In-depth long article丨From debt crisis to great power game, why will BTC rise in the future?

This article will explain how to use an advanced approach to value Bitcoin. We will focus on three important trends in the current world: the demand for digital cash, the need for a global neutral settlement network, and the need to hedge against the existing financial system. Since the supply of Bitcoin is fixed (it is difficult to replace it), the price depends largely on the demand to hold it. Based on these three trends, the future demand for Bitcoin may create huge upside for existing holders.

How to Value Bitcoin

Valuing Bitcoin over a long enough time frame is relatively simple. The market finds a price based on available supply and demand. When more people want to buy Bitcoin, the price rises, and vice versa. For most types of assets, rising prices encourage producers to invest more in the asset, which drives the price down. Likewise, falling prices lead to a reduction in supply and a rebound in price. Therefore, the prices of most commodities tend to remain relatively stable around the cost of production.

Bitcoin has a fixed supply, capped at 21 million. The market can still try to create "alternatives" (other cryptocurrencies with similar characteristics) to increase supply. We fully expect this to happen (and continue to happen), but the currency has huge "brand value" in terms of network effects, liquidity, and integration with existing financial infrastructure . Bitcoin supply is not completely inelastic to changes in demand, but it is certainly not as good as other assets, so existing owners, rather than producers, can gain advantages.

The sum of all bitcoins multiplied by the price is called market value. The “market value” of an asset like real estate, stocks, or commodities allows us to see the value people are storing at any given time, compared to fiat currencies. The current market value of bitcoin is $80 billion, which is small compared to the potential target market we believe could be undermined (the store of value market):

· U.S. dollars held abroad: about $1 trillion, including more than 75% of the $100 bills in existence · Global monetary base: $19.6 trillion · Gold held for investment purposes: about $1.1 trillion held by private individuals (excluding jewelry) and $1.3 trillion held by central banks

Since the supply side of Bitcoin (and alts) is less responsive to changes in demand, we expect that increases in demand will be reflected in higher trading prices. We have seen three main sources of this future demand.

The need for digital cash

90% of money today is virtual. It is created when someone takes out a loan and moves from time to time on a bank ledger - until the debt is paid and the funds are destroyed or withdrawn as cash.

The growing trend from physical cash to digital payments is understandable. Cash has an annoying feature that you need to be in the same place to exchange it. Most of us get our salaries in the form of digital payments and if you have to pay cash, you have to keep replenishing it.

A country that completely abandons the use of physical cash is called a “cashless” country. It can happen without coercion, as has happened in Sweden. In other countries, such as India, governments have already abolished larger denomination banknotes. In China, digital payments are the backbone of the country’s social credit system.

Central banks around the world have been attracted to the idea of ​​negative interest rates. In a cashless society, central banks could tax people’s bank accounts directly to discourage saving and encourage “aggregate spending” in the form of consumption and investment.

Digital payments are efficient and convenient, a new form of money. Digital payments are more efficient by incorporating a trusted third party into every transaction, who is responsible for maintaining a central ledger that can be updated more easily when needed. This arrangement is not without its drawbacks: the intermediary oversees all financial activity and can reject transactions it disagrees with or even confiscate the funds entirely.

Cash, on the other hand, can be exchanged peer-to-peer between people. These transactions are permissionless, private, and final (no one can reverse the transaction afterwards).

As our reliance on financial intermediaries grows, it becomes increasingly important to understand who controls them. Today, a handful of payment companies have enormous power and real influence in this regard. Money is the lifeblood of the economy - if a person is cut off from digital payments by payment processors, they lose their autonomy and have little chance of running their own business.

Every year, the world moves closer to going cashless. We believe the reason is that the benefits of digital payments are immediate and visible to users, while the drawbacks and disadvantages are not visible until they cause significant problems. As a result, the global supply of physical cash will continue to decline. However, this decline does not accurately reflect the demand for holding it. Governments, central banks, and large companies all have incentives to promote a cashless society (although not all institutions and companies do so), and there is no unified coordinated business interest in supporting cash. As long as financial intermediaries can be fully trusted (although there is no guarantee that this will always be the case), the demand for cash will continue to decline. Just like fire insurance, fire insurance seems unnecessary until a fire actually occurs.

Bitcoin is the first and only form of money that offers cash-like properties but can be stored and transferred digitally. When governments no longer provide physical cash, there may be a large excess demand for assets with cash-like properties - Bitcoin can meet this demand.

The need for a global neutral settlement network

Digital payments work when there are parties that have a trusted middleman. Since World War II, the United States has been the trusted middleman for most of the developed world. Recently, the United States has shown its willingness to weaponize the financial system to achieve its political will (forcing SWIFT to cut off business with Russia and Iran as part of U.S. sanctions on those two countries). U.S. allies do not want to be pushed around.

