Most people are familiar with exponential laws like Moore's Law and the more general Kurzweil's Law of Accelerating Returns. The history in the above logarithmic graph has been very linear and law like. All but one of the 7 order of magnitude (1000%) increases took about 6 months. Every successive order of magnitude increase at these rates makes it ever more difficult to deny that this growth is much like Moore's law. If you think it is not yet law like, the question would be, how many more would be required, before you would be converted to this camp?
Our working hypothesis is that this historical rate of better than 1000% per year growth will continue for at least several more years before slowing. When fans of Bitcoin talk about why it will continue to grow, they usually first mention things like pseudoanonymity, great technology, cheap transactions with no middlemen, ease of sending money around the world, it's a great protocol or "programmable money", its security, ability to be stored in banks and wallets that don't suffer from the woes of fractional reserve systems, and so on. While we agree that all these are fantastic, each one giving bitcoin a disruptive advantage over any competitor, there is one attribute far more important which people rarely mention, at least as a benefit. This single most important attribute is it's hard limited supply and the resulting way people hoard it because of this attribute. Some people talk negative about this attribute. Some even work to try to discourage people from hoarding Bitcoin. They think that this hoarding, and the resulting significant increase in value will hinder some of the attributes they so like about Bitcoin. But we believe this is all mistaken rational slowing the progress of Bitcoin. The significant increase in value, due to this hard limit supply is, more than any other single attribute leading to the success of Bitcoin and the improvement of all the other attributes, including its ability to be used like a currency. As the price increases, the less volatile it will become, and the easier it is to use to reliably buy things, and transfer large amounts of money easily around the world.
All previous investments, including Gold, have "limited supplies" but the hard limit supply of Bitcoin is different in a very game changing way. As the price of any previous investment goes up the supply always follows. Take Gold, for example. The more the price goes up, the more companies invest in mining it. If you look at the history of the rate of Gold Production, over the long term, it quite closely matches the exponential rate of economic demand increase. Bitcoins hard limit supply is dramatically different. No matter how high the price of Bitcoin goes, unlike Gold, or any previous competitor, Bitcoin's hard limit supply can not change, and there will never be more than 21 million Bitcoins - more and more of them continually being lost from people not properly caring for them.
The fact that Bitcoin is the first ever currency like investment with this hard limit supply gives Bitcoin an ability to dramatically out compete any other asset class. This fact is resulting in a demand that will be able to overcome anything standing in the way of Crypto Currencies becoming one of the most significant asset classes available.
China recently made a half hearted effort to make it harder to use Bitcoin. This is just one of many examples of a temporary road block, that temporarily decreased the price of Bitcoin that is only temporary, will be easily overcome and made irrelevant by this one single much more important long term attribute. India recently acted similarly, but after the slight drop due to China's actions, India's actions didn't affect the price much at all. Oh, and lots of people in both China and India are still buying and using Bitcoin, the demand for a limited supply item like this is just too great. Newbies may be selling when things like this happen, explaining the price fall, but the old timers know this is just another buying opportunity, till we work around yet another temporary problem.
All risks to fiat currencies and economies will accelerate the adoption of Bitcoins. These risks include world indebtedness see wikipedia: http://en.wikipedia.org/wiki/Government_debt . Governments trying to confiscate or devalue currencies, like they did in Cypress. And of course, the inflation of currencies, as a kind of tax on the people holding them to fund governments, is yet another risk/problem. Bitcoin enables people to escape all of these risks, and indeed profit from them, as the more they occur, and the more serious they are, the more rapidly people will adopt Bitcoin in those countries. Just like water flowing down hill, capital always flows to whatever is perceived to be the best investment. Bitcoin will be the first significant investment that, unlike all the other investments, because of it's hard limit supply will increase its rate of growth during market retractions, much more so than during economic recoveries, during which time it may even retract or even temporarily 'crash', depending on how high it goes during any economic contractions. Again, even when there are crashes like this, in opposition to economic cycles, declines in values of Bitcoin will always be temporary. Every successive spike in value, during the next economic contraction, will be above the previous spike, depending on the new exponentially large supply of capital newly available for investment in it.
There were huge interest expending all kinds of resources, governmental and not, attempting to shut down peer to peer filesharing of movies, music, or any copyrighted material. But the more effort thrown against this, the more it backfired. In fact the government shutting down Napster, is what spawned the creation of peer to peer sharing technologies like Bittorrent, on which Bitcoin is based, to say nothing of all the Napster copycat systems that sprung up to fill the vacuum. Any effort put forth by any group of governments will simply backfire in the same way, accelerating the creation of anything required such as distributed (as in uncontrollable) exchanges that allow people to get what they desperately want. In fact, there is already work underway to do things like create distributed exchanges which, unlike the current exchanges, have difficulty with governments.
