Bitcoin will not disappear. Again, the original cryptocurrency had commentators eating their words in 2020 – yours truly included. It is now time to accept that he is here to stay.
Like Monty Python’s Black Knight, Bitcoin believers treat almost fatal volatility as mere flesh wounds. 80 percent drops are welcomed as lucky buying opportunities. But far from being a weakness, this is evidence of the longevity of the asset class. The cryptocurrency rose 224 percent this year, recalling the wildest developments of 2017 as it soared to record highlights.
Although the supply side of the schedule is defined algorithmically, I was kept off guard by the demand side’s ability to withstand volatility. I went into more detail about how my thinking on this asset class evolved in this YouTube podcast:
The supply of digital tickets is capped at a maximum of 21 million expected to reach 2140, with periodic reductions in the reward for the network of transaction-certifying computers. Yet supply dynamics are not sufficient to guarantee a long-term future. Many assets have a limited supply of artifacts: Baseball cards, limited print-run artwork, and several historic Ponzi designs fall into this category.
What distinguishes the successes is how investors respond to accidents. In most cases, when a vehicle designed solely around the more foolish theory collapses, it never gets better. No significant progress has been made on Bitcoin as a unit of exchange. It is far from being widely adopted as a currency.
Since Bitcoin market capitalization reached $ 1 billion in March 2013, there have been two cycles of spikes to record highs, followed by drawdowns of more than 80 percent. Each of those cycles was preceded by halving the block prize. The first cycle could be dismissed as an anomaly, the second as a coincidence. But halving happened again in May, and the cycle repeats before our eyes with the cryptocurrency always coming in a whisper to the top last week. To ignore it now is to reject the evidence of history.
Like social networks, cryptocurrencies derive their value from the number of users. I could build a platform with the exact merits of Facebook, and even some improvements over it, but achieving critical mass is another matter.
The cryptocurrency remains a speculative asset and more needs to happen to secure its assertion to preserve wealth over time. Volatility would have to decline, and inflation would have to be reliably exposed. But to bet against Bitcoin recovering from the next crash is to bet against experience. And his pure, bloody-minded survival is what gives him the best chance of eventually becoming a store of value.
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