Why Bitcoin and Cryptocurrencies Are Likely to Rise in the Long Run
Everybody seems to have an opinion regarding where Bitcoin’s price is heading in the long run. There are the pessimists who say it will eventually become worthless and be worth nothing, while there are optimists that believe the sky is the limit and Bitcoin is heading for the $100,000 mark and beyond. While cryptocurrencies often trade on their own merits, the whole sector is clearly influenced by price movements in Bitcoin, so figuring out where Bitcoin is likely heading can provide some guidance regarding where the whole cryptocurrency sector is heading looking out a couple of decades.
Bitcoin Is Likely to Rise in the Long Run
A Basic Law of Economics Provides Insight Into Where Bitcoin’s Price Is Heading
The economic law of supply and demand states that a low supply and a high demand for any commodity increases the price of a commodity. This is because plentiful buyers bid up the price as they chase after dwindling supply.
The beauty of the way Bitcoin was designed by its creator (or creators) is that there is not an endless supply of Bitcoin. The way it was set up, the maximum number of Bitcoins that can be created through mining is 21 million. As of this writing, 16.8 million Bitcoins have been created, which is 80% of the total maximum supply. By 2032, 99% of all of Bitcoins are expected to be created, and the total is expected to approach the 100% mark by 2040. By design, the rate of supply of Bitcoins drops off as it nears its maximum, so reaching the 21 million maximum will take a number of years, even as it approaches the maximum in 2040.
However, based on supply and demand forces, reaching the actual maximum supply is irrelevant. The anticipated shortage of supply and foreknowledge that eventually Bitcoin will reach its 21 million maximum supply will likely cause Bitcoin’s price to rise substantially in coming decades, as long as demand for the cryptocurrency remains relatively strong. Simply put, new buyers will be chasing fewer freely available Bitcoins, as many are stored away by those that bought before them, and the new buyers' demand for Bitcoins will cause the price to increase, most likely substantially.
There is another factor that should help Bitcoin increase in price over time. While the official maximum supply of Bitcoin is 21 million, the reality is that since its creation in 2009 millions of Bitcoins have been lost forever. Analytical experts that have studied the Bitcoin blockchain estimate that 3 to 4 million Bitcoins have been taken out of circulation forever because they were lost by their owners. That may sound hard to believe, but keep in mind that for many years Bitcoin was not worth much, and some owners did not do a good job keeping track of their private keys that prove that they own the cryptocurrency. Once the private key is lost, a Bitcoin is essentially lost and taken out of circulation, because the owner has no way of selling it without the private key that proves ownership to a buyer.
So the actual maximum supply of Bitcoins might wind up closer to 17 million coins, assuming not too many more are lost over the next couple of decades, as owners are expected to be more careful about holding onto their private keys now that Bitcoin has become very valuable.
Bitcoins total supply will max out at 21 million.
Bitcoin and Cryptocurrencies Should Rise in the Long Run
Based on limited supply and expected strong demand, it is reasonable to assume that Bitcoin will rise in price over the long run. The bearish case that postulates that Bitcoin will become worthless over time seems implausible given the limited supply, unless a massive coordinated government crackdown essentially wipes it out. More likely, as the cryptocurrency nears the 99% supply level and then moves towards the 100% maximum supply, it will make a parabolic move higher, as buyers desperately try to buy a stake in the face of dwindling supply. So, the optimist’s $100,000 and beyond Bitcoin target seems much more plausible than it plummeting to zero.
Even though other cryptocurrencies are competitors to Bitcoin, the whole sector appears to benefit when the price of the flagship cryptocurrency Bitcoin increases. Therefore, it is reasonable to assume that broadly the entire cryptocurrency sector will rise in price in tandem with Bitcoin. Of course, individual cryptocurrencies’ prices are governed by their own unique features and developments, so whether they eventually rise or fall in the long run will be based on many factors beyond Bitcoin’s price performance; however, any sustained increase in the price of Bitcoin over the long run should provide a nice tailwind to the entire cryptocurrency sector, at least healthy cryptocurrencies.
Big Money Will Enter the Cryptocurrency Market Soon
One final thing to consider regarding the long-term prospects for Bitcoin and other cryptocurrencies to trade at much higher levels in the future is the fact that big money, for the most part, has not taken part in buying cryptocurrencies yet. Yes, there have been stories about renowned wealthy investors buying Bitcoin and other cryptocurrencies (some of which are quite difficult to buy since they are not available on all trading exchanges). However, the vast majority of mainstream investors have not yet gotten involved in purchasing cryptocurrencies. They are just too exotic, confusing and inaccessible for many investors.
Part of the reason for their non-involvement, beyond mistrust of digital currencies, is a lack of access to buy cryptocurrencies. Mainstream investors, large and small, cannot buy and sell cryptocurrencies using their stock brokerage accounts. However, that will change over time, as Goldman Sachs may someday open a cryptocurrency trading desk, and many other brokerage houses will likely follow with their cryptocurrency desks that allow their clients to buy cryptocurrencies.
Mainstream investors and big money having easy access to buying cryptocurrencies mean digital currencies are likely to rise in the future, as the demand side of the equation increases as they become accepted by the mainstream investing community. This new financial sector is in the early part of the game.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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© 2018 John Coviello