This is the full and final version of my article:
Will Bitcoin
Destroy the Current Financial System?
This question has come to me very strongly now that Bitcoin
has reached and surpassed the quite amazing price target of $10,000 per coin.
As I write this on Word 2007, I just noticed that Bitcoin
has a red line underneath it; it was not in the dictionary. I just put it into
the dictionary. I wonder if the new versions of Word Processors have this word?
Does the Oxford English Dictionary have it? They need to have it in there, now.
On my Dell UK style laptop computer keyboard, I have the
dollar sign $ and the British pound sign £ (SHIFT 4 and SHIFT 3 respectively).
Pressing CTRL ALT 4 gives me the Euro sign €. Where is the Bitcoin B with two
vertical lines through it? Is it in the Wingdings font yet? It needs to be.
Bitcoin is the digital peer to peer currency launched
around 2009 with little or no monetary value at the time. It was even discussed
back then whether it would ever have any use or monetary value. Now each unit
is worth approximately $10,000, varying from day to day as it trades and there
are about 17 million Bitcoin units outstanding, giving a total market value of
around $170 billion to the current Bitcoin currency supply. The maximum number
of Bitcoins that are available to be found or ‘mined’ was set at 21 million but
that process is gradual since Bitcoins are essentially mined essentially by
maintain the ledger of transactions and his takes computer power and work, as
does mining precious metals for instance.
Now as Bitcoin has hit $10,000, speculation has raged as
to what maximum value it might reach. Some have speculated it might go to
$500,000 to $1,000,000 per coin. This is extravagant in my personal view but
that is not investment advice.
The limit is likely to be dictated by the total amount of
money in other currencies that is available to be able to be put into Bitcoin.
Of course, since currencies fluctuate and often depreciate and since central
banks print money by doing quantitative easing among other things, the total
number of currency units tends to increase over time. However the Bitcoin
supply is fixed at 21 million units maximum, though this will not be reached
for some years. I am going to use a number of Bitcoins of 20 million because it
is a round figure and it is likely to be reached in the next few years.
We need to look at various monetary stores of value and
compare them to Bitcoin. In my view, the total value of Bitcoin could go to $1
trillion as a feasible target. This is because 1 trillion is an attainable
number for a valuable entity in the current world of investment. For example,
Apple’s total stock market value has been threatening to reach the 1 trillion level
- and this has in itself been a hot issue for the last year or two as to if or
when this will happen.
We must also consider that there are numerous other
crypto-currencies such as Etherium, Bitcoin Cash, Bitcoin Gold and others about
to be released such as Ucoin cash. The total market value of these is the same
order of magnitude as Bitcoin itself. Bitcoin’s “market share” of the total has
been slowly falling since these new crypto-currencies have grown from a
standing start, even though in general the value of most of them has been
skyrocketing.
A good place to look is https://coinmarketcap.com/ which
currently states as of 1 Dec 2017 that the total market capitalization of all
1320 of the cryptocurrencies it monitors is $332 billion, with the lion’s share
in Bitcoin ($188 bn), Etherium ($45 bn), Bitcoin Cash ($24.5 bn), Ripple
($9.9bn), etc. All of the top 16 have over $1 billion and even number 50 on the
list, Veritasium has a market cap of $196m!
The total crypto value is already 1/3 of a trillion!
Bitcoin currently has 56% of the market.
The website http://us.spindices.com/
gives useful information about the market value of the largest American
companies. All of the top 10 companies in the Standard & Poors S&P 500 index
had values over $300 billion at the end of November 2017, with Apple at the top
at $887 bn. The current money in cryptocurrencies is thus about equivalent to
the market value one of the top10 companies in the USA. This is significant but
not yet disruptive, since the total value of the 500 companies in the index is actually
about $22.6 trillion.
c
It doesn’t seem out of order to imagine Bitcoin’s market
cap going to 1 trillion with 50% of the total market, giving $2 trillion in
cryptos and a Bitcoin price of $60,000 per coin. This would give Bitcoin a
capitalization similar to Apple Inc, the most valuable company in the world and
a value approaching to that of the total central bank gold reserves.
