The Bullish Thesis of Bitcoin (IV)

The first three parts of this series (see here first , second and third ) have focused on the monetary nature of bitcoin. With this foundation, we can now analyze some of the most common errors and misunderstandings about bitcoin.

Bitcoin is a bubble

Bitcoin, like any monetary good ruled by the market, exhibits a monetary premium, that is, a surcharge on its “fundamental” value (which derives only from its utility). This gives wings to frequent criticism: “Bitcoin is a bubble”. However, all monetary assets show monetary premium; it is more, it is a characteristic feature of money. In other words, we could say that money is always and everywhere a bubble. Paradoxically, a monetary good can be a bubble and at the same time be underestimated, when it is in the early stages of its adoption as a currency.

Bitcoin is too volatile

The volatility of bitcoin’s price is a consequence of its youth (NT, the block genesis of the bitcoin chain and with it the first 50 bitcoins, was mined on January 3, 2009).During the first years of its existence, bitcoin behaved like the actions of low capitalization and high risk ( penny stocks ). Any large buyer (for example the Winklevoss twins) could cause a big price spike.

As their adoption and liquidity have increased over the years, the volatility of bitcoin has declined considerably. When bitcoin reaches a market capitalization similar to gold , it will show a similar level of volatility. If it exceeds this capitalization, its volatility will be reduced so much that it will permit widespread use as a means of payment.

As we have already indicated, the monetization of bitcoin occurs in a series of Gartner cycles. Volatility is low during the plateau phase, while it increases during the phases of euphoria and disappointment. Each cycle will have less volatility than the previous ones because the liquidity of the market increases in each iteration.

Transactions are very expensive

A recent criticism of the bitcoin network is that it is not an appropriate means of payment due to the increased cost of transferring bitcoins. However, this increase is healthy and expected. The cost of a transaction is necessary to pay the miners for maintaining the security of the network when validating the transactions. The economic incentives for the miners are the payments for transactions and the reward of each block (a decreasing number of new bitcoins that are created with each block mined). The reward is an inflationary subsidy supported by the current owners of bitcoins.

These rewards are programmed to decrease until disappearing according to a pre-established calendar. This inflexible monetary policy makes it an ideal value store and has the consequence that network security should be maintained only with payments per transaction. A network with “low” costs is a network with little security and susceptible to attacks or external censorship. Those who promote the low costs of other alternative currencies to bitcoin (alt-coins), without knowing it, are promoting their weakness.

The superficial root of the criticism of bitcoin for its “high” transaction costs is the belief that bitcoin must first be a payment system and then a store of value. As we saw when talking about the origins of money, this belief places the car ahead of the horse.Only when bitcoin is solidly established as a store of value will it become a useful means of payment.

When the opportunity cost of selling or buying bitcoins falls to a level that makes it suitable as a currency, most transactions will not be executed in the bitcoin network but in secondary networks with lower costs. Secondary (or second layer) networks, such as the Lightning network, are the modern equivalent of the notes that were used to transfer gold property titles in the 19th century. Banks used promissory notes because moving bullion was much more expensive than transferring it. a note representing the gold property title. Unlike the promissory notes, the Lightning network will allow the transfer of bitcoins with a minimum cost and without the need to trust a bank as an intermediary. The development of the Lightning network is a profoundly important technical innovation in the history of bitcoin, and its value will become apparent as it is developed and adopted in the coming years.


Being an open source software protocol, anyone can copy the bitcoin source code and start a similar network. Over the years, many imitators have emerged, from copies such as the litecoin , to complex variants such as the ethereum , which promises to execute arbitrarily complicated intelligent contracts in a distributed computer system. A common criticism of bitcoin is that it can not maintain its value if more modern and more easily competing chains can be created so easily.

The fallacy of the argument is that the hordes of competitors that have been created over these years lack the “network effect” of the first cryptocurrency. The network effect, that is, the additional value of bitcoin as the dominant network, is a fundamental advantage, as it has been for all the technologies that show this characteristic (for example, telephone, email, Internet, etc.).

The net effect in bitcoin covers the liquidity of its market, the number of people who own it, its brand image and the community of developers that maintain and improve it.Large investors, including state nations, prefer the most liquid markets, where they can enter and exit without affecting the price. The best developers are attracted to the development community with higher standards, and by integrating themselves in it they accelerate the virtuous circle that reinforces the community. The recognition of the bitcoin brand is fed back because competition is always mentioned within the context of the bitcoin itself.

