6 reasons why Bitcoin may not succeed long-term

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After reading of the many potential solutions to the monetary problems the world has been plagued with from not having a ‘hard money’ or stable unit of account, it’s hard not to see the underlying value that something like bitcoin could provide to the world. I highly recommend reading Debt Cycles by Ray Dalio and the Bitcoin Standard by Saifedean Ammous to get an understanding of inflation and the importance of hard money. With that said, I’m going to lay out a few of my thoughts as to where I see some of the risks for further cryptocurrency and bitcoin adoption.

Obstacle #1: Retail investors are getting priced out

The attraction of buying bitcoin will fall as the price becomes unaffordable for most people to ever have the opportunity of owning a whole bitcoin. At the time of writing, bitcoin is over A$57,000. This means that to own 0.1 bitcoin will cost an investor a whopping A$5,700. Based on the average savings of an Australian (~A$28,000), then buying 0.5 bitcoins is only possible by committing all savings to it. This I believe, will become psychologically enough of a barrier to not to want to buy in the first place. The limit in the long-term retail demand may make it much more of an institutional asset. With that said, there is plenty of institutional money to be invested.

Obstacle #2: First movers could become extremely powerful – this might be politically dangerous

The first movers into the space stand to benefit disproportionately - and we all know it. Companies such as MicroStrategy have shown full commitment, arguably too much commitment. This could dissuade other institutions and individuals from getting in at all. If the price of bitcoin did reach the estimates of Guggenheim, circa US$500,000 then it would make early adopters and companies enormously more powerful than they are today. Sticking with the example of MicroStrategy, the 77,000 bitcoin purchased would be worth a whopping $38.5bn.

Obstacle #3: Distribution of Wealth and Major Disruption to Central Banks

Arguably one of the benefits of central banks existence in the first place is to provide a flexible monetary policy to meet the demands of the time. In conjunction with government fiscal policy (i.e. giving money directly to individuals and businesses) can enable money to go where it’s needed most. For example, look at the recent COVID-19 pandemic which put over 1m Australians out of a job. If bitcoin was adopted as the new money, then governments ability to re-distribute wealth/money would be limited as they can’t ‘print’ more of it. The supply is controlled and held by those who made the switch to adopt it. Worth noting, however, is that bitcoins use case is more of a store of value, and so in theory the government could still re-distribute fiat to those in need, the price of bitcoin may just stand to benefit even more as the supply of fiat increased and bitcoin supply remains the same/shrinks. This leads to the next point.

Obstacle #4: The supply is not finite, it’s constantly shrinking

While the last bitcoins will not be mined until the middle of the next century, there is constant downward pressure on the supply of bitcoin in the market as individuals continue to hold their bitcoin without transacting. In some cases, each year, people will lose their keys to their wallets or transfer to an incorrect address and lose the bitcoin forever if the identity of the receiving address is not known or willing to re-send the money. To correct a common myth however, one cannot send bitcoin to an invalid or non-existing address as the transaction cannot be processed by the network and thus your bitcoin would remain in place.

Obstacle #5: Risk of Regulation

While many tout that regulation will bring welcomed boundaries and guidelines, improving the use case of bitcoin and other cryptos, this depends heavily on the specifics of the regulation that is heralded in. An outright ban as has been seen recently in Nigeria for example. If major economies like China or the U.S were to go down a similar path, it would have a significant impact on the adoption and use case of bitcoin in the global economy. This is just one or two decisions away from a possible reality. Arguments stating that this would increase adoption in other countries may be true, however, if the realm of use is within the much smaller economies and black markets of the world, then the price and use case is still ultimately quite downgraded from where some of the lofty price targets see it heading over the next 1-5 years.

Obstacle #6: Criminal activity is actually rising as a proportion of transactions

A recent report from blockchain security firm Chainanalysis shows that the use of bitcoin for illegal purposes is actually increasing. It shows that approximately 0.6% of transactions were believed to be for illicit purposes in 2017, rising to 1.2% in 2020. This runs counter to the notion that blockchain is an ideal defence against money laundering due to the traceability of blockchain from one address to the next. However, this anti-laundering capability only holds true if the holders of the addresses (bitcoin accounts) are known. So while we could say a specific address is believed to be responsible for criminal activities, there is still a significant barrier before we are able to identify exactly who the owner of that wallet is. In many ways, this runs counter to the purpose of cryptocurrency functioning as an anonymous payments network. Until the identities of the wallets can be mandatorily revealed by exchanges on a global basis, then unfortunately blockchain technology remains a viable option for those looking to launder money or undertake illegal activities.

In conclusion, there are barriers ahead for this emerging and highly disruptive technology and crypto-asset that we call bitcoin. As adoption increases, we can expect to see heightened interest from regulatory bodies as well as nefarious actors and speculators. Only time will tell how this evolves, but one thing is certain, we are in unprecedented times where people are rightly questioning the faith they put in governments and central banks’ ability to act as a guardian to their money. So long money can be increased ad infinitum, the value of fiat currency will continue to depreciate over time, punishing savers and causing continued booms and busts.

James Brannan

Director of Operations at STAX

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All views, investment or financial opinions expressed are those of the author and do not necessarily reflect the official policy or position of STAX. The information contained in this post is not investment advice or a recommendation to buy or sell any specific security.

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