What would be the implications of this? This really means
that $1 trillion would have exited the conventional financial system and gone
into Bitcoin and perhaps $2 trillion into cryptocurrencies in aggregate. This
would divert that money from the economy and perhaps numerous other markets,
such as the gold market, the commodities markets, the stock market, the
government and other debt markets as well as from savings accounts and bank
deposits.
What level of money flow into cryptos would endanger
other investments and how would this happen?
Well, $2 trillion flowing into cryptos would be
equivalent to about 9% of the value of the S&P 500 stock index. It is also
greater than the value of any individual company, more than the value of all
central bank gold reserves, more than the UK money supply and about 12% of the
total money in US banks. This would surely start to move markets. Of course the
flow into Bitcoin is coming from the whole world but it could be concentrated
in certain areas, especially where there is a perceived need to move money out
of another asset that is insecure.
I see several dangers. Excessive money flows into
Cryptocurrencies could cause:
1. Diversion
of funds out of the precious metals, the mining stocks and other ‘alternative’ markets;
2. Fall
in value of weak or vulnerable national currencies that are being converted
into cryptos;
3. Hyperinflation
in vulnerable countries.
4. Diversion
of funds out of general stock markets – possible stock market crash;
5. Diversion
of funds out of pension funds by savers causing bankruptcy of funds;
6. Draining
of bank savings accounts causing bank illiquidity or insolvency;
I think item (1) is already happening. Bitcoin is
zooming, while gold and silver, which are other alternative forms of currency,
are languishing. The libertarian political mindset is common both to precious
metals freaks and Bitcoin freaks so these markets are competing for that money.
Cryptos are winning, hands down. How far will it go? What will happen when
Bitcoin futures open on the same platforms as gold and silver futures in December
2017?
So how about a vulnerable economy like Venezuela (Items 2
and 3)? Here are some stats from the IMF compared to crypto values:
Bitcoin capitalization $187bn
(2 Dec 2017)
Cryptocurrencies total capitalization $332bn (2 Dec 2017)
Venezuela GDP $215
billion (2017 IMF estimate; down from $236bn in 2016)
Venezuela total savings $9.1
billion (2017 IMF estimate; down from $15.4bn in 2016)
We see a large shrinkage of Venezuelan savings and GDP
over the past year, measured in US dollars. That might be due to a fall in the
Venezuela bolivar currency but could also be due to money leaving that country
and into Bitcoin. Already, Bitcoin’s value is approaching the total GDP of this
crisis-ridden country and it could easily absorb all of Venezuela’s savings of
$9.1 billion.
There is actually a strange parallel between the
inflation rate in Venezuela and the price of Bitcoin. Is this a coincidence? I
think possibly not.
There will always be poor mismanaged nations that will
get hit by the markets. However, what about the world’s financial system that
itself is debt ridden and riddled over recent decades with asset bubbles,
crashes and market manipulation by the central banks by bailing out their
chosen friends when they lose money?
So at what point might we see items 4, 5 and 6, where the
largest sectors of the investment sectors and the mainstream financial system could
be endangered.
To me, that would require a real mainstream mania in
Bitcoin and the cryptos that would divert several trillion dollars or more from
the other investment markets. Essentially most people are probably not spending
Bitcoin so it is hardly functioning as a currency. In my view is functioning as
a hoarded asset, much like gold in the early 1930s during the Great Depression.
Ten trillion dollars equivalent going from conventional currencies into cyptos
would probably be a major threat.