A fork in the road

An upward trend in 2017 was to imitate not only bitcoin software, but also copy the entire history of transactions: the famous blockchain . In the process known as bifurcation ( fork ) the chain of blocks is copied until a certain time from which the two networks are separated. In this way the bitcoin competition solved the problem of how to distribute the currency to a large user base (and thus enjoy the network effect).

The most significant bifurcation occurred on August 1, 2017 when a group of investors and companies created a new network known as bitcoin cash (or BCash). At the time of the fork, on August 1, 2017, the owner of an amount N of bitcoins happened to have an additional amount N of BCash coins. The small but vocal community of proponents of BCash has tried tirelessly to appropriate the bitcoin brand, calling its bitcoin cash network and through media campaigns to convince the neophytes in the market that their currency is the real bitcoin .

These attempts have failed miserably as reflected by the market capitalization of the two networks. In any case, for new investors there is an apparent risk that a competitor clone bitcoin and its chain of blocks, will surpass its market capitalization and will become the de facto bitcoin.

An important rule can be extracted from the biggest bifurcations of the bitcoin and ethereum networks. The majority of the market capitalization will remain in the network that keeps the community of developers more active and of better quality.Let’s not forget that although bitcoin is an incipient money, it is also a very complex software network that must be maintained and improved. Buying coins from a network with the support of a few inexperienced programmers is like buying a Windows clone without the support of Microsoft developers (NASDAQ: MSFT ).

It seems clear seeing the history of the bifurcations that occurred last year that the best computer scientists and the most expert cryptographers are committed to developing the original bitcoin, not the growing legion of imitators generated from their DNA.

Real risks

Although the most common criticisms of bitcoin seen in the media and professional economists are misplaced and based on an incorrect understanding of money, there are real and significant risks when investing in bitcoin. Before considering investing in bitcoin, a prudent investor must understand and weigh these risks.

Protocol risk

In the future, some design error could be found in the cryptographic bases from which the bitcoin protocol has been built, or the development of quantum computing may make it unsafe. If a protocol failure or a new type of computer makes it possible to compromise cryptographic encryption, faith in bitcoin can be seriously affected.

The risk of the protocol was greatest in the early years of bitcoin development, when not even the most expert cryptographers were sure that Satoshi Nakamoto had found the solution to the problem of the Byzantine General. Concerns about serious flaws in the bitcoin protocol have dissipated over the years, but given the technological nature of bitcoin there will always be some risk of the protocol, albeit with low probability.

Closing of the foreign exchange markets

Being decentralized by design, bitcoin has shown a remarkable level of resistance to the numerous attempts of regulation or closure by different governments. However, the markets where bitcoins are bought and sold by fiat currencies are centralized and susceptible to regulations or closures. Without these markets and the willingness of the banking system to do business with them, the bitcoin monetization process can be severely affected if not stopped altogether.

Although there are other sources of liquidity for bitcoin, such as alternative markets (OTC) and decentralized markets for bitcoin trading such as, the main price update process occurs in the most liquid exchange markets, which are all centralized.

The jurisdictional arbitration allows to mitigate the risk of closing a foreign exchange market. Binance, a prominent exchange market that had its beginnings in China, moved to Japan after the Chinese government closed its operations within its territory.Many national governments are reluctant to stifle a nascent industry that could be as strategic as the Internet, and also give that enormous competitive advantage to other nations.

Only a coordinated global closure of all the bitcoin exchange markets would completely stop the monetization process. The bitcoin runs against the clock to achieve a level of adoption so wide that closing it completely is politically unrealizable, as would be the total closure of the Internet. Even so, the possibility of such closure remains real and must be taken into account among the risks of investing in bitcoin.As mentioned in the section on the entry into the market of nation states, national governments have begun to realize the threat that a digital currency, not sovereign and resistant to censorship, represents for their monetary policies. The question remains whether governments will act on this threat before bitcoin is too entrenched for political action to be ineffective.


The open and transparent nature of the bitcoin blockchain makes it possible to mark certain bitcoins as “dirty money” for having participated in illegal activities. Although the resistance to the censorship of bitcoin allows to transfer them, if the governments prohibit the use of those marked bitcoins, the market could reject them, annulling in practice their value. bitcoin would lose one of the most important properties of a monetary good: its interchangeability, that is, that any currency is indistinguishable from the rest.