Argentina is making a huge effort to outlaw Bitcoin as is described in this Why bitcoins are more expensive in Argentina than the US Coindesk article. But all this resulting price differential is doing is making it EXTREMELY profitable for people to find some way around whatever system they attempt to set up to stop it. To say nothing of the fact that Argentina is outlawing one of the greatest entrepreneurial and social revolutions in history, pushing them back towards a pre emerging economy state like North Korea.
Even if a defect is found in the algorithm, or if some government sized organization attempts a 51% attack, this can also be easily resolved. The miners simply halt processing of the block chain network, revert back to the last valid block on the block chain that everyone has a copy of, resolve the problem (whatever the attack or defect resolving it will surely be nothing compared to creating Bitcoin in the first place), then turn things back on. This has already been successfully done when the last significant defects were found early in it's history, causing only a temporary crash in value.
All of these reasons, including the distributed nature of the block chain ledger, leads us to predict the risk of the leading crypto currency going completely away, or becoming completely worthless, as being negligible or near zero. Sure, there is a small risk of a large group of leading countries banding together to outlaw Bitcoin, which would significantly impact it's price, at least temporarily. But Bitcoin, or some leading crypto currency, like gambling, will always be used in some parts of the world, making the odds of Bitcoin becoming completely worthless near zero. And the demand for such hard limit assets in all countries will be so unstoppable, and the damage done to countries attempting to outlaw it will be so devastating, that just like the attempt to outlaw file sharing via bittorrent the futility in attempting to outlaw it will ultimately be abandoned by all.
People tend to dislike change. There are lots of changes competing for our consideration, so we have been bred to be quick at filtering most of them out so we don't waste too much time considering them all. Hence we desire to find easy ways to reject anything that may not be worth our time and effort to step outside of our traditional comfort zones. And for good reason, many of us like traditional things. All this tends to support a kind of fear mongering amongst the bleating of the herding crowd. This is all very evident in the press on Bitcoin. Every time Bitcoin crashes in value significantly, all these fear mongers come out of the woodwork. They repeatedly completely destroy their reputation (and the reputation of all the major publications they publish in), yet again, saying things like: "As I was saying, nothing can go up forever, and bitcoin is of no significance!", only to be proven completely wrong within the year, as the price again goes off the chart, setting new records.
No matter how absurd the ideas, people seem compelled to want to latch on to them, without thinking too much about them. They tend to seek any excuse to avoid thinking about them further. A good example of the types of completely irrational ideas that seems to be popular out there amongst the bleating hurd is illustrated by in this example where a source is lauded and then quoted as saying:
"The problem is that if the price of a bitcoin
is on a steady upward trajectory, then
nobody's actually going to want to spend
a Bitcoin on anything. And if everyone's
hoarding their Bitcoins, then the network is
actually useless. Then, since it turns out to be
useless, you get a crash."
They tend to apply all the ways that "Get rich quick schemes" have failed in the past, and they want to apply them to Bitcoin, even though if they'd think about it in detail, they'd realize that there is just no justified reason to apply any of these to Crypto Currencies. They think that just because there has never been an investment like this, that this is a justified argument for why Bitcoin can't be what some already see it as having proven itself to be. Any good theoretical expert, worth their canonized reputation, knows that historical arguments, alone, are not a good arguments or that "Past performance is no guarantee of the future."
All the fear mongers are completely distracted by all the short term volatility their ignorance is contributing too. They tend to only focusing on all these lesser issues blinding them to the single most important attribute which will enable Bitcoin to overcome all these limitations and threats. Addressing the legions of reason people want to come up with for thinking Crypto Currencies or Bitcoin is about to "pop" like the tulip bulbs did in the 1600s can't be addressed here. But most of the experts supporting this camp have spent lots of time seeking out and considering as many as possible. So far we do not view any of the risks people worry about as anything other than a temporary threat that will be overcome overcome, one way or another, driven by the demand for an asset class with this kind of hard limit supply.
If there are any significant reasons or risks not mentioned here, we encourage everyone to to try to get them canonized, and if there is any significant number of experts that agree that such is a threat, we will certainly be open to considering and addressing such issues here, or maybe even jumping camps, if the rational is compelling. But we aren't interested in things for which nobody agrees are risks. For example, good luck finding any experts that agree with any arguments that are like the one described above. Canonizer.com is very good at filtering out this kind of noisy, umjustified, bleeting of the hurd that so many even reputable people want to believe and which are so costly to so many.
