Bitcoin may have risen 1,102,682-fold (!) since Laszlo Hanyecz bought two pizzas for BTC 10,000 in May 2010, but it has the potential to go a lot further still.
I believe there is a 'perfect storm' of factors that are contributing to the inexorable rise of cryptocurrencies. In no particular order, here are some of these factors:
Banks provide a poor service. The average bank is an inefficient and bureaucratic institution. Opening an account involves signing a lot of forms and can take a long time. The online banking facilities they provide are often clunky. Fees are expensive (the typical cost for making a SWIFT transfer is $40). International money transfers are slow (there’s nothing “swift” about SWIFT!) and banks too often “lose” payments, requiring time-consuming reconciliations and payment tracing. The typical bank mandate contains extensive clauses protecting the bank in the event of fraudulent access to your account, and bank security procedures are often antiquated (many banks seem to think that asking you for your mother’s maiden name over the phone constitutes security!). All in all, the service that banks offer may have been acceptable in the 1990s, but in today’s world, it just isn’t acceptable any more. Banking incompetencies can also hurt your business, as one entrepreneur found out the hard way.
By contrast, cryptocurrencies such as Bitcoin don’t suffer from those problems. Fees are low (generally), transfers are fast (generally), transfers cannot get “lost”, and security is very strong. Once you’ve experienced sending money via cryptocurrencies, using your bank’s fiat money facilities feels like going back in time by two decades. More and more people are going to realise this, once they experience cryptocurrencies for the first time.
Money remittances can be done much cheaper via cryptocurrencies. Many overseas workers remit money back home via remittance services like Western Union and MoneyGram, which are very expensive. For these workers, who work very hard for their money, the remittance fees are something they are very conscious about. Once mobile apps to facilitate cryptocurrency remittances become available, we will see a rapid adoption of such services.
Credit cards are prone to fraud. All a fraudster needs to do is get hold of your credit card details, and he can spend your money. Lists of stolen credit card details are routinely sold in hackers’ forums online. Every time you use your card online, you have to worry that the website you used it on might get hacked in future years and your card details will get leaked. If you buy something online in a different currency, the bank often overcharges you on the exchange rate conversion. What’s more, it costs merchants more than 2% to accept card payments. Settlement isn’t even immediate – it can take days.
Over time, the supply of bitcoins decreases because people keep losing them. If you lose the secret key to your bitcoins, the money is lost forever and there is no way to recover them. This happens all the time, because people misplace them, forget to make backups, send their bitcoins to the wrong address, pass away, and for numerous other reasons. Some new bitcoins are being created through a process called "mining", but that amount decreases over time. I suspect that the amount of bitcoins lost through the process of people losing secret keys exceeds the number of new bitcoins created through mining.
Many Bitcoin holders are hodlers. The word "hodl" is a misspelling of "hold" which appeared in a forum discussion once and became a meme. Hodlers are people who believe strongly in Bitcoin’s potential to change the world, so they hold on to their bitcoins no matter what is happening in the market. Hodlers are different to speculators: speculators are people who buy something with a view to reselling it at a profit. Hodlers are not thinking about reselling for a very long time, so the bitcoins that they hold are effectively taken out of circulation, thereby decreasing the available supply in the market.
Metcalfe's law. Cryptocurrencies gain value because of the network effect (called Metcalfe's law). This law states that the value of a network grows with the square of the number of users. With Bitcoin being the dominant cryptocurrency, it will benefit the most from this law. Bitcoin has yet to be adopted by the public at large, hence the potential for Metcalfe's law to multiply its value remains great.
Bitcoin is going to get a lot easier to use. At the moment, it’s still rather technical and isn’t easy for the average man on the street to get familiar with. But that’s going to change. Companies are hard at work creating intuitive apps that will make it easy to use Bitcoin and other cryptocurrencies.
Hedge funds have started investing in Bitcoin. Whereas to date many Bitcoin investors have been IT geeks investing a few thousand dollars, once hedge funds and other professional investors get interested, the amounts involved are going to be much larger.
Bitcoin’s volatility is going to level off. Today, many people have not invested in Bitcoin because of its high volatility. But as its market cap rises, its volatility will drop. Soon, it will be no more volatile than the Euro is against the dollar, or the pound is against the Euro.
Bitcoin’s liquidity keeps improving. Just like liquid stocks command price-earnings ratios higher than illiquid stocks, liquid cryptocurrencies will command higher valuations than illiquid ones. Bitcoin is going to become an asset into which you can easily invest a lot of money.