To improve the interchangeability of Bitcoin will require changes in the protocol that improve the privacy of transactions. There are new developments in this line, led by monero and zcash cryptocurrencies , but it will be necessary to weigh the technical counterparts between the efficiency and complexity of bitcoin and its privacy. The question remains open: Can you improve bitcoin’s privacy without compromising its usefulness as a currency?


The bitcoin is an incipient currency, in evolution from the collectable state to the value deposit As a non-sovereign monetary good (not dependent on any nation state) it is possible that at some point in the future it will become a global currency, very similar to the gold standard in the 19th century. This adoption as a global currency is precisely the bitcoin’s bullish thesis, and it was already formulated by Satoshi Nakamoto in 2010, in an email exchange with Mike Hearn:

If you imagine that you start using it for a fraction of world trade, and there will only be 21 million coins for everyone, it should have a much higher value per unit.

Hal Finney, the brilliant cryptographer and receiver of the first bitcoins sent by Nakamoto, put this idea into figures shortly after the announcement of the first functional implementation of bitcoin:

Imagine that bitcoin is successful and becomes the main means of payment in the world. Then the total value of the currency should equal the value of all the wealth in the world. Current estimates of the global family wealth that I have found range between 100 and 300 billion dollars, which gives a value of around 10 million per currency.

Even if bitcoin does not become a fully developed global currency and only competes with gold as a store of non-state value, it is drastically undervalued. Dividing the total value of the extracted gold (approximately 8 trillion dollars) between the maximum number of 21 million bitcoins that can exist, is an approximate value of 380,000 dollars per bitcoin. As we have seen in analyzing the attributes that convert a monetary good into a good store of value, bitcoin is superior to gold in all dimensions except in terms of established history.

As time goes on and the Lindy effect takes hold, established history will no longer be a competitive advantage. That is why it is reasonable to expect bitcoin to approach, and perhaps surpass, the capitalization of the gold market during the next decade. One criticism of this hypothesis is that a large part of the value of gold comes from its use by central banks as a store of value. For the bitcoin to surpass the capitalization of gold, the participation of nation-states will be necessary. It is not yet clear if Western democracies will store bitcoins; unfortunately it is more likely that the half-haired dictators and the kleptocracies are the first nations to enter the market.

Even if no nation state invests in bitcoin, the forecast remains bullish. As a deposit of non-state value and used only by retail and institutional investors, bitcoin is at the beginning of the adoption curve: the so-called early majority is now entering the market, while the late majority and the laggards will take years to arrive. A price between $ 100,000 and $ 200,000 is feasible with a broader participation of retailers and, to a greater degree, institutional investors.

Having bitcoins is one of the few asymmetric bets in which anyone in the world can participate. As in the purchase options, the negative side of the bet is limited to losing the position, compared to the possible gain of multiplying it by 100 or more. Bitcoin is the first global bubble whose size and scope is only limited by the desire of the world’s citizens to protect their savings from the vagaries of economic non-management by governments. In fact, the bitcoin emerged as a phoenix from the ashes of the global financial catastrophe of 2008, a catastrophe caused by the policies of central banks such as the Federal Reserve (Fed).

Beyond the financial implications of bitcoin, its rise as a store of non-state value will have profound geopolitical consequences. A global and non-inflationary reserve currency will force state nations to change their main funding mechanism: if we eliminate inflation, only the taxes remain, which are much less politically acceptable.

States will shrink in size proportional to the political erosion of this transition to taxes as the only means of financing. In another area, global trade will be liquidated in a way that would satisfy the ambition of Charles de Gaulle that no nation is privileged against the rest:

We consider it necessary that international trade be established on an indisputable monetary standard, as it was before the great misfortunes of the world, and that it does not bear the mark of a particular country.

Within 50 years, that monetary pattern will be bitcoin.


I want to thank Alex Morcos, John Pfeffer, Pierre Rochard, Mat Balez, Ray Boyapati, Daniel Coleman, Patri Friedman, Ardian Tola and Michael Flaxman for their valuable comments on the first drafts of this series of articles. Sanjay Mavinkurve generously contributed his design skills to create some of the graphics in the early parts of this series.

Vijay Boyapati

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