Is bitcoin over, or will it skyrocket again?
Barclays says bitcoin's best days are behind it, but the big picture might suggest otherwise.
When will bitcoin go to the moon and bring back a Lamborghini? According to analysts at Barclays Bank, it's already been and won't be going again. The analysts used an epidemiological model to assess the likely future of bitcoin, likening it to a parasite that infects people.
The three categories are the infected, the vulnerable and the immune. Bitcoin owners are infected, the vulnerable are the ones who might buy bitcoin, and the immune will never buy it. Much like the flu, those who recover by selling off their coins walk away with an immunity to it. According to the analysts, bitcoin awareness has plateaued and the virus has run out of new susceptible individuals to infect.
“As more of the population become asset holders, the share of the population available to become new buyers – the potential 'host' population – falls, while the share of the population that are potential sellers ('recoveries') increases. Eventually, this leads to a plateauing of prices, and progressively, as random shocks to the larger supply population push up the ratio of sellers to buyers, prices begin to fall. That induces speculative selling pressure as price declines are projected forward exponentially," Barclays said in its letter to clients.
"We believe the speculative froth phase of cryptocurrency investment – and perhaps peak prices – may have passed."
But are they right?
Maybe, maybe not.
It's very possible that bitcoin prices peaked months ago and it's all downhill from here, but the reasons have nothing to do with Barclay's fun epidemiological model.
On the one hand, it's undeniably true that bitcoin awareness is at an all-time high. On the other hand, this awareness typically comes with very little actual knowledge. Just because someone's heard of bitcoin, that doesn't mean they know how it works, why it took off or what makes it different. Learning about this might make a previously immune person vulnerable to the bitcoin infection. Not unlike a secondary infection or having a weakened immune system.
Awareness may have plateaued, but knowledge almost certainly hasn't.
Plus, just like the flu virus, bitcoin is a mutating organism. Immunity is a very specific thing and usually only protects against specific strains. The reason flu season is different each year is because it's a different strain. The bitcoin virus is also mutating into different strains, and the release of the Lightning Network, wider acceptance in stores or another massive price rise might see previously immune segments of the population become vulnerable again.
The main problem with Barclay's epidemiological model is that bitcoin isn't a flu virus. In fact, if you take a closer look, it turns out that infectious diseases and digital currencies are actually fundamentally different things. You might as well argue that McDonald's is on the way out because its brand awareness has plateaued, and some people still just aren't into it.
And assuming bitcoin does manage to overcome its current hurdles and becomes a more reliable way of digitising and transferring monetary value on the back-end of applications, it might one day be more like arguing that credit cards are obsolete because public awareness of ISO/IEC 7816 has plateaued.
Barclay's epidemiological hot take all starts with the assumption that bitcoin serves no purpose.
Good news: Bitcoin's purpose.
All things considered, bitcoin has shown itself to be of surprisingly reliable monetary worth. Like any other money, its purpose lies in its value, and bitcoin's proven to be reliably worth something. This is why most criminals still prefer bitcoin, even over objectively superior alternatives. Bitcoin is like the US dollar equivalent of the cryptocurrency world. It's considered to be one of the more reliable stores of value, and it's therefore widely accepted. It's also almost infinitely divisible, so its prices actually have relatively little to do with its intended purpose.
And at the moment, its prices can be manipulated with relative ease. Its first climb from $150 to $1,000 was probably caused by trading bot manipulation, and there are signs that its most recent step back above $7,000, and step back down afterwards, was also deliberately engineered. Being able to manipulate prices is a very specialised feature which is difficult, but definitely not impossible, to find in most fiat currencies or existing marketplaces.
It's also worth considering the enormous amount of capital and tangible real world infrastructure that is now backing bitcoin. The network is run by billions of dollars "worth" (arguably) of bitcoin mining hardware, there are bitcoin ATMs, bitcoin brokers and many new companies that have chosen to build entirely new businesses around bitcoin. Enough livelihoods depend on it that there's a solid enough core of users to keep driving some perceived value. Belief is the only thing that keeps any currency afloat, and bitcoin has achieved a religious-like significance to many people.
The chances of bitcoin exceeding $20,000 again might be slim, but at the same time, it's not going to die anytime soon. It serves a purpose and too many people have too much invested in it. And as long as it's still alive, there's a chance of it skyrocketing once again.
Even if bitcoin only has a 1% chance of clearing $20,000 again, the possibility of it going well beyond that when it does means it's possible to make some reasonable economic justifications for buying bitcoin.
Bad news: Bitcoin's problems.
Banks, authorities and established institutions aren't bitcoin's primary obstacle. Bitcoin's primary obstacle is that it's a bit rubbish. The main feature of bitcoin is its ability to digitise monetary value via blockchain architecture. This is literally the least a cryptocurrency can do.
You only need to look as far as joke coins like the Useless Ethereum Token ("the UET ICO transparently offers investors no value") to understand how functionally poor bitcoin actually is.
UET was designed to be a worthless joke, but it's also objectively superior to bitcoin. It has all the same functions in that it can be held in wallets and transferred on the blockchain while containing some kind of monetary value. It's currently worth about 1.2 cents per token. It's objectively superior because it does everything bitcoin can, except with quicker transfers and lower fees, with less risk of centralisation and without consuming insane amounts of energy. The only downside is that it doesn't have the same cachet as bitcoin.
This cachet is bitcoin's value, and it's undeniably worth a lot.
Bitcoin is often referred to as a kind of digital gold, or an infectious disease in this case, but the most accurate comparison is probably natural diamonds.
Diamonds serve a range of industrial purposes, but the much cheaper and more reliable synthetic diamonds are used for these, much like people often swap out bitcoin for Litecoin when they want to actually move money.
The bitcoin supply is capped at 21 million, even though the actual numbers don't really matter, to help push its value upwards. The diamond supply is controlled in the same way. The stone is actually relatively common compared to many other gems, so strict control of the supply is used to ensure artificial scarcity and higher prices.
Bitcoin has some unsavoury sides too. It's energy use is pretty high, although it's probably overall less than the amount used to wrest diamonds out of the ground.
And both bitcoin and diamonds have questionable ethical implications. Bitcoin is used to buy drugs online, while diamonds are used to pay mercenaries and fund civil wars and are directly responsible for mass murder and child slavery. Still, these issues seem to have very little impact on price or desirability.
A lot of experts have spent a lot of time charting bitcoin prices, but the world was still caught off guard by its ridiculous price rise. Now that its prices have dropped down again, and seem to be more in-line with the laws of reality, it's gotten much easier to bring out the charts and try to look for common sense in bitcoin prices.
But at the end of the day, it might be futile. Just like people's preference for diamonds over less expensive rocks, bitcoin's value is what makes it desirable, and its desirability is what makes it valuable. Throw in a bit of price manipulation, some shiny marketing spiels and pretend hard enough that there's some kind of inherent value or long-term potential, and you might surprise yourself by being right.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VEN, XLM, BTC and NANO.