Fundamentals

The economic conundrum of a 1 million dollar value of BTC

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People consistently claim and scream 1,000,000 US Dollars as bitcoin price by 2021-2022, but few fathom the dire consequence of such high value of BTC in a short period of time. The uneven distribution of Bitcoin and concentration with the early adopters will be more severe than what Big Tech has had on society recently.

Lets provide some perspective to this value of 100000 US Dollars in below, and discuss these thereafter: 

  • With an existing circulating supply of 18375000 BTC as of the 3rd halving in 2020 , the total market cap would be 18375000 * 1000000 = 18.375 trillion dollars, i.e. 4 times the market capitalization of Gold  – 5 trillion dollars – which was reached in 50 years. 
  • 1 bitcoin will roughly cost the per capita income of Luxembourg and Singaporeaverage income of Switzerland, and twice the median income of Luxembourg  
  • What will the amount of withdrawal fees from exchange cost be? Aren’t gas and network fees increasing as price is going higher?
  • How service and goods would become more expensive without us realizing?

 

Market capitalization and its consequence

Gold took 50 years to do a 500x with 3 major long term pullbacks: 1980 – 1984, 2007 – 2009, 2012 – 2014 – and one minor pullback in 1983 – 1984. These pullbacks were gradual pullbacks and represented more  market correction and distribution.

Distribution and accumulation are two major components for a healthy market cycle, because these two aspects bring more hands into the market. After every pullback, a long time of accumulation occurred before prices bounced to ATH with more active hands trading the asset.

The participation of more hands limit manipulation and flash dumps in the market like we often see in BTC markets today.

While, the numbers mentioned here imply that distribution is happening, I am skeptical of this data. More addresses been generated does not apply more people have bitcoin, because  anyone can create a new address without any additional cost. Hence, a possibility can also exist that whales and people with large amounts are likely moving BTC into their newer addresses to prevent hack of their entire portfolios. If this data is entirely correct  and distribution is happening,  I am more than happy as a retail trader.

An increasing market cap and escalating price with concentration in the strong hands present extreme challenges for the development of a risk-free and sound bitcoin based economy. If BTC does indeed reach a value of 100000 USD by 2021-2022, it would be more than the per capita income of Luxembourg and Singapore. Wow, that is just wow. 

100,000 USD BTC and its equivalent today

Like I mention in the points above, this price is above the per capita income of a wealthy developed nation like Luxembourg and median income of Switzerland. Can you imagine people putting their entire annual gross salary into a risky investment? Dollar averaging could be another suggestion, but when the asset is as volatile as BTC then unfamiliar and new faces in the market won’t be encouraged or interested in buying it to avoid stress. 

Another argument always put forward is they can buy lesser amount and think in Satoshis? Isn’t that your counter argument? My experience tells me otherwise.

Most of my friends like the idea and want to buy it. When they see the price, they think its too late to buy a full bitcoin. I explain them Satoshis and that you can buy in Satoshis. Some feel disappointed and say, if price ever comes down to 4000, let me know I will buy one otherwise I am too late for it. 

The funny part begins when they do their research and call me back a week or two later. ‘I can buy alts, they are so cheap and have 1000s of them.’ (Someone even thought of buying Ripple and Dogecoin). Then I make another session and explain them what little I know of crypto currencies and why everything depends on Bitcoin. Then after this long ordeal, some buy Satoshis. Most of my friends are in the top 2% income earners of their nations – western Europe,  and this is how they think about buying BTC at today’s value. If more people are not buying it, then distribution won’t happen.

If I extrapolate this, I find it hard to accept that more people will buy bitcoin at 100000 USD. The 100000 USD value maybe good for current holders, but a lack of people coming into the system will not bode well for the ecosystem in general. Uneven distribution, and control by exchanges and whales will only bring inflation in the economy. This inequality and uneven distribution will have huge consequences on the long term purchasing power of bitcoin holders. Let’s see how.

