With news of the stratospheric 2017 Bitcoin price rally of over 1000% reaching mainstream culture, many retail investors have become interested in the prospects of Bitcoin as a long term investment. While the concept behind Bitcoin’s attraction is simple enough, a distributed digital ledger system that is hypothetically immune to tampering and regulatory interference, the implications for Bitcoin’s prospects as a long term investment are more complicated.
Let’s quickly unpack the two dominant factors that will determine Bitcoin’s worth as a long term investment.
Bitcoin’s main draw as a store of value is the fact that its operation and governance are decentralized. While currencies and other forms of value storage, particularly gold, are subject to government and regulatory controls, Bitcoin is free of such potentially value-destroying burdens.
Therefore, people who are worried that their Bolivars, Yuan or even Dollars and Euros may be subject to devaluation or even seizure by government fiat believe that Bitcoin represents a safe storage of value beyond the control of governments and other regulatory bodies.
This demand for a truly ‘safe’ haven asset is by far the biggest driver in the demand for Bitcoins. Very few investors are buying Bitcoins for the purpose of making transaction or transferring wealth between individuals. Rather they are buying Bitcoins to safely store value away from government mismanagement and/or appropriation, and to avoid other other regulatory burdens, such as capital controls.
Your belief in the long term viability of Bitcoin as a speculative investment depends in large part on your views of the future of value storage with respect to government controls, and the likelihood that Bitcoin will remain the cryptocurrency of choice for the storage of value beyond traditional assets.
The creation and management of Bitcoin is the least understood aspect of this cryptocurrency, yet it plays one of the most important roles in the determination of its value and prospects as a long term investment.
The management of the distributed digital ledger that underpins Bitcoin is undertaken by decentralized ‘Bitcoin miners’. These miners are rewarded for their efforts through the creation and distribution of additional Bitcoins. However, this process is limited by a decreasing output of Bitcoins, which will be capped at 21 million units.
Therefore, not only is the number of additional Bitcoins, or its supply, being gradually reduced as the demand for them increases, but the supply will eventually be capped for all time. The implications are that not only will the Bitcoin price continue to rise as long as the demand for Bitcoin outstrips the slowing increase in supply, but also that the price of Bitcoin could ultimately reach into the millions of dollars per unit, from its current range of around 10k USD each, once that supply cap is reached.
The Third Factor: Your Perspective
Unfortunately there is no simple answer concerning the prospects of Bitcoin as a long term investment. The dwindling and limited supply of future Bitcoins ensures that Bitcoin prices will be determined by its demand in the future. However, this demand for Bitcoin will depend on the future course of value storage in general and whether Bitcoin itself will be the alternative asset of choice for storing value.
Other forms of alternative value storage could arise, including alternative cryptocurrencies, or the current fears over currency controls and devaluations may themselves become relics of the past as Bitcoin’s underlying technology is adopted by government in the management of their currencies.
Your perspective on these matters will determine your position on Bitcoin’s prospects as a long term investment.