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What Role Might Bitcoin Play in the Future?

The two main uses of a currency are as a means of storing savings and as a payment mechanism. If we want to hypothesize about the future impact of Bitcoin, we need to compare and contrast these two roles of money and explore which role the currency can take on—because the role that Bitcoin plays can make a big difference in terms of the value of the Bitcoin economy, as well as the value of an individual bitcoin.

Using Bitcoin for Savings

Bitcoin potentially has much to offer as a mechanism for storing savings. The reason is that its total supply is precisely known. Also, if used properly, it cannot be easily seized or stolen. You might imagine that in the future, it could become a preferred vehicle for saving your wealth instead of cash, precious metals, or real estate.

In this role, Bitcoin's use may be most comparable to that of gold, currently the most popular decentralized medium for storing savings. If we could estimate how much wealth is currently saved in gold, it would indicate the scope of possibility for Bitcoin to be used in a similar way.

Can we estimate how much wealth is currently stored as gold? As this book goes to press, it is estimated that all the gold above ground (as opposed to gold yet to be mined) is valued at about $9 trillion. Roughly half that amount is used for jewelry, and the rest is in gold bars or coins, which are used simply as a store of value. Let's conservatively assume that everyone who possesses gold jewelry does so purely for its beauty, not as a form of savings. That leaves $4.5 trillion worth of gold used purely as a means of savings.

So if bitcoins were ever widely adopted for saving wealth, the Bitcoin economy would eat into the market share of a $4.5 trillion gold economy.

Another way to estimate the amount of money currently in savings is to look in aggregate at how much wealth exists in the world. Today, the average net worth of a person (combining all the billionaires with the destitute poor) is about $25,000. This value consists of savings held in cash and wealth held in other types of assets. Hence, the total wealth currently kept in savings worldwide is about 7 billion times that much, or approximately $175 trillion.

If Bitcoin were ever to become a popular store of value, it would represent some fraction of that $175 trillion. Even if only 1 percent of the world's wealth was stored in the form of bitcoins, the total value of the Bitcoin economy would be in the multitrillion-dollar range. Since we know that there will only ever be at most 21 million bitcoins in circulation, each bitcoin would need to be worth hundreds of thousands of dollars in order for Bitcoin to store 1 percent of the world's wealth.

Using Bitcoin as a Medium of Exchange

If Bitcoin becomes primarily used as a medium of exchange (i.e., a payment mechanism), people would keep only as many bitcoins on hand as they needed for purchases and would keep the bulk of their savings in other places. Currently, most people use traditional currencies this way. They spend US dollars (or euros, yen, etc.) to make purchases, but they save the majority of their wealth in bonds, stocks, mutual funds, or other assets that don't lose value due to steady inflation.

Because Bitcoin transaction fees are low, the payment network is not proprietary, no identity information is unnecessarily revealed, and the transaction security is based on modern cryptography, Bitcoin is potentially a superior medium of exchange compared to national currencies.

To estimate the impact Bitcoin might have if it were used widely as a payment mechanism, we need to estimate how much money (of any type) is currently in active circulation across the world for payment purposes. Specifically, we need answers to two key questions:

1. How many expenses does a person have to pay on a regular basis?

2. How long will it take a given bitcoin to be reused within the economy as it passes from person to person?

To answer question 1, we can use the fact that the current median yearly income of a person in the top-earning billion people in the world is roughly $15,000. Let's assume that from this income, $3,000 is put toward savings and that this person spends $1,000 a month.

To answer question 2, let's estimate that it currently takes about a month for a dollar to be respent. In other words, if you buy a hamburger at a restaurant today for $10, let's assume that it will take about a month before those same$10 are spent by the restaurant owner.

Using these assumptions, we can roughly estimate that approximately $1,200 needs to be in circulation per person at any moment. For 1 billion people, a total of $1.2 trillion worth of currency needs to be in circulation as a medium of exchange for the world economy to function.

If Bitcoin became a widely adopted medium of exchange, some part of this $1.2 trillion payment economy would be executed in bitcoins. Again, because of the hard limit of 21 million bitcoins, we know that if bitcoins were used for just 1 percent of the world's transactions, then each bitcoin would need to be worth tens of thousands to hundreds of thousands of dollars.

Clearly, Bitcoin has a long way to go in terms of adoption before it reaches these staggering numbers (if it ever does). We will always use many different assets as a form of savings (stocks will never go away, for example, no matter how popular Bitcoin gets), and we will use many different payment mechanisms. That being said, nothing stops Bitcoin from being used to some degree as both a medium of exchange and a form of savings, and the more widely it is used, the more useful and convenient it will be to its users.

In this section, we have discussed the potential value of Bitcoin under certain adoption scenarios, but we have little basis for predicting just how much it will be adopted. Depending on the adoption level we assume, we could forecast virtually any value of a future bitcoin, from hundreds of dollars to millions. Somewhat ridiculously, if we assume almost all of the world's savings are stored in Bitcoin, we can even imagine a billion-dollar bitcoin, because the amount of savings and assets in the world is so incredibly immense!

For this reason, it doesn't make sense to try to assign a precise estimate to the value of bitcoins in the future. The best we can do is suggest that Bitcoin has potential as a technology, and in the future it could be a big deal—that is, if it doesn't first fail in the many possible ways we've considered.

UNIT OF ACCOUNT

It's theoretically possible in the distant future that a currency like Bitcoin could be used to denominate the prices of goods as an international standard. Using Bitcoin as a unit of account is certainly an intriguing idea, and this purpose is commonly mentioned in economic texts as an important role of money, but it would have negligible economic impact on the future world economy. The reason is that using Bitcoin as a pricing standard, in itself, doesn't directly affect how many bitcoins or other goods are bought or sold, simply because you can "measure" items in Bitcoin without needing to own them.

 
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