Purchasing power inflation in Bitcoin price

With a blind bias of adopting new technology and plausibly a better system, we are ignoring the basic problems that daily transactions in Bitcoin will entail such as gas usage or miner fee. 

Usually, as technology becomes or tries to reach masses, its cost of operations reduce, thus allowing more people to join the ecosystem and network. This increasing number of people further reduces the cost which in turn leads to mass adoption. This fosters growth.

Oh, but price will come down with new technology and mass adoption. If you can give me an example from history where the price of assets or services have declined over a larger time frame, I would agree with you. It has never happened, and never will. Economists like to call this ‘survival of the fittest’, or ‘you must adapt to survive’, but I see it as ‘forcibly killing the weak’, like the current Covid-19 is doing to SMEs.

Presuming that my hypothesis of ever increasing prices is correct, imagine if all vendors started to ask Satoshis for their trades and services. For simplicity, lets simply take the exchange withdrawal fee or the miner fee because this affects most BTC owners. As of today’s price, we pay 0.0005 BTC for withdrawal. This amount is roughly equivalent to 6 USD today. However, at 100000 USD it will be 60 USD. Have you ever paid a bank 60 USD dollars to withdraw money or an additional 60 dollars for payment at a restaurant, or buying groceries.

Btw, currently – Thursday, 6th August, 2020 – the mining fee for transactions through ledger are 0.0011 BTC (equivalent of 10 Dollars). This will be a highly unacceptable feature and a huge obstruction in mass adoption for BTC. I can say for myself that I don’t have millions to tranfer vvia Bitcoin which makes transfer fee look miniscule. 

If you are thinking, ‘Good for me, I can collect more Satoshis’, I think you are underestimating the diminishing purchasing power. 

If BTC does become the defacto medium of exchange between business, then every service provider will be charging you in Satoshi. Now, remembering my hypothesis that price always increase, if the price for the loaf of bread is 10000 satoshi (1.17 USD on 9th August, 2020)  and remains so when bitcoin is 100000 USD, we will end up paying 10.5 USD for bread. Now, that is a serious loss of purchasing power I believe. This is calculated assuming that service provider won’t shift the miner fees to the consumer. But, if he decides to do, we will possibly pay even more.

As much as the current economic system of Fiat is unsustainable, and not my favourite system, I believe Bitcoin will never be ready for a soundly accepted monetary policy on a large scale without much deep distribution amongst the masses. There has to be more distribution from the early adopters and holders so that the asset value can become more easily transacted. Even distribution shall allow SMEs and others to understand and adopt the system gradually, rather than get it thrust by governments. The latter is always devastating and create a huge jolt – no matter how temporary – to an ecosystem. I am also impressed as how mobile walllets and other things have popped up in the last 2 years to make paying with BTC easier, but businesses are about reducing cost, and not ease of transaction.

Therefore, it is imperative that gradual distribution occurs of Bitcoin without price escalating. This shall allow the SMEs and Mom and Pop stores to receive payments in Bitcoin without increasing their service cost or paying unnecessary transaction costs. If it continues at an exponential pace then exchanges and whales will control it irrespective of the recent positive news on acceptance of Bitcoin in many countries. 

The even distribution must happen and should keep pace with the increasing price of BTC, else we will only make a new cycle of wealth concentration and manipulation by the early investors, thus, recreating the current economic cycle in a digital format. 

For my part, I give BTC amounts as gifts to my friends and family with a detailed explanation as a printed note about it. 75% of these receivers have become BTC savvy, and one has much more BTC than I will ever hold.

Meanwhile, I find it a good asset to trade and that’s the best purpose it will have. With conventional and legacy power houses entering the crypto trading ecosystem, this feature will become less attractive too. With powerhouses will come efficiency and hence, less volatility in the asset. 

 

  • PS: I am not the expert on Lightning and hence, cannot estimate if it could reduce these costs.

 

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