The Longer-Term Outlook for Bitcoin

Given that Bitcoin was originally devised as a digital currency, to allow for people to make payments peer to peer, from one computer to another via many computers used for verification, it stands to reason that Bitcoin’s future will at least be tied to its utility as serving what it was originally designed to do.

Bitcoin as a currency seems like a fabulous idea until you realize just how unsuited it has been from a practical standpoint as far as its use as a means of payment, for general purposes anyway. There are several reasons why this is the case, and all will likely serve to be limiting factors going forward, into the foreseeable future at least.

While many have envisioned a world where currencies like Bitcoin dominate, perhaps taking us from the archaic world of managed central currencies into the free market domain of a user managed currency, there are practical considerations which must be addressed if this ever were to happen.

Bitcoin is certainly an asset that has increased dramatically in market capitalization in recent times, beyond most people’s expectations, but this growth has had little to do with its usefulness or prevalence as a currency, even though we call it a cyber-currency.

In spite of Bitcoin rising in value to a quarter of a trillion dollars recently, its use in transactions remains very limited, and the growth here has been very modest. When we look at all of the places you can spend money and the percentage of them which accept Bitcoin as payment, Bitcoin’s utility overall remains virtually non-existent.

Can Bitcoin Achieve its Lofty Dreams as a Competitive Currency?

For Bitcoin to achieve its potential as a currency, this would have to change, where one would be able to at least subsist by keeping their funds in Bitcoin alone if they wished, and not just convert it to hard currency virtually every time they wanted to spend money.

The Longer-Term Outlook for BitcoinThis is a very long way off, and we may even wonder whether this will ever even be possible, given the load upon the system that the pittance of transactions today place on it. Even the relatively small number of transactions what we currently see has taxed the system considerably, where users have had to wait excessively long periods of time to have transactions confirmed, often taking a half an hour or more in an era where anything beyond a few seconds is seen as excessively long.

Even though improvements have been sought, these challenges remain for the most part. While transactions can be sped up by paying higher transaction fees, this serves to make Bitcoin uncompetitive, unless you have a particular need to use it in order to not create a paper trail for instance, as criminals would, in which case the additional costs may be worth paying.

Even by paying the highest fees, users may expect nothing resembling the lightning speed of competitors, like credit cards for instance, where transactions are processed almost instantaneously.

Otherwise, if you’re looking to do this on the cheap, which still costs much more than traditional means, you can wait for a couple hours in some cases to get your transaction confirmed. It’s hard to describe this system as anything but broken to be honest, already broken while only handling a very small fraction of the world’s transactions.

If Bitcoin transactions increased by a thousandfold or more, which would be required to bring it more in line with playing a significant role as a currency, we may wonder where all this added capacity is going to come from, and rightly so.

The idea that Bitcoin or any cryptocurrency could ever replace government currency even substantially looks more like fantasy than reality at this point, and while this may one day be possible in theory, this would require a dramatic change in either technology or how these transactions are processed.

In spite of some people’s misgivings, there are some huge advantages to managing transactions centrally, even though there may be some pitfalls involved as well. One of the pitfalls of decentralization though is that this may never end up being practical, especially with point of sale purchases.

This is not to say that Bitcoin as a currency cannot still play a role, as an alternate means of storing wealth, but its dreams as becoming an independent currency where one may simply use it exclusively or even substantially does not appear to be realistic in any way at the present time nor in the foreseeable future.

Can Bitcoin Achieve Enough Stability?

The stability of a currency is paramount to its utility, and governments go to great lengths to achieve stability with its national currencies. Within a national economy, this offers natural advantages as the currency is used commonly and therefore its external value is not so much of an issue, how many Euros or Yen could be purchased with a dollar for instance.

If a currency such as Bitcoin serves as a secondary and not primary currency, exchange rates will always influence it, and while exchange rates do affect every currency, due to trade, they affect digital currencies like Bitcoin much more fundamentally.

