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If we’re to view the price of Bitcoin in isolation as an investment indicator, it would leave much to be desired, and most short-term investors would, quite wisely, steer clear. When we look at the patterns and plateaus of surges, stabilisations and dips in years gone by, it’s unsurprising that there’s an audience who opt for more established, predictable and ‘safe’ investments.
But the reality is that Bitcoin shouldn’t be viewed as a short-term investment, nor evaluated as a traditional one. Its true potential and reward lies in a long-term perspective and understanding its exceptional characteristics as a technology.
Unlike fiat currency, which can be created at the whim of the governments and central banks, bitcoin supply is restricted to 21 million coins. This regulation is hard-coded into the algorithm that controls the network and is absolutely fixed.
The finite supply provides bitcoin with a unique feature of being a currency with the commodity-like quality of scarcity, built into its design. A stark contrast to fiat currency, which is subject to inflation and eroding value over time.
The basics of economics in terms of supply and demand dictate that limited supply, ceretis parabis, pushes the price upward. Investors who’ve acquired coins already - while still relatively available - can realistically expect to see the value of those coins increase, as supply diminishes over time.
Note: The current number of bitcoin in circulation is around 15.5 million (March 2016). Thanks to the regimented and predictable nature of the bitcoin algorithm, we can expect the 21 millionth coin to be minted in or around 2140.
Demand is the other side of the supply-price equation (as mentioned above), and the clearest picture of demand is seen when reviewing the adoption metrics of bitcoin.
There are a few I like to keep an eye on.
The number of user wallets currently stands at approximately 13 million, representing about an 800% increase over a 3 year period. While it’s reported that there’s a portion of wallets lying dormant or neglected, the steady increase year-on-year provides a positive view of adoption, most especially when viewed alongside metrics such as merchants accepting bitcoin and average daily transactions.
Merchants have increased at high exponentials over recent years with more and more retailers (across a wide range of services and from SME’s to large corporations) accepting bitcoins as a means of payment. Not to mention the average number of transactions being performed using bitcoin hovering around the quarter of a million per day, up by more than 350% in 2 years.
This keen appetite - from both a consumer and commercial perspective - bodes well for amplified demand, and subsequently provides bitcoin investors confidence that the laws of economics will play to their favour when it comes to ROI over the long-term.
Bitcoin is often compared to the early stages of the Internet.
The Internet was a breakthrough innovation, providing a quick, convenient and cost-effective means to transmitting messages and accessing information. Its creation signified a momentous step in the evolution of communication. Bitcoin is the same for the progression of money, representing the Internet of money.
But with one fundamental difference.
In the prime of the dot-com boom, many investors were successfully wooed into pouring millions into companies with fast-climbing stock prices and promising favourable future profits. And then the bubble burst and the majority of companies sunk, taking piles of investors’ money and venture capital down with them.
This is because investors were investing in corporations building commercial opportunities on top of the Internet protocol, and not in the protocol itself. The Internet didn’t collapse, the businesses built on its application did. It was impossible to invest in the underlying protocol of the Internet, as it essentially had no market value. No price feed. No way to buy in.
And therein lies Bitcoin’s dramatic distinction.
Bitcoin the protocol and the currency are integrated, creating the only protocol of the Internet with an active price feed. By investing in bitcoin, the currency, you’re consequently and simultaneously investing in Bitcoin, the protocol, too.
Satoshi Nakamoto, Bitcoin’s creator, envisaged Bitcoin to be an electronic form of currency, used to enable frictionless, digital monetary transactions between two parties, without the need for either party to know each other. And while bitcoin has proven success in its intended objective as a global e-commerce currency, it certainly hasn’t stopped there.
With trust and confidence in traditional financial institutions, central bodies and fiat currencies waning under political and economic distress, we’re seeing bitcoin making steady inroads in several sectors of the wider financial market.
In recent years, bitcoin has gained favour with conventional hedge funds, with several prominent players incorporating bitcoin as assets on their balance sheets.
With many similar attributes, bitcoin is regularly compared to gold when it comes to investment. Consider their parallels in terms of finite supply, divisibility and fungibility to name a few. It’s not surprising then that we’ve seen several ex-gold bugs touting bitcoin as the gold of the future and confidently divesting capital.
Remittance is another prime area of increasing opportunity for bitcoin use. Conventional money transfer companies like Western Union and Moneygram expunge much of the funds being received as a result of high transaction fees. In most cases, it’s poor, rural people being supported by migrant family members, who have little choice but to carry these costs if they’re to receive much-needed income to pay for basic living expenses.
The foreign exchange market also holds promise for bitcoin. There are now several forex brokers who accept bitcoin. With compounded conversion rates between bitcoin and fiat, as well as between different currencies to consider, this is a risky environment to ‘make money’ from bitcoin, but that’s not to say it’s not possible. The Winkelvoss twins’ have always been bullish on the potential of the forex market for bitcoin, repeatedly claiming it’s plausible for bitcoin to capture 1% of this vast and liquid market.
Notwithstanding all I’ve covered above, Bitcoin’s market cap is spectacularly undervalued.
For now, that is.
Current figures position it around the $6.5billion mark (March 2016), which is still a far cry from the gold market’s $7trillion, or the $400billion remittance market. If we, however, consider the use cases outlined in point 4, and the combined magnitude of these markets, even cautionary, diminutive capital deployment from each equates to a momentous rise in bitcoin value. A welcomed day for early bitcoin investors, indeed!
All of the above motives are based on objective facts and figures, sensible estimations and calculated projections. But there’s another driver for bitcoin investment, and it rests in the more subjective, emotional side.
You see, bitcoin is technology and currency that sidesteps incumbent processes and protocols laid down by traditional financial institutions. Processes and protocols that perpetuate classism and inequality in social status that should simply not be in existence in today’s society. Processes and protocols that leave about 2 billion adults on this planet unbanked and, as such, economically restrained.
Bitcoin empowers these people.
With permission-less access to bitcoin, it provides them the opportunity to financially interact, not only within their community, but with the world at large too. It gives them the ability to ease or even lift themselves out of politically imposed poverty and build a more gratifying life for themselves and their kin.
It’s this quality of bitcoin, this capacity to allow people - irrespective of financial standing or place of birth - to emancipate themselves and take control of their economic fate, which spurs my firm belief in this technology’s potential to change our world for the better.
It just so happens that by investing in bitcoin, you’re not only supporting this profound movement, you’re positioning yourself to make an incredible return from what’s undeniably the most philanthropic investment available today.
And for me, that’s a bloody good reason!