are needed to verify the authenticity of the gold reserves.

But it offers something that people around the world have always wanted - a safe investment. These "digital gold" also offer the same divisibility (you can easily buy and sell fractional shares of a gold ETF), liquidity, and ownership as Bitcoin.

If you still don't believe it, just look at what has happened in the past five days.

The S&P 500 fell 8% as concerns over the coronavirus intensified. Investors flocked to safe-haven assets like gold and Treasury bonds. What happened to the price of Bitcoin? It fell more than 9% - nothing like what digital gold should have.

Yes, the digital gold metaphor is useful in helping people understand that even digital assets have scarcity value. However, this literal interpretation of digital gold is very misleading.

Where else could strong, sustainable, long-term demand for Bitcoin come from?

There is over $80 trillion of broad money in the world held in fiat currency, of which about $5 trillion is in circulation in the form of banknotes and coins, and the rest is held in checking accounts, current accounts, savings accounts, money market accounts, etc.

The U.S. dollar is currently the most popular legal tender, with nearly two-thirds of the People’s Bank of China’s foreign exchange reserves denominated in U.S. dollars. In foreign exchange transactions, about 90% of transactions involve the U.S. dollar, which can be said to be a global currency.

So far, the United States has achieved remarkable results in controlling dollar inflation. However, the growing US federal budget deficit (currently $1.1 trillion) has raised concerns about hidden dollar inflation. Therefore, China has also been proposing to the International Monetary Fund to establish a separate global foreign exchange reserve while diversifying its foreign exchange reserves.

It has been suggested in the past that Bitcoin has the potential to become a global reserve currency. However, Bitcoin currently does not meet one of the basic requirements to become a global reserve currency - it is not an effective medium of exchange due to its extreme volatility.

At a minimum, a global currency reserve needs to be a medium of exchange, a store of value, and a unit of account. Currently, Bitcoin is none of the above. Therefore, the often-touted $7 trillion global foreign exchange reserve market opportunity is untenable today.

3. Is there a demand for Bitcoin for global remittances?

Global remittances currently total about $715 billion. India and China are the world's largest recipients of remittances, each accounting for about 10% of total remittances. These markets are highly competitive, resulting in relatively low transaction costs.

If you are sending a large sum of money to India, the transaction cost of a fast and cheap service is about 0.6%-0.7% of the total amount of the remittance. However, the average transaction cost of sending money to low- and middle-income countries around the world is as high as 7% of the total amount of the remittance.

Transaction costs for remittances to parts of Africa, in particular, can exceed 10% of the total remittances. While the current situation is crying out for disruption, it is unrealistic to expect participants to convert a large portion of the $715 billion per year from fiat currencies to Bitcoin to achieve the goal of low transaction costs.

I personally think that stablecoins with the same low volatility as fiat currencies may become the backend service for cheaper global wire transfers. At that time, the underlying programmable assets (cryptocurrencies), programmable distributed databases (blockchains), and decentralized consensus protocols will be basically invisible on the consumer-facing front end.

In other words, customers could care less whether it is asset-backed, reliable, independently audited, or otherwise collateralized, and without reducing transaction costs, customers would have no reason to favor a trustless system with carefully designed incentives to suppress volatility.

4. Is there a demand for Bitcoin in e-commerce?

So does Bitcoin have a chance in the legal e-commerce market?

It’s exciting to see more and more e-commerce businesses accepting Bitcoin payments every day. However, what fundamental problem does Bitcoin solve for merchants?

Yes, e-commerce merchants can find companies that process Bitcoin payments (transfer Bitcoin from the customer’s wallet to the merchant’s wallet) to get a merchant discount fee that is cheaper than credit card payments (usually between 1.5% and 3%).

But given the volatility of Bitcoin today, no reasonable businessman would want Bitcoin on his balance sheet. That’s the hidden cost.

To convert received bitcoins into cash, merchants typically need to first withdraw the bitcoins to a cryptocurrency exchange (for a fee), convert them to cash (for more fees), and then withdraw them from the exchange to a bank account.

Even putting this limitation aside, Bitcoin cannot currently be used for large-scale commercial applications. Visa can process an average of 1,700 transactions per second, with a maximum of 24,000 transactions per second, and the Alipay system processes more than 250,000 transactions per second.

All in all, Bitcoin cannot currently have a meaningful impact on the e-commerce industry.

In the long run, the place where Bitcoin will be most in demand is actually: those distressed fiat currencies that are suffering from hyperinflation - this number is about $6.5 trillion.

While Bitcoin is significantly more volatile than most current fiat currencies, the gap is certainly narrowing. Bitcoin, an asset with a precise inflation setting, is a very attractive asset for those who fundamentally distrust the government to maintain the value of its currency.

Many people know that the demand for Bitcoin has exploded in countries such as Venezuela not long ago. However, it is still unclear whether Bitcoin is a preferred asset to protect savings from high inflation. In this field, stablecoins with a certain scale and widespread use will also become competitors of Bitcoin.

All in all, Bitcoin still has a long way to go before value investors see its value. Today, it is mainly a tool for speculators to bet on the future, and most people have no intention of actually using it.

Bitcoin is absolutely amazing, and the Bitcoin community has every right to be proud of itself. However, a great technology can only create more lasting economic value if it becomes an excellent product or basic service.

Bitcoin’s future requires real demand, rather than speculation that comes and goes. Events that spark temporary demand, such as the Cyprus banking crisis or Brexit, will ultimately mean little to Bitcoin’s future if growing awareness of Bitcoin doesn’t generate stronger demand.