*I originally wrote this post in August 2020, the Bitcoin price was roughly $8,000 USD. I realize I wasn’t nearly bullish enough about the Bitcoin Endgame. As I have learned more, I have realized that hyperbitcoinization is a far greater possibility and likely an inevitability than I previously thought. I have taken out the percentages but I will leave the rest of the article unaltered.
What is the Bitcoin Endgame? Never has the world seen an asset class emerge so quickly from relative obscurity to become a multi-billion dollar international asset. In this article, we speculate about the future of Bitcoin and what role it may play as time unfolds.
Bitcoin End Game #1 Bitcoin as a Commodity / Fails
Approximate price level $0-$50,000 US. (worst case scenario for Bitcoin bulls)
We start with Bitcoin in roughly what I’d consider its current state. Under the Currency and Exchange Act, the United States classified Bitcoin as a commodity in 2015. This put Bitcoin in company with oil, gold, coffee, wheat, etc. This was an important milestone for Bitcoin as it gave regulatory clarity to investors. In our first scenario, this is the end game for Bitcoin and all it ever becomes.
In this rather unexciting scenario, not a lot of changes with Bitcoin. There will still be those who use the currency for special circumstances and transactions. The Bitcoin price will find stability within a given range.
The price stability itself will catalyze more Bitcoin users as it becomes an excellent place to store value (which is why this scenario is extremely unlikely). Bitcoin has been designed with game theory to form a virtuous cycle that incentivizes new users.
In this scenario, Bitcoin doesn’t go away any time soon. There will always be someone that needs assets that cannot be confiscated and is trustless. As long as there is demand, there will be a network of decentralized miners ready to turn on their computers and earn a fee.
Much research has been done to show that the price of Bitcoin has historically been valued near the cost of production (the electricity and hardware cost of mining a Bitcoin).* New Bitcoin is rewarded (production) to miners who verify transactions on the blockchain. The block reward incentive structure helps keep Bitcoin alive and stable.
Several research papers on Bitcoin prove that the Bitcoin mining cost follows the Bitcoin price and not the other way around.* However, so far the price of Bitcoin has found bottoms near the break-even price for the cost of mining a Bitcoin.* Economic theory shows that commodities should not be priced by how much it costs to produce them but by demand.
If the Bitcoin price goes down, then miners make less money. Eventually, miners turn off their equipment. With less competition in mining, the network automatically re-calibrates how difficult (and expensive) it is to mine a Bitcoin.
In this scenario, mining power will diminish and find a lower equilibrium. However, mining will always find a way to become profitable again, but if there is no price appreciation, the overall network security will be weaker. Bitcoin mining is designed to seek equilibrium as the network automatically adjusts to accommodate demand.*
Eventually, near the year 2040-2050 or so, as block rewards shrink, transaction fees may play a larger role in incentivizing miners to keep the network secure. If demand dissipates and the miner incentives that keep the network going are not profitable, Bitcoin could even die a slow death.
Keep in mind there are several variables that could affect this scenario as well as the others:
- The cost of electricity around the world
- The efficiency of mining equipment
- Changes to the Bitcoin protocol
As mining equipment and computer hardware grow more sophisticated, the network will become more secure. Changes and additions to the code of the Bitcoin protocol will continue to serve the community of users. Lastly, the energy itself used to power Bitcoin mining rigs could be harvested more efficiently in future generations.
I believe this scenario of Bitcoin as a commodity has a low probability of occurrence. The demand has been growing exponentially and continues to at a historic pace. This will not only drive the security and efficiency of the network but will attract more investors and innovators.
Bitcoin Endgame #2 Bitcoin as Digital Gold
Approximate price level $250,000-$500,000 per Bitcoin
Bitcoin is digital Gold 2.0. The two share many similar properties. In scenario 2, Bitcoin’s end game establishes its status as digital gold.
You can see that Bitcoin matches many of the qualities of gold and even adds more capabilities!
It is very easy to transport Bitcoin, in fact, it never moves. If you store your private keys on a thumb-drive you can easily carry it around the world. Gold isn’t so easy to pack into your carry-on luggage.