Obviously, growth that is more rapid than 1000% per year can't continue forever, so it won't. Bitcoins hard limit supply has resulted in two long term megatrends driving valuation growth. All the noise and volatility that people tend to focus on disappears when viewed in long term graphs, such as the one above. When viewed in the long term, you can see the effects of long term megatrends as they clearly stand out above all the temporary noise and volatility that tends to distract everyone from what is important.
The first megatrend has to do with the ability of Crypto Currencies to out compete any other asset class. The current dramatic speed in valuation growth is largely due to capital flowing from other asset classes into Bitcoin. It is no different than if the smart early adopters already holding the leading crypto currencies are stealing money from Fort Knox and from the dumb people still holding the stocks of Big banks and Credit Card companies, that have all traditionally performed so well in the past largely driven by debt and their size.
Making money from shorting unsecure dinosaur middlemen companies like mastercardâ€¦.
The biggest threat to Bitcoin, is likely to be some other newer asset class or crypto currency that can outcompete Bitcoin. If such ever shows up, it will do the same thing to Bitcoin that Bitcoin is now doing to Gold, and all inferior investments. The resulting environment will be a kind of increasingly rapid darwinistic competition for wealth. Dumb faithless managers of capital that stay invested in inferior traditional stores of wealth for too long will become dramatically poorer, while smart managers that are among the first to recognize and move to superior investments will dramatically increase their wealth by moving their capital to such before everyone else. Smart optomistic people already investing in Bitcoin should easily recognize when a significant new competitor shows up, and profit significantly by such disruptions, by again being the first to invest in such. But if you miss the boat, and hold on too long, you could lose some significant money, as this transition between competing investments like Bitcoin could be very fast and messy, once the bleating herd starts moving attempting to catch up with the smart leading experts.
If a significantly better currency does show up, it will rapidly increase in market capitalization, compared to Bitcoin. The relative speed of market capitalization growth will be an important indicator of it's superiority. To date, all competing currencies are not significantly enough better to overcome Bitcoin's first mover advantage. The market capitalization of all alt coins combined, remains at about 10 percent of the market capitalization of Bitcoin. If a new competitor does show up, that does rapidly achieve a 25% total market cap value of Bitcoin the experts in this camp will simply be starting to move a similar percentage of their Bitcoin, into this new competitor, depending on the speed of the adoption, and the reasons for such accepted by the experts as canonized in survey topics on comparing crypto currencies. While alt coins are much more volatile than Bitcoin, and it is possible to make more money on them, if you time things just right. For most of us, however, the risk is too great to invest any significant amount of capital in them.
Since there is a finite supply of total capital in the world at any given time, this first S curve megatrend will not last forever. Its time duration or speed is dependent on how fast capital managers and holders are able to recognize superior investments compared to traditional assets they are familiar with, and then act on this information. Many people are traditional people, and they love traditional investments like Gold. It could take huge influences to convert them from investing in their traditional dumb assets to something so new and different as Bitcoin. So this S curve may not complete until the current generation of capital holders are replaced with younger people not so bound by tradition. We predict that in general, younger people will be much more quick to convert to new and improved investments, such as Bitcoin, than their parents, giving them a huge intelligent leg up.
The second megatrend, though not as dramatic in the short term, will not end. It simply has to do with the fact that in the long term, economies progress exponentially. The total capital available to compete for all asset classes increases exponentially in proportion to the size of the economy. The total market capitalization of leading investment classes, such as real estate, are limited by this growing but still finite supply of capital. If the total amount of capital increases on average at a rate of 10% per year, the long term market capitaliza of the leading investment classes, including Bitcoin, will be similarly limited over the long term. They will tend to approach this same economic growth rate, as the First S curve megatrend finally comes to an end. However, unlike all other assets that increase and decline in synch with economic cycles, crypto currencies will be inverted from this cycle.
Historically, economies have grown at somewhere around 5% per year, depending on what and how it is being measured. Bitcoin is currently inflating at a rate of 12% / year. This rate will continue till 2017. Then it will drop to about 6% new coins per year and stay at that rate till 2021. If the growth in supply is outstripping the growth in demand, this must result in at least some amount of inflation, or decrease in value for the coin. So, depending on how fast the megatrends progress, such could have a significant effect on Bitcoin valuations.
