Nassim Taleb, famous for writing “The Black Swan” and also for his math work in trading, was once a bitcoiner. He recently sold his bitcoin, stating that today it is no longer what it should be for a stable, usable asset. I agree with him.
To date, Bitcoin has not reached its potential as a currency that is widely used around the world. However, that does not mean that it is not on a journey to reach this point, which looks more promising today than at any other point in the asset’s history.
The way to a usable asset
For most of the past three years, I’ve wondered if Bitcoin actually lives up to its use case as limitless peer-to-peer e-money. Many of us remember the last six months of 2017 when wild speculators artificially skyrocketed the price of Bitcoin in a fit of irrational exuberance, only for Bitcoin to begin a deep decline that continued into the next year.
This led to a “digital gold” marketing campaign by Bitcoiners that I always hated. The demand that Bitcoin was a “store of value” encouraged the narrative that it was not useful for anything else and brought my thinking to a standstill. Had Bitcoin just turned into a really speculative instrument with no real value other than shimmers blowing up the price to sell it to a sucker who came in later? Was this an elaborate Ponzi program where early buyers sell to the next cohort who is forced to go on Twitter to try and raise prices again so they can sell at an even higher price?
I wrote a few years ago about what I thought Bitcoin should be as a usable good and my disappointment that it didn’t turn out to be. My arguments were vaguely familiar to Taleb. However, I continued to hold my Bitcoin because, despite the fact that I had been disenfranchised a bit, I believed that the price would continue to rise, at least to some extent, even though there would be a new blockchain that did this at some point in the future Safe moving global payments at a reasonable cost could make the debut. (Many people believe Ethereum is the answer, but once you understand how gas prices work, you will quickly find that the cost is too high to be efficient, even though it is faster.)
In early 2020, my mind began to change again about where Bitcoin was going. I was at a conference called the Satoshi Roundtable and had a chat with a few friends I see there every year. The topics that kept coming up were: First, the reuse of Bitcoin and its dangers; Two, security; And three, Bitcoin use cases.
A friend of mine had gone to South America to see if the common use case stories down there were actually true. The feedback was “not yet” and “not as much as you think.” This only fueled my suspicions that there isn’t enough price stability for many people to use Bitcoin. Although some people who left certain countries to rebuild their futures in Florida used Bitcoin as a means of transporting their wealth – although that was insufficient to justify the hype this Bitcoin use case had received.
Usually, low adoption messages like this make me further doubt the use case of Bitcoin, but given my contrary nature, it actually turned me the other way. I came to the conclusion that a little use is better than none, and that Bitcoin would have to go through a speculative phase in order to grow to the size it takes to become more useful. Also, you need to apply the Law of Large Numbers to Bitcoin in order to achieve a market cap at which volatility begins to dissipate.
The law of large numbers
Jakob Bernoulli first proved this theorem in relation to large numbers that many of us know from our statistical studies. Bernoulli claimed that a small sample size made some difference to the study population as a whole. As you add more samples to the sample size, the relationship converges to the wider population until the sample is the population.
The trick with statistical sampling is understanding how large the sample needs to be in order to track the population within a reasonable range. The law of large numbers also applies to economics. In this case, the larger a company becomes, the more units it has to produce in order to continue the percentage growth.
In my discipline, I have applied this to the country’s GDP many times. Smaller countries have to produce less than larger countries to achieve their percentage GDP growth. Bitcoin is no different. The bigger it grows, the less volatile it becomes, as it takes many more dollar face value purchases and sales to move the percentage price. In other words, as Bitcoin market capitalization increases, the percentage moves in either direction will be much smaller as more and more capital and momentum are required to move the price. For example, if Bitcoin was $ 10,000, a switch to $ 5,000 was possible, meaning a price change of 50 percent. For Bitcoin at $ 50,000, a price shift from $ 5,000 to $ 45,000 is very likely, but this only corresponds to a price change of 10 percent at this level.
As Bitcoin’s market capitalization increases, the law of large numbers dictates that it will become increasingly difficult to move price, manipulate volatility, and reduce the potential for price manipulation.
The adoption phases of Bitcoin
In order for Bitcoin to be useful as a digital currency, market capitalization must continue to grow. In the beginning, Bitcoin was a new kind of magical internet money. Money for developers. In the early days, I thought the best use case for Bitcoin was to conduct cross-border transactions for developers working on projects together.
Prior to the Pre-Satoshi whitepaper, I worked at Electronic Arts for a few years and there were third party studios and developer stores around the world. It was convenient to work on projects in multiple time zones and solve location problems, but it was inconvenient to send money. Bitcoin solved this problem, but Bitcoin used to be too complicated for anyone but a developer to store and operate. When other financial services companies started digging into Bitcoin and exchanges began popping up, all of that began to change. We started speculating on the promise of a digital currency, and with that speculation came financial speculators.
In late 2016 and 2017 there was a gold rush in Bitcoin and other cryptocurrencies, including many scam coins. New characters emerged at conferences and Bitcoin meetups: gold brokers, scammers who could get rich quick, former financial service providers who were no longer allowed to trade securities, people who were in jail – the list goes on.
They viewed cryptocurrencies as a quick way to make money and pushed the market beyond its limits in late 2017. It didn’t end well for many, and the next three years were spent restoring, building, and regaining their legitimacy.
We are still at a speculative stage, but at a much more measured stage than we were four years ago. However, a speculative phase is required to grow market capitalization to a size where wider trades become possible. What are we speculating about? This bitcoin will be a widely used global currency. And that’s no different than any other forex investment. Instead of speculating about a country’s GDP growth and economic development making its currency stronger, Bitcoin speculation is the bet that the digital economy will grow without cross-border financial intermediaries and that central bank currencies will devalue.
I make a bet that all of this will happen and that it will be quick.
As speculation suggests, Bitcoin is making way for more realistic usage. As of this writing, Bitcoin’s market cap is now $ 1 trillion, up from $ 200 billion a year ago.
In 2021, more companies conducting digital transactions will have Bitcoin on their balance sheets. no different from a global company that holds a certain amount of foreign currency reserves. When the first big company, MicroStrategy, made this piece, it was big news. However, its market capitalization was only $ 1 billion. Next came Tesla with a market cap of $ 670 billion. The more companies make this announcement, the lesser the news will be, as smaller market cap companies don’t have much of an impact on Bitcoin price. This is the law of large numbers.
After Bitcoin hits the $ 500,000 price range, we will likely see more transactions and daily usage. Projects have already been created that allow use cases for multiple transactions. BAKKT, Coinbase, and Gemini have wallets that you can use to send Bitcoin and other cryptocurrencies between friends (like Venmo) and merchants. Tesla accepts Bitcoin as a means of payment for cars. Paydrop and Wyre allow payments to W-2 and contract workers in Bitcoin.
What is preventing the mass use of these tools and more transactions with Bitcoin today?
This story about cotton could provide some answers.
This is a guest post by Steven McClurg. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.