If you want to pay for your coffee, you could easily send .00027 Bitcoin ($3.25 at the time of writing) to your barista. I don’t think Starbucks would be interested in you shaving down a gold bar in their cafe.
It is far easier to confidentially and securely store Bitcoin. Unless you have Scrooge McDuck’s money bin, securing large amounts of gold could be costly and dangerous.
To be completely fair gold does have some properties that exceed Bitcoin.
- Shinny and makes nice jewelry and statues
- Has a thousand-year plus track record
- Is currently stored by central banks and high network individuals around the world
As Bitcoin is clearly superior but shares many of the same characteristics to Bitcoin, it makes logical sense to see Bitcoin taking over the role of digital gold. (Full disclosure, I have some personal investment in gold)
What happens to Bitcoin in 2140 when the mining block reward goes to zero?
In this scenario, the price appreciation of Bitcoin enables miners to secure the blockchain profitably with transaction fees as the block reward eventually reaches zero.
Satoshi Nakamoto stated, “Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.”
In this endgame scenario, Bitcoin becomes used more of a store of value than a medium of exchange. Transactions wouldn’t be on small purchases like coffee. More likely Bitcoin would be used for large transfers and big purchases.
I believe that digital gold as the end game of Bitcoin provides the most probable scenario. I’m doubtful of Bitcoin going beyond this. The simple reason for this is I believe the resistance from governments and powerful banks will be too great for it to become more.
These giants will likely try their hardest to financialize and control the flow of money like they have since we departed from the gold standard in 1971.
I believe Central Bank Digital Currencies are going to be the next big move from the government. It is likely big corporations begin issuing their own tokens as well as we transition into a world of decentralized finance.
These inventions won’t necessarily stop Bitcoin, but it may distract from its dominance and role in society. Never-the-less the use case of Bitcoin in being absolute digital scarcity and true decentralization will cement its status as digital gold.
Bitcoin Endgame #3 Bitcoin Becomes the Reserve Currency of the World
Approximate price level $500,000- $1,000,000 per Bitcoin
Scenario 3, goes a step beyond the previous scenario and establishs Bitcoin as the World Reserve Currency.
The good news for Bitcoin bulls? I don’t believe this takes a dramatic step from the previous scenario and presents itself as a similar probability to Bitcoin as digital Gold.
All it takes is a few nations declaring Bitcoin to become a part of their central banking reserve currency. Central banks hold large quantities of various national fiat currencies to help facilitate trade for various commodities, investments, and debt obligations.*
Central banks are currently the largest owners of gold in the world.
Bitcoin seems like a very logical choice for nations to hold. Imagine a nation transporting and trading an enormous amount of gold.
The decentralized nature of Bitcoin also ensures a fair playing field for all nations. A country could not manipulate its national currencies in hopes of gaining an unfair advantage.
In 2018, the US put 9 nations including China, Japan, Italy, and others on a watchlist for deliberately manipulating their currency to gain a trade advantage against the US.* Bitcoin fixes this.
Any type of political or financial manipulation becomes thwarted by Bitcoin’s architecture. Hal Finney, one of the potential candidates to be Satoshi Nakamoto;
“I see Bitcoin as ultimately becoming a reserve currency for banks, playing much the same role as gold did in the early days of banking. Banks could issue digital cash with greater anonymity and lighter-weight, more efficient transactions.
Hal Finney
I can see a small country or two, being the first to adopt Bitcoin as a part of their reserves. This could serve as a competitive advantage to the first movers as Bitcoin continues to appreciate in value compared to failing fiat currencies of other nations.
Like dominoes, those country’s trading partners will then begin stocking their reserves with Bitcoin to further facilitate trade.
I also see corporations getting in on the action. Just this morning (August 11th, 2020) publically traded Microstrategy (Nasdaq: MSTR) announced that they invested $250,000,000 in Bitcoin as a part of their strategic reserves.* Their stock soared 9% upon the announcement.
