If you’ve only been following Bitcoin’s course development for the past twelve months, like most of the outside world, my headline might seem a bit delusional. After all, Bitcoin has been declared dead hundreds of times, so what more could it have to offer? A lot, so keep reading.
Before going any further it’s good to reexamine what Bitcoin is all about. Bitcoin is the first and most widespread application of blockchain technology. Bitcoin uses the blockchain to form a worldwide shared ledger, which anyone can (with the assistance of miners) add new entries to and read without the possibility to erase old entries.
The ledger’s security and unchangeability is granted by the massive computing capacity of miners, for which they are rewarded with transaction fees and, for now, new bitcoins. Anyone can decide to become a miner, but not even a group of miners with over half of the computing power can together cheat the system. All they could do is try to cancel some recent entry to the ledger at a great cost, and still their expensive endeavor would be likely to fail.
The ledger offered by Bitcoin can be used not only for logging bitcoin transactions, but also as a basis for countless other applications. For instance, the Lightning Network is a second degree solution that makes it possible to scale bitcoin all the way up to a global currency. With Bitcoin one can also sign contracts reliably, keep one’s savings secure as well as found companies and democratic societies (multisig wallets).
The benefits of a shared ledger are probably obvious to anyone who’s thought about the problems regarding corruption and economic crimes. In turn, the benefits of fast, affordable and reliable global transactions are obvious to anyone using online stores or international bank transfers.
As for what comes to bitcoin’s 80% course crash, this seems to already be the third of its kind in addition to some smaller ones. On the other hand, the first bitcoin payment in history was the legendary 10 000 BTC pizza purchase, which even at the current price is 30 million euros for two pizzas. We, have come a long way since then, and if the chicken-or-the-egg problem is solved we can expect the volatility to drop as well.
Which came first, the chicken or the egg?
I can already hear your thoughts: “if bitcoin’s advantages are so supreme, why does the course keep dropping?” There’s a few good reasons for that.
First of all, when bitcoin shot up like a crazed rocket about a year ago it became an alternative investment for both bigger investors as well as average people, which led to some excessive mania. Like previously in bitcoin’s history, the course seems to have peaked higher than it had reason to stay at that point.
On the other hand, the heightened awareness of the previously separate or even anti-cyclic bitcoin might have at least temporarily made it a part of the larger economic cycle. And since bitcoin is a rather liquid investment, its course drop can play a part in the larger turn of an economic cycle, in which bitcoin rather ironically can be the herald of the collapse.
Thirdly, like any new technology built upon network effects, also bitcoin “suffers” from the chicken-egg problem. In order for bitcoin to be a means of payment for the masses, it should be used by enough people, but it might be hard to attract enough people unless it’s already a means of payment for the masses. This problem was already partially solved by last year’s rally, but what happens next will be the actual breakthrough.
The last economic cycle
The economic history of the era of central banks quickly becomes a monotonous story. First the economy grows at an enormous pace and then there’s a collapse. Then people recover from the collapse and enter a new growth period, which again collapses into a recession.
The pace of economic cycles has only accelerated after the early 1970s when president Nixon removed the bond between the dollar reserve currency and gold, which had already by then become mostly nominal. This ended the so called gold standard and released the economy from its last restraints with dire consequences.
After this the importance of focused bubbles has been highlighted in economic cycles. There have been real estate bubbles and IT bubbles. In central bank circles, particularly the American Fed, some have even publicly suggested creating new bubbles to fix previous crashes. This is basically identical to fixing a hangover by getting drunk again.
Unfortunately even booze runs out eventually, and after a long binge one must face an unprecedented world-class hangover. It’s very possible that the current bubble of public debt is part of the last economic cycle, and that the next crash will leave us completely unable to blow a new bubble, or get drunk to fix it.
The world economy grows through bubbles. The current bubble has been blown with the help of huge public debt.
Bitcoin & a world currency
Bitcoin is already concretely helping people in different broken economies in South America and Africa. Venezuela, for instance, has destroyed its economy and the official state currency has an inflation rate exceeding one million percent. Therefore it’s no surprise that Venezuelans are quickly accumulating bitcoins, since the cryptocurrency on top of all else is inflation-free.
The same lies ahead in the developed world once the era of central banking comes to an end. When that happens, it’s good to have bitcoin as an alternative, ready lightning networks and a large-ish minority already using the cryptocurrency.
When the monetary economy last collapsed properly in almost the whole known world, it was followed by a centuries-spanning dark age during which money was rendered useless in the entire Western Roman region and people suffered dependent on direct exchange. Fortunately we have an alternative ready this time.
The best Christmas present?
The maximum amount of bitcoins is 21 million units. One bitcoin is divided into a hundred million smaller units called satoshis, and as the lightning network progresses it’s in principle possible to transfer even smaller units than a satoshi.
When we divide 21 million bitcoins into seven billion, an already outdated estimate of the world population, we get a result of three millibitcoins equaling three hundred thousand satoshis. If (and when) bitcoin is a world currency, the average world citizen will have a net worth of approximately as much.
Bitcoin’s recent price drop has given it quite a discount. Our children can acquire larger fortunes on their own later, but isn’t the average net worth of the future world a rather nice nest egg?
Written by Pasi Matilainen, translated by Robin Nyberg