More thoughts on Bitcoin

A couple days ago, a long-term reader sent me an email asking about my long-term forecast for Bitcoin. As some may have noticed, in the past 3 months or so I turned bearish on Bitcoin. That is correct: I am bearish on Bitcoin in the long-term, both in terms of the technical chart patterns but also the technology. Bitcoin won’t go away; it will find a niche market that will keep it somewhat relevant and important, but it won’t be the paradigm shift many are hoping/expecting it will be. Under such a scenario where Bitcoin has niche rather than mainstream adoption, predicting a final price is, understandably, hard, but I think it will settle around a few hundred dollars. Some see Bitcoin as a sort of transcendental technology that defies any sort of attempt at reification, I see Bitcoin, however, as more like a tech company, such as Google or Uber, that is governed by the same laws of supply of demand. Bitcoin’s ‘product’ is decentralized, quasi-untraceable, anonymous, irrevocable currency. It’s coins are shares, which when multiplied by quantity gives a market capitalization, much like a stock. Given what I know about tech stocks and how the biggest tech companies such as Facebook and Amazon are worth about $300,500 billion apiece, that was my basis for my Bitcoin $20,000 price target last year, which it very briefly hit in December. Bitcoin at $20,000 was the same size as one of those aforementioned tech companies.

Since December, I have done much more reading on Bitcoin and I realize that the bullish arguments were not as sound as I originally believed. It seems like theft and accidental loss off coins is a big problem despite new and improved wallets (such as seed-based deterministic wallets) and increased awareness of Bitcoin. This is due to the inherent complexity of Bitcoin and Bitcoin wallets, and there are some currencies such as Iota which are even way more complicated than Bitcoin. Yes, although cash can also be lost and stolen, credit card transactions can be reversed. The FDIC covers deposits up to $250,000, but Bitcoin has no such protection. This will greatly hinder any sort of mainstream adoption, especially given the tendency of even really smart, tech-savvy people to make mistakes that result in the irrevocable loss of funds. Regarding the store of value argument, hard commodities can be recovered and insured; Bitcoin cannot. Bitcoin does have the advantage of not requiring physical space, but I don’t think that is reason enough to justify people buying it as an alternative to precious metals. Unless you have only a few hundred bucks and you don’t care that much what happens, you cannot just put a seed paper in a drawer and forget about it. Someone can steal it or it may be thrown away accidentally. Owning bitcoin is surprisingly a lot of work for something that occupies no physical space.

It’s possible, I suppose, to make Bitcoin ‘idiot proof’ so as to prevent loss of funds, theft, hacking, and so on, but then you end up with just a worse version of what already exists. Cash, bank accounts, etc. have worked well for hundreds of years. It’s not something that needs fixing.

Since I began writing this post, Bitcoin has fallen $500. I don’t get that much enjoyment out of telling people their investment will likely be worthless (as in a few hundred dollars being worthless relative to $9000), but that’s how I see it.