Why Bitcoin is like the best stock in American history: Bitcoin's "sin" and "rise"

There are many different opinions on whether Bitcoin is a Ponzi scheme or the currency of the future. The most common argument for Bitcoin is that decentralized currency issuance and trading has a promising future, and there is also the theory of currency over-issuance. At the very least, the story of large financial institutions bringing leverage into the currency circle can be brought up. Those who are bearish say that the country will never allow the right to issue currency to fall into the hands of Bitcoin, so it will be banned sooner or later.

After reading so many articles, I always feel like I am scratching an itch. Take the decentralization that is always mentioned in every coin, for example. Many economic phenomena that we take for granted are actually the result of "centralization". For example, even the most basic unit of modern economy, the limited liability company, was born and developed under the promotion and maintenance of state coercive force. Decentralization for the sake of decentralization may not necessarily have positive economic benefits.

I think the above comments miss the point. After much thought, I propose a framework for thinking about the value of Bitcoin, aiming to highlight the most critical factors. How is Bitcoin like the best stock in American history? Readers, don't worry, the following article will soon reveal the mystery.

This thinking framework includes four aspects:

1) Marginal production costs continue to rise sharply

2) Huge trading demand continues to support prices

3) The total value scale is still not large

4) The attitude of the country

1 ) The marginal cost of Bitcoin

Although the maximum total amount of Bitcoin is capped, the long-term price increases of many limited natural resources are not significant compared to inflation. For example, the price of oil is now similar to that of more than a decade ago, and the price after taking inflation into account has not increased much compared to the 1980s.

Source: inflationdata.com, red is the price considering inflation, black is the actual transaction price in history

According to Credit Suisse research, the prices of some resources (such as copper) have even fallen over the past century, excluding inflation.

Source: Credit Suisse

What is different about Bitcoin is that the marginal cost of mining a new Bitcoin continues to rise rapidly.

Source: Comprehensive calculation difficulty, electricity cost, etc.

The cost of mining Bitcoin has increased nearly 10 times in the past two years. It is estimated that as of September 18, 2017, the production cost of each Bitcoin is as high as $2,800, and it will only get higher. Even if there are cost-reducing factors such as "public appliances", the marginal production cost of Bitcoin in the long run will be close to the theoretical cost and rise rapidly.

2 ) Providing continuous support for huge transaction demands

The speculative bubbles we are familiar with, such as the Internet bubble in the United States in the late 1990s, look like this:

Source: Stockcharts.com

If Bitcoin is only issued in limited quantities and has no trading value, it may be no different from some limited edition cards of Raccoon instant noodles. What makes Bitcoin different from the above-mentioned speculative bubbles (and Raccoon cards) is that it has a huge real trading demand. From this perspective, Bitcoin has a steady stream of funds willing to take over, which can avoid the ups and downs like speculative bubbles.

Where does the potential demand for Bitcoin transactions come from? It mainly includes compliant and non-compliant transaction demands. What is often overlooked is that residents in high-inflation developing countries have the potential to use Bitcoin, and the cost of transactions in the banking system of these countries is often high. In today's developed countries where inflation rates have been low for a long time at 1-2%, if countries with inflation rates exceeding 5% are defined as high-inflation countries, the total GDP of these countries (that is, the amount of goods and services that change hands in a year) can also reach 6 trillion US dollars. Of course, an unavoidable fact is that the anonymity of Bitcoin is likely to cause other transaction demands to be less compliant (for example, even in developed countries, there are a large number of cash transactions to avoid taxes, which European and American economists call the "underground economy"), or even illegal (this goes without saying), and how huge is the potential "use scenario" of Bitcoin in the world?

*Based on relevant economists, we take the lower estimate

**Global Financial Integrity estimates

***: Comprehensive database of the United Nations, etc.

Just a rough estimate shows that the use case of Bitcoin can exceed $12 trillion in transaction volume, and in fact it should be much more than this amount. Admittedly, speculative demand in actual Bitcoin transactions may account for the majority of it, and it is currently mainly overdrawing the expectation that real transactions will gradually shift to Bitcoin in the future.

Interestingly, when the United States and Europe investigated the use of large-denomination banknotes, they found that their use was often non-compliant, which is why Harvard professor Rogoff advocated the gradual abolition of cash in "The Curse of Cash". Even former Federal Reserve Vice Chairman Alan Blinder said in an interview with the Wall Street Journal in April 2017 that "the Federal Reserve has long known that most $100 bills are not in the United States. It doesn't take a genius to realize that they are used for illegal activities."

This reminds us that the best performing stock in the United States over the past 50 years was actually the "evil" tobacco stock Phillip Morris (now Altria). If you invested $1 in Altria in 1968 and held it until 2015, the return would be $6,638, ranking first among US stocks during the same period. The return of investing in the S&P 500 index during the same period was only $87.

Source: S&P Capital IQ

If you had invested $1 in tobacco stocks in 1900 and held them until 2010, the return would have been an even more astonishing $6.3 million.

Betting on Bitcoin, to some extent, is betting that the above-mentioned less glorious transaction demands will exist for a long time and gradually shift to Bitcoin.

3 ) The total value of Bitcoin is not large

As of October 19, 2017, there are about 16.6 million bitcoins issued, with a total value of less than $100 billion. If the above-mentioned compliant and non-compliant transaction needs turn to Bitcoin in the future, the value of Bitcoin can be simulated by the currency volume of a moderately developed country. The following figure shows the total economic volume and total currency volume of some moderately developed countries. It can be seen that the total price of Bitcoin is still in an almost invisible position compared to its potential transaction usage scenarios and the economic volume of the benchmark moderately developed countries.

4 ) National attitude

The above three factors are the core elements that are conducive to the further development of Bitcoin. However, the recent attitudes of various countries have cast a shadow on the future of Bitcoin.

As a technological innovation, Bitcoin itself is innocent. On the one hand, its anonymous transaction function gives it huge transaction value. On the other hand, it is uncertain to what extent countries will tolerate these transactions, especially the "original sin" of non-compliant ones.

Recently, various countries have also introduced policies to suppress Bitcoin. From China's ban on transactions, to Europe and the United States tightening ICOs, to Russia's rumored ban, to South Korea's consideration of taxation. At present, countries mainly focus on regulating Bitcoin, rather than killing it with one blow, perhaps because Bitcoin has another function that cannot be ignored: de-dollarization! As mentioned above, American big-name economists themselves admit that large amounts of US dollars are often used for evil. If this part of the US dollar demand turns to Bitcoin, it is a covert move to undermine the international status of the US dollar. And some countries that are in urgent need of fiscal revenue may try to impose taxes on Bitcoin to provide a safe haven for Bitcoin.

In short, as the production cost of Bitcoin continues to rise and the transaction demand of trillion-dollar application scenarios continues to provide support, the attitude of the country has become the key. If countries work together to suppress Bitcoin and technically prevent transactions, then Bitcoin may return to zero; and if countries only regulate and tax, then the return of Bitcoin may be comparable to that of American tobacco bull stocks. This is the sin and rise of Bitcoin.