I suspect more large multinational corporations will begin incorporating Bitcoin into their strategy as a hedge to inflation risk.
As Bitcoin becomes owned by larger entities in greater quantities, we will see the price eventually begin to decrease in volatility. As the numbers behind Bitcoin become larger, the volatility swings will diminish over time.
In this endgame scenario, Bitcoin becomes more of an infrastructure to the world of money. Many systems may use Bitcoin in their base settlement layer, but individuals may not even realize they are using it.
At some point, the Bitcoin price will be very stable and personal investors will seek it only when they desire guaranteed stability. Investors will gravitate toward investments with higher rates of return as Bitcoin will be boring.
Bitcoin Endgame #4 Hyperbitcoinization
Approximate Bitcoin price – ???? 1 Bitcoin = 1 Bitcoin
In scenario 4, Bitcoin completely takes overall money in Hyperbitcoinization.
Bitcoin has already thrashed fiat currencies into submission, in the future of Hyperbitcoinization it finishes them off.
When Hyperbitcoinization occurs, all fiat currency will rapidly lose their value as Bitcoin gobbles them up with complete dominance over all forms of money.
In my estimation, Hyperbitcoinization will not happen quickly, but will likely proceed the major events of the previous scenarios. First Bitcoin will establish itself as a commodity. Next, Bitcoin will take over the role of digital gold.
Small counties and large corporations will be next to embrace Bitcoin. As these corporations and countries benefit greatly from their first-mover advantage, the largest companies and central banks will have no choice but to adopt the hardest money ever created.
Bitcoin will become an inevitable choice for the laggards. It won’t seem like a choice to buy Bitcoin.
Technology built on Bitcoin will flourish as the greatest minds converge to improve the currency.
Many Bitcoin holders fantasize about building “citadels” that offer a free market infrastructure that thrives on Bitcoin.
Second layer solutions such as the lightning network will solve scalability problems and enable cheap, fast transactions. Any transaction whether it is a cup of coffee or a house will be denominated in Bitcoin.
Bitcoin will be used as a global unit of account. Bitcoin will be the only standard in which individuals measure wealth and value.
A cup of coffee in Brazil and a cup of coffee in Hong Kong will both be priced in Satoshis. Everything from salaries, trade, and debts will be denoted in Bitcoin.
Bitcoin mining will be completely sustainable. Solar, hydro-electric, wind, and other renewable energy sources will power Bitcoin security. Mining will be an extremely important part of the global energy equation.
From a personal finance perspective, Hyperbitcoinization allows for capital to be allocated more efficiently. Bitcoin will be seen as a risk-off asset.
As investors become uncertain about the future they will buy more Bitcoin. If investors feel confident, they will invest their Bitcoin in businesses that promise high returns or sell their Bitcoin for goods and services.
Bitcoin will be a more stable asset to invest in. While the value you will be going up, it will be slowly and steadily instead of the dramatic price swings of today. Investors will choose between riskier assets, but only if they offer more attractive terms than investments of today. This will equal a more fiscally conservative world.
The endgame of Hyperbitcoinization creates a more peaceful world. Citizens essentially vote with their money. With money in the hands of the citizens rather than central government entities and big businesses.
War will be a harder decision to make. We’ve already seen that globalization has led to more peace in the world.*
The big struggle we will likely see is will the fiat-based societies go down with or without a fight? What does that fight look like? Bitcoin is very difficult to fight. While nobody knows the future, I feel very confident in saying, buckle, up it is going to be a fun ride!
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*https://medium.com/@QuantMario/the-lgs-s2f-bitcoin-price-formula-751d0aac06af
*https://www.sciencedirect.com/science/article/pii/S0140988319303834
*https://www.investopedia.com/terms/r/reservecurrency.asp
*https://www.independent.org/publications/tir/article.asp?id=457
2 responses to “What is the Bitcoin Endgame? 4 Incredible Scenarios”
Interesting ideas here but I think that hyperbitcoinization is inevitable.
Thank you Johan, I agree. when I initially wrote this, I wasn’t nearly as bullish, now I realize this is inevitable.