3 reasons to be bullish on Bitcoin!

Author | Su Zhu & Hasu

Compiled by | Jhonny

Source | Medium

Based on a long enough time frame, it is often clear to assess the value of Bitcoin. The cryptocurrency market gives it a price based on the available supply and demand for Bitcoin. When there are more people buying Bitcoin than selling it, the price of Bitcoin will rise, and vice versa.

For most types of assets, rising prices induce producers to create more of that asset, which drives prices back down; similarly, falling prices lead to reduced supply, which drives prices back up. As a result, the prices of most commodities tend to remain relatively stable, close to their production costs.

Bitcoin has a fixed supply, with only 21 million bitcoins ever issued, and we always know the total number of bitcoins in circulation and the total number of bitcoins remaining.

While the market can still try to create "alternatives" to Bitcoin (other cryptocurrencies with similar characteristics) to increase supply, there is a great deal of "brand value" in currencies such as Bitcoin, and it manifests itself in network effects, liquidity, and integration with existing financial infrastructure. While it is not impossible for Bitcoin's supply to change based on demand, this elasticity is certainly lower than other types of crypto assets, leaving the upside for Bitcoin to current Bitcoin holders rather than its creators (miners).

The number of bitcoins in circulation multiplied by the bitcoin price gives us the bitcoin market cap. By comparing the bitcoin market cap to the market cap of other types of assets (such as fiat currencies, real estate, stocks, or commodities, etc.), we can understand the value that people store in these assets at any given time. Currently, the market cap of bitcoin is about $80 billion, which is far from the market cap that we think could "disrupt" the potential target market.

Current U.S. dollar banknotes held outside the United States: about $1 trillion, including more than 75% of all $100 bills in existence.

Data source: https://www.bundesbank.de/resource/blob/635016/dd6ad2cca1c1819561bfc957833cd853/mL/2017-04-24-judson-data.pdf

Global monetary base: $19.6 trillion,

Data source: https://twitter.com/crypto_voices/status/1096435880603148288

Gold held for investment purposes: private holdings of about $1.1 trillion (including jewelry), central banks holding about $1.3 trillion,

Data source: https://www.gold.org/

Since Bitcoin’s supply is less elastic to changes in demand, we expect rising demand to lead to higher Bitcoin trading prices. We can illustrate that Bitcoin’s demand will continue to rise from the following three aspects.

01Demand for electronic cash

Currently, 90% of the currency exists in virtual (electronic) form. When we get a loan from a bank and live around the bank's ledger, virtual currency is generated-until the debt is repaid, the funds are destroyed or taken away by others in the form of cash.

We can understand the growing trend from cash to electronic payments. Currently, most people are paid for their work electronically, and if a company pays wages in cash, it will have to constantly replenish its cash reserves, which is very cumbersome.

Countries that have completely abandoned cash are hoping to achieve a so-called "cashless" society. This can happen without government coercion, such as Sweden. In other countries, such as India, the government has stopped using larger denomination banknotes. In many countries, digital payments have become a tool for social control and the backbone of the social reputation system in these countries.

Central banks around the world are obsessed with negative interest rates because they are the ultimate means for central banks to achieve monetary control. In a cashless society, central banks can directly tax bank accounts held by citizens to curb savings, thereby encouraging citizens to increase "total spending" in the form of consumption and investment.

Making payments electronically is very efficient and convenient, although for older generations, electronic money is not the "money" they are familiar with. Electronic money is a completely new form of currency that can achieve very specific trade-offs. Electronic payments gain efficiency by using a trusted third party in each transaction. This third party maintains a central ledger and can easily update the ledger at any time. However, this approach is not without flaws: because the third party monitors all financial activities, it can refuse to execute any transactions it objects to, or even confiscate all funds.

In contrast, cash can be exchanged point-to-point between people. Transactions conducted through cash are permissionless, private, and instant (i.e., after a cash transaction, no one can reverse the transaction).

As our reliance on financial intermediaries increases, the importance of who controls them also increases. Currently, a small number of payment companies have a significant influence on what businesses can operate: money is the lifeblood of the economy, and if someone is cut off from payment providers, they lose their autonomy and have no chance to run their business.

With each passing year, our world is closer to a cashless world. The author believes that this is because the advantages of electronic payments are immediately visible to users, while the disadvantages are temporarily invisible. Therefore, the supply of cash will continue to decline globally.

But this decline does not accurately reflect people's demand for holding cash: governments, central banks and large companies (although not all) have an incentive to promote a cashless society, while cash has no such coordinated business interests to support it; and since as long as the financial intermediaries that promote a cashless society are fully trusted (although this trust is not guaranteed to last forever), people will follow the trend and accept these financial intermediaries, which also makes it a false reflection of people's demand for cash. This situation is similar to fire insurance, which is completely unnecessary until a fire occurs.

Bitcoin is the first and only form of currency that has cash-like characteristics but is stored and transferred electronically. When governments no longer provide cash, there will likely be a huge demand for an asset with cash-like characteristics (i.e., transactions that are private, instant, and require no third-party permission) - and Bitcoin is uniquely positioned in this regard!

02The need for a global, neutral settlement network

Currently, electronic payments work when there is a trusted intermediary (middleman) between the parties. The United States has played the role of middleman in most developed countries since World War II. Recently, the United States has shown that it is willing to weaponize the financial system to satisfy its political will (such as by forcing SWIFT to cut off funds between Russia and Iran), even though its allies do not approve of this approach.