The combination of these two long term megatrends leads us to assume that there will eventually be a time, possibly as early as 5 years, when the Satoshi will achieve par with the inflationary penny - at least temporarily. Before we reach this valuation the consensus will agree that the number of decimal places should be increased by 8 or more, resulting in an effective 100 million to one split in the divisibility of Bitcoin in the mining process.
There are currently two general economic theory camps: The keynsean vs the Hayekeans making opposite predictions about whether currency freedom or currency central control are better for the economy. The Keynesians are predicting that this limited supply of Bitcoin will dramatically increase the boom and bust economic volatility. They are predicting that as the economy tanks, everyone will be pulling money out of everything, and putting it into Bitcoin. During recessions, people become very thrifty. Having something far better than inflationary cash to store capital with will amplify this effect. And as the herd usually does, they will tend to take the booms and the busts way to far. People will only start buying things, once the valuation of Bitcoin goes way above any previou peaks and the boom and bust cycle switches, and people finally start selling their now significantly increased in value Bitcoin savings to purchase that Pizza they've been craving for so long.
We agree that there is good arguments for the keynesian point of view, especially given the recent evidence for how well Japan, and other countries have done, with 'looser' supplies of money. Some of the supporters of this camp were previously ardent Keynesians, now having been converted, due to Bitcoin, to the Hayekian camp. In fact, we believe there is a good chance of a very dramatic and quick depression on the horizon, exactly for these reasons being predicted by the Keynesians.
Every peak and valley continues to be dramatically, often by an order of magnitude, above the previous. Each one requiring about 6 months. If these dramatically increasing spikes continue to occur at increasingly rapid rates like this, it won't take too many more of these before the bleating buzz of the world wide hurd starts to move in a big way. Once the world wide herd starts to move and buzz like this, things could become way more dramatic and rapid than any fiction or dream has ever imagined.
The herd will tend to want to go way beyond where it should go as things really start moving. In magnitude, the resulting recession could make all other depressions in history pale in comparison. It could make the Tulip craze in the 1600s, the dot bomb in 2000, and any other overindulgences of the herd all look like silly nothingness. But this mother of all depressions will likely be very short and quick, as the world economies all increasingly rapidly make this revolutionary change. People will be selling second properties, not buying new cars, avoiding even buying Pizzas, thinking that even small amounts of money will soon be worth significantly more, if invested in Bitcoin. Heck, people will be picking up quarters off the street and getting them into Bitcoin as fast as they can as this S curve really gets going into it's most steep and dramatic part.
If the herd pushes things way to far, they could push Bitcoin's total market cap way beyond the total market cap of all other assets, possibly including even the market cap of all real estate. Then, finally, when people can no longer starve themselves, when their car finally will not run, when they become unable to live with their parents for another day, there will be the Greatest Bitcoin pop that has ever been. People will start spending all their Bitcoin wealth on new things. This dramatic reversal will cause the Stock market and the price of real estate to return more dramatically and more rapidly than at any time in history. But of course, there will be a lot of stocks that will not come back at all, like Big banks, Gold related services, Credit card companies, and so on. But the stocks that will rise the fastest will be the new Bitcoin based financial economy and services sector.
Faithless doom and gloomers are often people that take actions to short the future of the local or world economy. They spend much less on faithfully improving the world and instead tend to spend more on on short the future things as bomb shelters, Gold, large and spacious religious houses of worship, cash in the bank, and so on. These are the type of people that sold all their stocks near the bottom of the recent recession, converting to things like Gold. These experiences will make them not want to invest in something like the stock market for a long time. Many of them don't even realize the dramatic return they've missed out on, let alone what they;ve are missing out on with Bitcoin.
But, once the herd is finally forced by the dramatic undeniable growth of Bitcoin, to start bleating about it, everyone could start thinking of Bitcoin as something way better than even cash. If we see the stock market drop, due to Crypto Currencies, this will confirm their beliefs about the end of the world, and they could all start moving into Bitcoin or "Gold 2.0" in a big way. The depression that results in this movement of the herd will just, yet again, confirm their bleating from the pulpit suspicions that the apocalypse is near. If this depression get's really extreme, undoubtedly you'll start to hear so called moral leaders proclaiming from the pulpit about how evil Bitcoin is. These traditional, so called moral leaders will be pleading with everyone to resists it's "temptations" and and to not "gamble" with them causing what they will think is long term evil. But, thankfully, most will not have the ability to resist this temptation to get significantly richer with gold 2.0. There could be lots of institutions and countries that attempt to stop this what could become temporarily known as "bitcoin immorality" that they will argue is surely leading to the apocalypse. Centrally controlled traditional organizations and countries that suffer from traditional and stagnating moral wisdom bottlenecks will be much more involved in this type of bleating that is fighting change.