Bitcoin is getting a lot of press coverage, and that is leading to a lot of new people getting interested. For example, Coinbase.com is reported to be getting tens of thousands of new account signups per day. All these first-time users create 'buying pressure' on Bitcoin.
People are going to use it for tax evasion. I’m not at all saying that’s a good thing, but it’s a reality. Cryptocurrencies are like what Swiss numbered bank accounts used to be: anyone who owns the code owns the currency. It’s going to create real headaches for tax collectors.
The Common Reporting Standard (CRS) is going live this year. The CRS is a new global system whereby if you are a resident of country A and have a bank account in country B, country B will report that account (and its balance) back to the tax authority of country A. The CRS is meant to track down tax evaders. It will, however, have many unintended consequences, such as account numbers of high-net-worth individuals being leaked or hacked and hence entering the public domain, which will put those individuals at risk of invasion of privacy, and in certain countries (e.g. some South American countries) extortion, blackmail, kidnapping, etc. At some point in the future, it is likely that a large percentage of such bank account databases will end up on Wikileaks and other similar websites. This will lead to some high-net-worth individuals preferring to hold their assets in cryptocurrencies, which are not subject to CRS disclosures.
People are going to use it to evade currency controls. I'm not saying this is a good thing either, but if you live in a country with currency controls, Bitcoin provides a way to get around the controls. Cryptocurrencies are going to make currency controls pointless. Again, I'm not saying this is a good thing but it’s the reality of the world we currently live in, and will create upwards pressure on the price.
Criminals are going to start using cryptocurrencies. Today, there isn’t much use of cryptocurrencies by organised crime (apart from ransomware groups) because your average drug lord, weapons dealer, kidnapping gang, or corrupt politician isn’t very technically savvy. But they’ll learn quickly once they understand the potential for their “businesses”, and once Bitcoin wallets become easier to use. It’s going to create very serious headaches for law enforcement around the world, and very bad consequences for societies as a whole. From the point of view of cryptocurrency prices however, it creates demand.
Certain industries such as Forex trading and online gambling are being pushed into cryptocurrencies because it’s so hard for them to obtain banking facilities. Cryptocurrencies are also much more convenient for these industries, because accounting and reconciliations can be fully automated (which is extremely convenient as they typically have a very large number of transactions to process), and fees are much lower.
Companies are going to start doing IPOs on blockchains. The typical IPO on a traditional stock exchange is a painful and expensive process. You’re lucky if you can get 1,000 investors to subscribe to the offering. With Initial Coin Offerings (ICOs), you can offer securities to an international audience and get 10 times the number of subscribers, at a fraction of the cost. What’s more, online token exchanges have much better technology: they operate around the clock (whereas traditional stock exchanges typically only open during weekly working hours), have lower fees, faster settlement, and solid audit trails. You also don’t need "brokers" (with all their associated fees) to access the exchange.
Companies are going to switch to Bitcoin as the base currency in which to run their business. Admittedly, this is still some way off but makes a lot of sense: with fiat currencies, companies need to spend a lot of money to maintain accounting departments whose job is to transcribe bank statements into online accounting systems. They also need to reconcile supplier and employee payments and then create monthly management accounts. It's all very inefficient and manual, not to mention error-prone. With fiat currencies and the legacy banking system, little of this can be automated. Once cryptocurrencies gain traction, much of this will be fully automated.
Bitcoin has no “intrinsic value” against which you can measure its value. It’s not a commodity like gold, where you can calculate the cost to mine it, and if the price exceeds that cost by enough of a margin, more mining activity starts and the supply hence increases, balancing out the price in due course. The same mechanism exists for stocks: once a stock’s price-earnings ratio starts getting high, company bosses start thinking about issuing new shares on the market, or issuing new shares to make acquisitions – which increases the supply of shares. But Bitcoin doesn’t work like that. There’s no internal system to increase supply if demand gets high. If demand rises, the price rises. That’s all that can happen.
There’s a massive amount of technical innovation happening in the blockchain community. Bitcoin's core code is only at version 0.15 – in the IT world, a project is only considered “ready” by its developers once it hits version 1.0. Bitcoin as it is today is like the first airplane developed by the Wright brothers: it works, but there's still massive room for improvement. There’s plenty of technological innovation that’s going to happen in the years to come – all of which will add value to the network. Some very smart people are working on this code.
And remember, all the above is happening against the backdrop of a finite and fixed supply of bitcoins, coupled with the fact that bitcoins get destroyed all the time by people simply losing or misplacing them. There’s massive and growing demand, against a fixed (if not eventually shrinking) supply.