The Future Potential of Bitcoin
A quote that has been attributed at various times to several people, including Niels Bohr and Yogi Berra, is the maxim "Prediction is very difficult, especially about the future." Nonetheless, in a book about Bitcoin, we would be remiss if we didn't explore its potential in the future.
First, we'll look at the existential risks for Bitcoin—situations that could cause bitcoins to become worthless. Second, we'll look at the two main roles that Bitcoin could play in a future world, either as a method of storing value or as a method of exchange. Third, we'll consider some quantitative assessments of a successful future economy built around Bitcoin.
What Are the Existential Risks to Bitcoin?
For Bitcoin to survive long term, it must have advantages over existing currencies, or its adoption rate will stall. Also, because it is a software technology, Bitcoin needs to instill confidence that its network cannot be destroyed by computer bugs or hacks. Additionally, Bitcoin won't survive if it can be extinguished by outside entities, such as governments or corporations. Finally, it won't survive if it is somehow replaced by another, possibly better form of money (perhaps another cryptocurrency). Let's look at each of these existential risks to Bitcoin in succession.
Does Bitcoin Have Advantages over Existing Currencies?
Many have argued that Bitcoin is just a fad, and after the fad is over, people will realize that Bitcoin has no advantages over paper money. As Paul Krugman has asserted in regard to Bitcoin, "So do we need a new form of money? . . . We have huge economic problems, but green pieces of paper are doing fine—and we should let them alone."
However, a strong case can be made that Bitcoin does have significant advantages over traditional currency. An ideal currency has certain properties that make it as useful as possible. Those properties include portability, divisibility, durability, scarcity, and fungibility. Let's look at each property in turn:
• Portability: In a perfect world, money should be light, compact, and easily transported. By this measure, bitcoins easily trounce paper currency: Bitcoins weigh nothing, are stored effortlessly even in large quantities, and can be moved across the world within minutes. Of course, as part of a world financial system, electronic mechanisms are available for storing and transporting traditional currencies in digital form, improving the portability of those currencies as well. However, in terms of simplicity, cost, and speed of portability, Bitcoin has clear advantages at this time.
• Divisibility: Everyone knows the frustration of needing to pay someone a small dollar amount but only having a large bill and no change. This problem cannot exist with bitcoins since bitcoins are completely divisible to fractions of a penny. Because computers are efficient at crunching numbers, it's no surprise that they can handle the task of dividing Bitcoin amounts in any way necessary to make change.
• Durability: By design, every bitcoin is stored within the Bitcoin block-chain, a computer file that is stored on many thousands of computers across the world. As long as a person doesn't lose the private key that protects their money, that person's bitcoins are indestructible. On the other hand, the US Federal Reserve estimates the life span of a dollar bill at 5.9 years.
Of course, another aspect of durability is that the value of a bitcoin must be maintained into the future. Although the value of a bitcoin in the future is unpredictable and volatile day to day, it has generally increased from year to year. One can certainly argue, however, that durability of Bitcoin in terms of maintaining its value is not a certainty until the network of users grows much larger.
• Scarcity: The primary innovation of Bitcoin is the decentralized creation of scarcity for a digital asset, which is necessary for bitcoins to retain any monetary value. Therefore, like paper money, bitcoins can maintain a limited supply. However, with paper money you need to trust the government (i.e., the owner of the printing presses) to maintain this scarcity over time and hence prevent inflation.
• Fungibility: It's important for any dollar bill—or any bitcoin—to be equally valid for payment. If a recipient of money constantly needs to worry about whether they have received "good money" or "bad money," the utility of the currency is damaged. As you know, paper money can be traced physically by tracking the serial numbers on bills or electronically through tracing mechanisms built into our modern electronic payment system. Similarly, bitcoins are traceable by following coins through the public blockchain. Hence, neither traditional currency nor Bitcoin has a clear advantage in terms of fungibility.
With regard to some of the properties that determine the utility of currency, Bitcoin scores quite favorably, especially in term of portability and scarcity. Therefore, it is unlikely that Bitcoin will ever fail solely because it offers no advantages over traditional money.