Some hypothetical
levels for Bitcoin compared with today:
Date
|
Bitcoin market
capitalization
|
Total cryptos
market capitalization
|
Bitcoin’s share
of cryptos
|
No of Bitcoins
in
Circulation*
|
Price per Bitcoin
|
% of size of major
US markets**
|
1 Dec 2017
|
$188 billion
|
$332 billion
|
56.6%
|
16.7148 million
|
$11,239.80
|
0.83%
|
8 Dec 2017
|
$269 billion
|
$427 billion
|
62.9%
|
16.7281 million
|
$16,104.20
|
1.07%
|
?
|
$1 trillion
|
$2 trillion
|
50%
|
17 million
|
$59,000
|
5%
|
?
|
$5 trillion
|
$10trillion
|
50%
|
20 million
|
$250,000
|
25%
|
?
|
$10 trillion
|
$30 trillion
|
33%
|
20 million
|
$500,000
|
75%
|
?
|
$21 trillion
|
$70 trillion
|
30%
|
21 million
|
$1,000,000
|
175%
|
*I am allowing for the possible increase in the number of
Bitcoins towards the maximum limit of 21 million.
** I am comparing the total crypto currency hoarding with
the size of the main US stock and bond markets using $20 trillion US debt and $20
trillion valuations of S&P500 ($40T total). One could instead use a figure
for the total world money supply of approx $90 trillion in which case the
percentages would be less.
I personally would not be surprised to see a 1 or 2
trillion dollar market capitalization for cryptocurrencies in the very near
future. In just the last week, Bitcoin has added 43% and cryptos 29% in
aggregate.
I would think that if either of the bottom two scenarios
were to arrive, then the world’s regulated financial system would be in some
danger and the effects on our over indebted fragile western world economies
would encourage government action to curtail the crypto markets or at least cap
them.
We know from the Roosevelt gold confiscation in 1933 and
other executive orders passed over the years that governments can turn on a
dime and enact arbitrary laws at any time. The effects of these on peer to peer
decentralized systems like the cryptocurrencies are difficult to judge.
In the meantime it will be fascinating to see what
happens in the crypto market. Some hedge funds are already invested in Bitcoin.
Bitcoin futures are scheduled to start trading in mid December 2017. What will
be the effect if financial institutions can bet against Bitcoin in the futures
market? Will crypto currency Exchange Traded funds come soon? The mainstream is
not quite there yet. The cryptos are still at the Wold West stage.
In a fascinating interview on Russia Today (linked
below), Rick Falkvinge, the ‘CE’ of Bitcoin Cash, the Bitcoin Cash 'CEO' discusses
cryptocurrencies versus the current financial system. He sees deep and lasting implications
for the conventional system and a sea change in the monetary world. I also link
to an interview with the evergreen investor Jim Rogers where he talks about
this and all kinds of topics.
In the end, we cannot tell whether this initial bubble of
speculation will take a hit before the mainstream comes in with products or
whether it will just add to the current mania. A useful comparison might be the
Internet bubble of 1999--2000. Even though there was a big wipe-out in
valuations of internet companies in 2000-2002 due to unrealistic expectations
and a bubble mentality, the internet continued to grow at a steady pace and
became the universally used utility that it is today, with major new
corporations coming into existence even since the initial bubble ended. We have
to wait and see whether similar events can happen in the crypto market and
whether it will become part of the mainstream money universe.
I hope that you enjoyed the article and find it a useful
pointer to further information and ideas. Please also see my article on the
potential effect of the crypto revolution on the gold market.
© 2017 MGTOW Cat
References:
Poor Nerds Become Millionaires Thanks to Bitcoin.
Fascinating interview with Rick Falkvinge Bitcoin Cash 'CEO' on Russia Today
JIM ROGERS TALKS BITCOIN PRICE / U.S. DOLLAR / GOLD /
FUTURE FOR THE WORLD & 2018
Russia Today – Max Keiser.
Bitcoin: The 'Gateway Drug' To Gold - Doug Casey at
Freedomfest
Cryptos Are Taking Over Markets But Not Gold - Frank
Holmes
Bitcoin Will Outperform Everything Including Warren
Buffett Says Max Keiser – Part 1
Bitcoin Will Be Like Moses for Gold, Liberate Metal To
$5,000 - Max Keiser
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