Even if a significant number of countries try to outlaw and make purchasing 'evil' bitcoin hard this will have no effect. Today, we see huge masses of people leaving their overly controlled locals - flocking to the likes of Las-Vegas, to 'have a little fun'. Such free societies have obvious economic benefits, the draw to places where Bitcoin is legal could result in significantly more economic benefit to their societies than we've seen with legalized Gambling.
This increasingly rapid boom bust cycle will repeat and bounce multiple times, each one being less dramatic than the previous, as things finally all settle down and establish the long term balances of dramatic continued exponential law like growth of all assets, including crypto currencies, according to Kurzweil's law of accelerating returns. Bitcoin will replace Bonds as the new long term investment, and it will be come significantly more expensive to raise capital via bonds, and so on.
In this new world economy, with ever more rapid appearances of new investments and investment classes like Crypto Currencies will result in a much more efficient darwinistic weeding out of dumb money. In the past, dumb faithless traditional people would inherit large organization and stores of capital, and they could sleep on their laurels and completely waste such assets. The only thing these large dumb traditional hierarchies and stores of wealth contribute to is what the dump people the top want. They contribute little, if anything at all, to what the people at the bottom want. All these types of new investments will constantly disrupt all this kind of inefficient usage of capital, and be much better at getting what the more intelligent, hard working and deserving people at the bottom want.
Once the entire world starts to move to Bitcoin, and if the herd takes it way to far, as we suspect will happen, the pessamistic dump people, only getting in at the end, will really suffer once this final 'pop' occures. They will be the last to move from Bitcoin, back to the stock market, as the stock market makes it's more dramatic recovery from a the deepest crash in history. Again, hopeful smart people will get very rich, at the cost of the dumb, faithless, traditional investors.
If the Hayekians are right, these decreasing economic bounces will soon settle down as this disruptive S curve approaches its end. This will be a dramatic change from a debt based economy that runs on a fractional reserve banking system to one where fractional reserve is far less influence. The result will be a world where savings in the right currency will offer rates comparable to the best investments in the world, especially since they will go up, the worse things get. (ultimately becoming somewhat popular, like gold was, for the fear mongers.)
The Hayekians are predicting that these newly rich smarter saving people will far outperform dumb centrally controlled deficit spending stupidity. Instead of going into debt to spend on things like wars (to destroy all other competing centrally controlled hierarchies), bridges to nowhere, digging ditches, and paying people to destroy perfectly good old cars, these new faithful entrepreneurial people will be using their newly obtained disruptive savings to spend us out of any recession by investing in cryptographic protocols, infrastructures, and companies, that will soon make the world a dramatically better place, especially for many smart people that were previously held at the bottom for way too long. If the boom and bust cycles quickly decrease, even disappear, as the world switches from debt based financing to savings based finances, or even if the boom and bust cycles aren't do dramatic, the consensus will be converted to the Hayekian camp indicating a free savings based economy is far better than a debt based centrally controlled one.
The question is, if you could profit, significantly, from correctly betting on and joining one of these camps, before it is proven right by this crypto currency scientific experiment (as demonstrated when everyone else joins) which one would you join, today? And when do you think a Bitcoin will first achieve a $10,000 valuation, if ever? Are you with the expert consensus in the sub camps, or do you have a better prediction? Knowing, concisely and quantitatively what everyone, especially the experts currently think on this will surely amplify the wisdom and wealth of everyone.
The above chart shows that Bitcoin valuations have already increased in an order of magnitude (10 times or 1000% increase) 7 times. All but the $10 to $100 increase took about 6 months. The great first pop of 2011 was the reason that one took 2 years, and we predict such events are likely to continue to be rare.
We must disclose that most experts in this camp are heavily invested in Bitcoin, and hence will profit significantly if people head the expert advice being provided. To say nothing of the idealistic desires of most supporters to see Bitcoin succeed, whether we get rich from the adoption of it or not.
If there are any justified reasons to not be as bullish on Bitcoin as we are, we hope the experts that see such will be able to get such concisely and quantitatively 'canonized', demonstrably proving that there are reputable experts that buy into such, so that we will be more aware of such reasons, if any significant risks we haven't yet recognized do indeed exist. But if few experts agree, as with so much of the grossly wrong bleating "buzz" out there, it will likely not be worth anyone's time to worry about such.
This topic is part of the Crypto Currency Survey Project.