Furthermore, political sentiment in many countries is turning toward isolationism, both in Europe (Brexit, uprisings in France, etc.) and in the United States (trade war with China, threats to withdraw from a nuclear arms treaty with Russia, etc.). Soft power institutions led by the United States, such as the World Bank (WB), the International Monetary Fund (IMF), and the World Trade Organization (WTO), are losing influence. These institutions were originally the main tools for projecting American power abroad, and if these institutions are usurped, it will bring power vacuums and uncertainty. The author believes that the current world is transforming from a world order with trusted protectors and middlemen to a multipolar world order.

As friction between world powers increases, people will be less willing to trust financial infrastructure controlled by others. This will create a need for a politically neutral financial network that is not controlled by any one party. Even online, censorship is increasing, with countries such as North Korea already cutting themselves off from the rest of the world in terms of the internet, and Russia planning to follow suit:

https://www.theguardian.com/world/2019/feb/12/great-firewall-fears-as-russia-plans-to-cut-itself-off-from-internet

Bitcoin can meet conditions such as neutrality and anti-censorship. Although some controversial transactions have occurred through Bitcoin in the past (such as Silk Road (the Silk Road website, which accepted Bitcoin to buy banned drugs, was blocked in 2013 and the founder was imprisoned for life) and Wikileaks (the Wikileaks incident in 2010, when Wikileaks relied heavily on Bitcoin transactions due to the US government's ban on it through financial payment systems such as Visa, MasterCard, and PayPal, which was opposed by Bitcoin founder Satoshi Nakamoto, source: https://zh.wikipedia.org/wiki/%E4%B8%AD%E6%9C%AC%E8%81%AA), etc.), the world may wake up to the benefits of anti-censorship and no longer think that this feature "only benefits criminals."

03The need to protect against the collapse of existing systems

Many people are concerned that the world economy and our financial system are over-indebted. Both consumer and sovereign debt levels relative to GDP are at all-time highs, while the ECB and the Bank of Japan remain at zero interest rates. Under these circumstances, it can be difficult for central banks to provide relief and boost economies when they slow.

Moreover, widespread demographic changes have created a huge gap between future government debt and tax revenues. For example, the US government not only “only” owes $20 trillion in foreign debt, but also owes ten times as much domestically. Many people believe that the only way to pay it back is to “devalue the dollar to reduce the US debt burden.”

It’s not fun to think about this situation, but it’s a reality that any investor must deal with today. Gold has traditionally been a trusted asset form when investors choose to avoid fiat currencies, but it’s also largely the government’s choice of reserve. The author believes that in the long run, Bitcoin may become the gold of the Internet and serve as a form of asset reserve to prevent the collapse of the existing financial system.

In fact, in countries such as Venezuela and other South and Central American countries, Bitcoin can replace weak national currencies and is being adopted at the "grassroots level" as an alternative to the US dollar. Recently, a study by peer-to-peer trading platform LocalBitcoins found that "in the fourth quarter of 2018, although Bitcoin prices and interest seemed to have hit a low point, 23 countries on the LocalBitcoins platform still had the best trading records ever. Almost all of these countries are from developing countries." Information source:

https://medium.com/@mattahlborg/nuanced-analysis-of-localbitcoins-data-suggests-bitcoin-is-working-as-satoshi-intended-d8b04d3ac7b2

Bitcoin can be cashed out better than fiat currencies like the dollar in some ways, making it an attractive alternative currency for people in developing countries. For example, using Bitcoin makes it easier to prevent funds from being seized (such as using brain wallets) and can be transferred electronically, especially across borders. Bitcoin skeptics often overlook the fact that currency competition is like running away from a grizzly bear - you just have to run faster than the slowest one. Given Bitcoin's immature state, Bitcoin can compete with the weakest fiat currency rather than with stronger currencies such as the dollar, euro, or yen, and can still compete with the former despite its price fluctuations.

04Is Bitcoin's price volatility a problem?

The volatility of Bitcoin prices is often cited as a factor preventing its adoption. There are two reasons for this: first, the supply of Bitcoin is fixed and does not change with demand; second, as a new cryptocurrency, Bitcoin is currently mainly used for speculation.

The best way to think about price volatility is to think of it as a temporary transaction cost. As Bitcoin's market cap grows, its value will come less from speculation (because there will be less speculation that its price will increase) and more from its fundamental utility. This will reduce Bitcoin's price volatility and make it cheaper to use.

Bitcoin needs adoption to achieve price stability, but many forms of adoption require price stability to be achieved - while this may sound a bit like the chicken and the egg question, using Bitcoin has different values ​​for different people.

Bitcoin’s success as money should not be judged based on its ability to perform consumer payments. Rather, Bitcoin will be adopted by those who can accept its current flaws because it meets their needs better than any other existing alternative (or no other alternative at all).

As the number of people using Bitcoin grows, its price will become less volatile, cheaper to use, and more attractive for more price-sensitive use cases. Frankly, given the current volatility of Bitcoin’s price and its complexity, anyone using Bitcoin should be seen as a loud supporter by the market.

05 Conclusion

Bitcoin is a new financial network with its own cryptocurrency, BTC, which is currently in the process of minting coins. At this stage, the price of Bitcoin is largely determined by expectations of its future growth (speculation), which makes its price volatile. Despite the current high cost and complexity of using Bitcoin, people in some developing countries are using Bitcoin and conducting unstoppable transactions online. The more people use Bitcoin, the less volatile its price will be, which will drive further adoption.

Since the supply of Bitcoin is fixed and it is difficult to create alternatives, its price depends largely on people's demand for holding Bitcoin. In the above, the author explains the three major trends that drive the demand for Bitcoin in the current world. People's demand for Bitcoin is the only competitor it faces, and it is also the key to creating huge upside for current Bitcoin holders.

Thanks to Nic Carter for feedback on this article.