Furthermore, the political mood in many countries is turning isolationist, both in Europe (Brexit, the “yellow vests” movement in France) and the United States (trade war with China, withdrawal from a nuclear arms treaty with Russia). US-led soft power institutions, such as the World Bank, the International Monetary Fund, and the World Trade Organization, are losing influence. These institutions are the primary tools for projecting US power abroad, and their weakening will lead to a power vacuum and uncertainty. We believe the world is currently shifting from having a trusted protector and broker to a multipolar world order.

As friction between world powers increases, the willingness to trust financial infrastructure controlled by others will decrease. This creates a need for financial networks that are not controlled by one party but are politically neutral. Even on the current Internet, censorship is increasing.

Bitcoin satisfies the conditions of neutrality and censorship resistance. While there has been some controversial activity on the Bitcoin network in the past (such as Silk Road and Wikileaks), the world may come to see censorship resistance as a positive feature that is no longer just for criminals.

The need to hedge the existing financial system

Many people are concerned that the world economy and our financial system are over-leveraged . Consumer and sovereign debt levels relative to GDP are at all-time highs, while interest rates, particularly in Europe and Japan, remain at zero. When the economy slows, central banks have little room for monetary policy maneuvers to boost the economy.

Furthermore, the demographic shift has created a huge hole between future government debt and tax revenues . For example, the U.S. government not only owes $20 trillion in sovereign debt, but also has $200 trillion in domestic debt in the form of entitlement programs. Many people believe that the only way to pay for it is to devalue the dollar to a level that is at least nominal enough to pay off the debt.

Given, this is a doomsday scenario that isn’t very fun to think about, but it’s the reality any investor has to deal with today. Gold has been the safe haven of choice when investors flee fiat currencies, but it’s also highly regulated by governments, difficult to secure, and sometimes difficult to withdraw — as some countries (Venezuela) are experiencing today. We believe that over a long enough period of time, Bitcoin can become the gold for the internet-native generation, a hedge against governments and central banks.

The “Bitcoin as Doomsday Insurance” narrative is gaining traction, with even skeptics like Ken Rogoff now often citing it as a primary use case for Bitcoin. As more people worry about systemic risk, demand for Bitcoin as a limited “insurance ticket” is likely to increase accordingly.

Indeed, in Venezuela and other South and Central American countries, where Bitcoin can serve as an exit route for local currencies, Bitcoin is increasingly being adopted as an alternative to the U.S. dollar. A recent study of global data from peer-to-peer exchange LocalBitcoins found that the fourth quarter of 2018 was the highest quarter in terms of trading volume for 23 countries on LBC. Almost all of these countries are developing countries.

The dollar remains the most popular black market currency, but Bitcoin is better in some ways, making it an attractive option for people in developing countries. Bitcoin is resistant to confiscation and can be transferred digitally - especially across borders. Bitcoin skeptics often overlook the fact that currency competition is like a group of people running from a bear - you just have to outrun your slowest friend. Bitcoin is still in its immature state and can only compete with the weakest fiat currencies, not the dollar, euro or yen. Despite its huge price fluctuations, Bitcoin is still able to compete with fiat currencies.

Is Bitcoin's volatility a problem?

I am often asked if Bitcoin's price volatility is a hindrance to Bitcoin's adoption. Bitcoin is volatile for two reasons. First, Bitcoin's supply is fixed and does not respond to changes in demand. Second, as a young currency, it is currently used primarily for speculation. Its price is a function of delayed expectations of growth (and expectations of what others expect, etc.), all of which are constantly being modified. The best way to think about volatility is as a temporary transaction cost. As Bitcoin's market cap grows, the value from speculation will decrease, while the value from fundamental use will increase. This will reduce Bitcoin's volatility and make it cheaper to use.

While it can initially be seen as a chicken and egg problem — Bitcoin needs more adoption to become price stable, but many forms of adoption require price stability — using Bitcoin has different values ​​for different people. Bitcoin’s success as a currency should not be judged by its ability to perform consumer payments. Instead, Bitcoin is adopted first by those who can tolerate these current transaction costs because it helps them better than existing alternatives — or because there are no alternatives. As more people use Bitcoin, it will become less volatile, cheaper to use, and applicable to more use cases. A positive feedback loop! In fact, given its volatility and complexity, anyone using Bitcoin right now is to be applauded by this author, and the actions of these people should be seen as a resounding endorsement of the market.

Summarize

Bitcoin is a new financial network with a token that is currently in the monetization phase. During this phase, its price is largely determined by expectations of future growth - making it predictably volatile. Despite the high cost (given volatility) and complexity of Bitcoin transactions, many people in developing countries are still using Bitcoin. The more people use it, the less volatile it becomes, encouraging further adoption in a positive cycle.

Since Bitcoin’s supply is fixed (it’s hard to replace it), the price is largely determined by the demand to hold it. We’ve identified three major trends in the world that could lead to massive demand. This demand could create huge upside for existing holders.