Why bitcoin may pass a one million dollar valuation and why I don’t like it

Question: how many times does 21 million go into 20 trillion? That’s a lot of noughts, but it’s actually quite simple maths. Twenty-one million is 21, followed by six zeros. Twenty trillion is 20, followed by 12 zeros. Dividing large numbers is simple enough — you just deduct the noughts. Twelve noughts minus six noughts in six. And that in a nutshell is why bitcoin could theoretically one day pass a million dollars. The current price of bitcoin is $35,000, which means, in theory, it could increase in value 30 times over.

I suppose I better explain the logic behind the equation — but let me lay my cards on the table and say I don’t like the implications of this logic — but that doesn’t mean it’s wrong.But before I explain the logic, I need to first talk about Isaac Newton and then go into a little about bitcoin's nature. I won’t go into detail describing bitcoin — I am assuming that if the cryptocurrency interests you, then you will do your own research — but I will outline a few salient points.

Isaac Newton

Isaac Newton once got seduced by greed. Back in the early 1700s an investment craze ran a-mock, and then went bad in 1720. We now refer to it as the South Sea Bubble. Sir Isaac was one of those who invested; he watched his money grow in value and sold. A shrewd move was that. But then he made his mistake. He watched the value of South Sea investments rise and feared he had sold too soon. So he re-invested. Then the bubble burst and Newton lost a small fortune. Later he remarked: “I can calculate the motion of heavenly bodies, but not the madness of people.”

And that rather sums up the argument against bitcoin. Yes, it has risen in price from $1 or so in 2011 to around $800 at the beginning of 2020 to about $20,000 today, which makes it seem like a tempting investment, but the nagging fear that bitcoin is akin to a famous bubble from yesteryear won’t go away. No one wants to repeat the error made by Sir Isaac.

Or as someone else said, in their case comparing the bitcoin to the Dutch Tulip Bubble — “at least tulips look pretty.”

What is bitcoin?

As I said above, I won’t say much here; I suggest you do your own research if you don’t know. But you may find some of these points salient.

Bitcoin is a form of blockchain which is a form of distributed ledger technology (DLT.) We have all heard of the double ledger — a clever accounting system in which you add up your accounts in two different ways — if the two different methods throw up the same answer, you know your calculations are probably right.

With DLT, this idea of ensuring records are accurate is taken to a whole new level. A ledger recording ownership of a certain asset type is held on every computer used to record the asset's transactions. To change the ledger, you would need to change it on every computer.

This makes DLT almost impossible to hack — there is a question mark over whether quantum computers will one day be able to do this, but that’s a question for another day. The other point about DLT is that it doesn’t need a middleman — or middle person. It effectively runs itself. Taking the example of a currency held on a distributed ledger, you would not need a bank to facilitate exchange. That is why DLT represents a potential massive disruption of the banking system.

You can apply distributed ledger in multiple ways — not just for a currency. It can be used to record property ownership, ensure accurate online voting, by stamp collectors, for example, or in healthcare. This report sums potential applications extremely well. Blockchain is the most high profile example of distributed ledger, and bitcoin is an example of blockchain.

Bitcoin is also known as cryptocurrency.

Supporters of bitcoin typically love how a central authority does not control it — the crowd manages it.

Central banks have been looking at applying DLT to manage the money system — but they are not looking at bitcoin, they seek control of whatever cryptocurrency is used.

There are three more points I need to make.

Firstly, bitcoins are not free to make — they require enormous computer processing power to make by a process called bitcoin mining.

Secondly, the maximum number of bitcoins there can ever be is 21 million.

Thirdly, as we have learned from elsewhere, monopolies appear to be the natural state in tech.

Why one million dollars

Supporters of bitcoin believe that one day it will be the currency we use by default.

They partly believe this because they understand that above all, for a currency to be used, people need to believe in it. They think that the actions of central banks, creating money will erode trust in existing currencies.

There is another point. Banks create money with their lending — that is how the money supply grows. That is why central banks try to expand the money supply by creating low-interest rates. They figure that low-interest rates will encourage more borrowing, boosting the money supply.

If the currency we all use is bitcoin, money probably won’t be created by borrowing. The money supply will be fixed at 21 million bitcoins, forever.

The current dollar money supply is 20 trillion dollars.
Therefore, if the bitcoin replaces the dollar, its 21 million units will equate to 20 trillion dollars. That is how I derived my equation.

Of course, if bitcoin becomes the de facto global currency, its value could rise even further.

Assumptions and central banks

All the above assumes bitcoin will become a kind of currency monopoly. That may or may not be a valid assumption. But I have a concern. My concern doesn’t mean the above scenario won’t pan out, but it does make me concerned about the implications.
I think bitcoin's ideology is a libertarian belief that neither governments nor central banks should control the money supply.

The rationale behind bitcoin is similar to the idea behind returning to a gold standard — the bitcoin is like a virtual gold standard. I think such ideology is dangerous. The gold standard didn’t work — it squeezed growth out of the economy at a time when innovations had created so much potential.

The money supply needs to grow with economic potential — or we will end-up in a permanent economic depression. If bitcoin becomes the global currency, the economy may be throttled forever.

Article originally appeared on share.com