Monthly Archives: April 2015

Why Bitcoin will go down to near zero

Why would anyone pay their USD for a BTC? Because:

  • they believe value of BTC will increase in the future
  • arbitrage (current value of BTC is such that by selling something in BTC and immediately transferring it to USD, he makes more money than selling it in USD)
  • there is certain amount of production, and certain number of BTC in the market

And why would a merchant sell something for BTC instead of USD? Because he/she believes that the amount of BTC he/she will be exchangeable for other goods or USD worth the same amount as the USD he could have charged you instead. So again, based on belief.

There is no “intrinsic” value in BTC, except for the fact that people think it is valuable. Even if there was 1000 BTC out there, and nobody thought that it was worth anything, it wouldn’t be worth anything. So BTC is entirely speculation.

But let’s say nobody believes BTC is actually worth anything. Then one merchant decides that he believes a BTC is worth a car, and announces that he will sell cars for 1 BTC. Suddenly, people who want a car will exchange their USD to BTC very cheaply, and buy that car. But if many people want to buy that car for 1 BTC (which they will – because they can sell it for more USD), then suddenly many people will start competing for BTC, driving up the price of the BTC compared to USD that 1 BTC suddenly becomes the equivalent of the USD price of that car. This means, that merchant will have driven up the price of BTC to the USD price of that car, for as long as he can keep selling that car for 1 BTC.

At the same time, there will be “fanatics” who refuse to pay USD – who will only buy a car if they can pay with BTC. And other car dealers will lose these customers if they don’t offer it for BTC. Naturally, they will offer similar value as the first car dealer – because otherwise they will either lose money, or lose customers. So the first car dealer will have set the BTC value to an arbitrary value that he/she picked to start with.

What will happen with Bitcoin’s price if this magical car dealer disappears?

Now, let’s examine what happens with the price if this car dealer disappears from the market? (I.e. can no longer sell an unlimited number of cars at 1 BTC per car.)

In reality, what this means is that there is no controlling authority determining the price any more. Our original car dealer could control the price because he could mysteriously produce an unlimited number of cars, never going bankrupt. Because of this, he could determine whichever price he wanted, and he arbitrarily set 1 BTC per car. Because his ability to keep producing cars was unlimited and not dependent on what other people would pay him in USD for his BTC, he didn’t need to follow any price indications. But other people could not set whichever price they wanted – they had to follow his price example, otherwise they would either lose customers or USD. Thus, he became the price setting authority.

Now that he’s gone, who will set the price and how will the price fluctuate?

The simple answer is – nobody and everybody. What will happen is that everybody will look at everybody else, trying to second-guess each other as to how many USD others will be willing to pay for a BTC. There will be no “intrinsic value” unless someone, for some reason, will offer something valuable in return for those BTC. And the only reason someone would do that, would be 1) speculation, or 2) that an authority which doesn’t have to produce anything can force you to pay them that thing. There is nothing in BTC which is inherently valuable – unless you count the “fun factor” of paying with it – but how much is that actually worth, in USD?

Which is exactly why fiat currency is valuable. Because inherent demand for it exists, since this is the currency the government wants to get paid in.

There is, however, a “roof” on how much value BTC can have. And that roof is determined by the amount of BTC out there in the market. If there are not enough BTC in circulation to pay for a product, then prices can’t rise any more – people simply won’t pay those prices.

So it seems the case that BTC is ultimately doomed to fail, or have very little value. How little? It depends on hur much you would be willing to pay for the fun factor of being able to pay with it. Because that “fun factor” is going to determine how many people want to have BTC in their pockets so that they can pay their friends with it – and the number of people who want to have it, and how much they want to have it, will determine how much they are ready to pay for it.

Gold? Gold is solid. It feels heavy. It shines. Its “fun factor” is significantly higher than that of BTC. It also has a solid history and its value is buried into people’s minds. It is told about in countless stories, always reinforcing its value for us.

BTC could in achieve the same thing. But its value came from the fact that criminals used it to perform criminal activities. There is no group of people out there who would use BTC to do something that money can’t do. Exchange money over long distances? Money will be able to do that. Owning BTC will not be needed – just the transferral protocol.

Miners and the infrastructure? Yeah, they have a lot of BTC. But it’s not the amount of BTC they have that counts. Its what others are willing to pay them to get their BTC. Miners can’t do squat about the fact that soon nobody will want their BTC. They can mine and mine – and collect more and more BTC. And beg people to take their BTC and give them valuable stuff in return for it (USD or products). But no amount of power and infrastructure can make them force people to take their worthless BTC, if nobody wants to have it.

Can miners offer services and take BTC as payment for those services? Short answer – no. Because unless they can create services for free, they will go bankrupt doing so – since they won’t be able to purchase anything with BTC nobody wants back from them. They will just collect even more BTC, at a faster rate than before. And ultimately go bust quicker.

With a roof on the upside, and no limit on the downside (except wipe-out), I am afraid BTC is doomed to go down in history as one of those experiments that taught us that regardless of how many conspiracy theories and ideas we might have about the “evilness” of the state, the way the system works today does so for a reason. Unless an authority (individual, organization or a group of people) want to gather BTC so much that they would pay for it. Which is exactly how all free markets work. Unfortunately, I can see no reason that someone would.

(P.S. Note that this doesn’t mean that BTC will disappear and die. It only means that BTC will have a really low exchange rate. Basically, all the BTC in the world will be worth a certain amount of dollars, which will be equivalent to the market need in order to perform Bitcoin’s core value proposition – which is to record ownership of records in an easy way or to make purchases over the net cheaper and gaining the extra money by being able to offer prices slightly lower than the credit card fiat currency price. But that doesn’t mean BTC will be valuable – because the merchant will likely want to transfer BTC to USD immediately and keep the money as USD. You don’t need many BTC to perform these operations. Only a couple of million Satoshi.)

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