If Bitcoin had the stability that hard currencies have, where differences in exchange value change slowly, then this would be a benefit, but what we have seen with Bitcoin is very far from the case. The value of Bitcoin can change by 5-10% on a daily basis, and this leads to a lot of instability to say the least.

This can be seen as a benefit from the investing or trading side, but this is not desirable for a currency generally, as this introduces risk, and in the case of Bitcoin, a lot more risk with transactions.

This likely will stabilize over time, as it has been the intense interest from speculators lately that has driven this instability, where the great majority of the demand for Bitcoin has been from those seeking to speculate on its changing values.

It might be a while though before things settle down to the point where one could receive Bitcoin and be fairly confident that its value would not diminish significantly over a certain period of time, but we have quite a way to go before we can even be safe holding it for even a matter of days.

Given that transactions do not settle immediately, it is understandable that a lot of merchants are and will continue to be reticent toward it due to this instability, and additional transaction risk is not something that businesses find appealing at all, especially since this is not normally present with traditional currencies.

The outlook here is that things will really need to change before Bitcoin can ever make some real inroads as a currency, and until then, it is very likely going to remain on the periphery.

Bitcoin’s Outlook as an Asset

It is Bitcoin’s perceived value as an asset that has driven all the excitement surrounding it, and this will likely remain the case in spite of any pullbacks that we will see.

When people look to assess the outlook for Bitcoin as a commodity, they generally don’t look too far out, with the next year or so being typical. Even in this short timeframe, there is a great deal of uncertainty involved, with a wide variety of predictions from the mania continuing unabated to even complete collapse.

The natural scarcity of Bitcoin, where about 80% of the total supply has already been mined and in circulation, with only about 20% left to be added ever, serves to keep the market gravitating higher, as long as demand increases that is.

This principle of scarcity is what allows precious metals markets to rise, as demand does, although with precious metals, prices certainly do fluctuate with demand.

The Bitcoin market is certainly demand driven, perhaps in a way that we have never seen before, and the utter accessibility of it compared to other assets has no doubt served to drive this demand.

One may purchase bitcoins very readily, more so than precious metals, as Bitcoin is purely a digital asset, with no intrinsic value beyond this demand. This does serve to scare some people, but as long as the demand remains, the value will remain with it.

Value is always measured in demand essentially anyway, or at least the interplay between supply and demand, so this should not be so alarming, even though people do often take solace in the fact that gold can be used for other things, or that the value of a stock is at least related to business performance and earnings and not just what people bid and ask for it.

With that said, with an asset being purely dependent on demand, there’s more risk involved, and if the demand went low enough, the price would go that low as well, down to nothing if demand for it ceased, theoretically anyway.

There is no point with Bitcoin that people will step in and assess it as being oversold, like they would with a stock, based upon fundamentals, where the value would increase as the price drops.

With Bitcoin, there are no fundamentals involved, so the risk of collapse is certainly greater. Without these limitations, there’s no reason why downward momentum could not take us back to seeing Bitcoin go back to days where it was only worth a couple of hundreds of dollars, or worse.

This does not mean that this will happen, although it could. It also could go up in value to a million dollars or more in the next few years, as some have predicted.

There is a lot of uncertainty involved when we try to view Bitcoin from a longer term perspective, and a long term perspective weigh Bitcoin may only be a year or so.

It’s almost as if there really isn’t much utility in trying to predict Bitcoin longer term, and the most we are probably able to do with any real degree of certainly is to look at current trends and look to get a good idea of where it is headed in the shorter term.

We may even be limited to what we may consider to be the very short term, the next few days or weeks at most. This does not mean that we need to act with uncertainty though, provided that our time frame matches what we can reasonably predict, although if our desired holding period exceeds this, we can not only neglect the known but marry ourselves completely to the unknown.

The bottom line is that no one really knows what will happen to Bitcoin as an asset other than if the people keep buying it, it will go up, and as the money flows out of it, it will go down. We can expect that both forces likely will continue to be dramatic though, and much greater care and diligence is required to manage the huge amount of extra risk involved in investing in such a volatile asset.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.