Bitcoin’s price averaged $272 in 2015, $567 in 2016 and $4,001 in 2017. It peaked at just below $20,0000 in mid-December 2017. So far in 2018, as of mid-March, the average is just over $11,000. Bitcoin’s price has risen exponentially, as has interest in it from regulators, speculators, developers, innovators, economists, journalists, bloggers and others.
What happens next is anyone’s guess, no-one knows, despite the volume of predictions, and the confidence of those who make them. The probability of the price reaching, say $50,000 is somewhere between 0 and 1, as is the probability of the price going to zero – a statement of the obvious, but it highlights that predictions are futile as these probabilities are unknown. However, in this blog, I paint a picture of what might happen if the price does continue its exponential trajectory and somehow reach $50,000 or more.
Scale and Scope
Firstly, Bitcoin’s market cap would be at least $850bn (currently ~$141bn), and if recent market shares are a guide, the whole cryptocurrency market would be worth over $2trn (currently ~$317bn). To put these figures into perspective, the total number of US dollar banknotes in circulation is $1.6trn, and of euro banknotes €1.1trn/$900bn.
At a $2trn market cap it will be even more apparent than perhaps it is already, that cryptocurrencies are filling an unmet, if unclear market need, a gap in the market, and that they are here to stay. This unmet need appears to divide into:
• tokens for (cross-border) payments
• tokens for utility i.e. prepayment for future services
• tokens as digital assets to fund new ventures or projects.
Currently, there are over 1500 cryptocurrencies across these three categories, and at a $2trn market cap, there are likely to be even more. I expect that the unmet needs they address will be much clearer as the number of cryptocurrencies increases, as will identification of those that serve a genuine purpose versus those that are purely speculative, opportunistic or fraudulent.
At these levels, central banks and other regulators will have to act. Central banks are responsible for narrow money creation and supervision of commercial banks who create broad money, so I am sure they will have something to say about the creation of private money and digital assets, as will other financial regulators. But the rhetoric and focus of regulatory actions will have to move beyond Bitcoin to the much wider universe of other cryptocurrencies and initial coin offerings.
Regulation could be anywhere along the spectrum from prevention to containment to support. I attended a recent blockchain event in London arranged by the Swiss embassy, where the different token types and developments were debated. It was clear the Swiss for one, are on the front foot to anticipate, nurture and supervise innovation in the cryptocurrency sector, at the support end of the spectrum. Other jurisdictions may follow.
Currently, the Bitcoin network is made up of around 12,000 nodes (servers) globally, and although only a proportion of these are miners (who create blocks and validate transactions), the number of nodes is likely to increase, perhaps double, reflecting the increase in activity and innovation.
In a previous blog I showed a possible correlation between the computing, or hashing, power in the Bitcoin network and its market cap. If this relationship holds, then at a $850bn market cap, Bitcoin’s hashing power would be in the region of 110bn giga hashes per second, five times higher than today. The electricity required to support this computing effort would be enormous – Digiconomist estimates that the Bitcoin network already consumes 56 terawatt hours annually, and even allowing for Moores law in computing improvements, this suggests at least 125 twh of electricity is needed to support 110bn gh/s, on a par with that consumed by countries such as Sweden, Norway or Malaysia.
However, at $50,000 per bitcoin, miners fees would be at least $90m per day at the current reward rate per block (until it halves in 2020), and they would be able to afford these electricity costs and hardware required. Even so, there would be an imperative to seek low cost electricity, so, as is already happening, mining would continue to disperse to regions where electricity is cheap or where surpluses are difficult to export, for example from geothermal energy electricity generation in places like Iceland.
I have highlighted in this blog some implications if Bitcoin’s price continues to rise. Some of them, such as electricity consumption appear unsustainable, even fantastical.
Bitcoin may be the leading cryptocurrency, but it is being overwhelmed in terms of numbers and scope by new ones appearing every day, evidence of a new, but ill-defined domain that is emerging in financial services, and one that will become clearer over the next few years.
Whether Bitcoin reaches $50,000 or anywhere near that level is for you to decide, or perhaps better to keep an open mind, and watch this new emerging domain continue to unfold.