Can Bitcoin hit $500,000? Perspectives through the Blockchain lens

As Bitcoin price has reached lofty heights again, there is a renewed frenzy around it, and hence around Blockchain, the technology behind bitcoin. Bitcoin has for long been the poster child of Blockchain technology, much like Tesla has been for EVs. Some would say that Bitcoin is slowly replacing gold as the safe haven for investors who lose trust either in the stock markets or in the safety of the economy and many are predicting that bitcoin price can reach as high as $500,000. This has also been fueled by the reports that bitcoin is attracting interest from established financial institutions like JP Morgan and Blackrock.

The current state of economy as we all know is shaky, to say it most modestly. Mounting debts of several trillions US dollar that got added just during the pandemic because of a spree of printing stimulus money has led to the weakening of dollar and and has led to the fear that inflation will eventually rise. Usually in such situations people rush to buy gold to offset the uncertainty, and it seems like some of that money has gone into buying bitcoin.

However, I'm neither an economist nor a foreteller to be able to make a prediction on where the bitcoin would go from here, but in this article I would like to provide perspectives by looking into the technology behind bitcoin, Blockchain, to help understand what is it about this technology that makes bitcoin the trusted investment destination for so many. Below, I discuss some of the characteristics that gave gold its safe status and are giving bitcoin a similar status -

• Scarcity - one of the biggest reasons for gold's value is its scarcity. The supply of gold has remained scarce over time and is expected to remain so in future, unless we find unexpected huge reservoirs of gold on earth or if asteroid mining becomes a possibility, which would crash the price of gold. Bitcoin on the other hand has a fixed number of 21 million bitcoins that can ever be mined. The rate at which bitcoins are mined halves every four years and the last bitcoin is expected to be mined around 2140. This will ensure that bitcoin will remain scarce and by that logic retain its value.
• Durability - gold has been a destination of people's investments (and for jewelry, decoration etc.) for thousands of years (at least 3 thousand years as per research) and has been passed on through generations partly because it's durable and can't be destroyed easily. Bitcoin on the other hand is digital, so it can survive as long as the digital world survives. The distributed nature of the ledger ensures that bitcoins that have been created cannot be destroyed. (although it is possible to lose bitcoins by losing access to your digital wallet).
• Trust - the value and status of gold has remained stable and only gone higher even through empires have fallen, countries have been conquered and economies have collapsed. Fiat currencies have failed time and again since they have existed (little over 300 years) and are a lot dependent on the economic policies of the governments and that fear has become rife again. Bitcoin on the other hand, like gold, is trusted across borders and its price is not dependent on a specific country or its government. The "Proof of Work" consensus mechanism employed by bitcoin ensures that bitcoin cannot be generated by cheating (although technically possible but highly improbable) without everyone in the distributed networking approving it. The cryptographic security ensures that bitcoins cannot be stolen (unless of course you lose your digital wallet) or confiscated by government and hence can act as a buffer against economic uncertainty.
• Portability - gold's portability was one of the reasons of why it became the currency for trading couple of thousand years back, compared to some of the other commodities like barley (history's first known money, around 3000 BC), in addition to the fact the it was too soft for any real use in making either hunting or agricultural tools. Bitcoin, being digital is far more portable and you can carry around any amount of bitcoins just by carrying the password to your digital wallet with you.

So, will all of the above characteristics ensure that bitcoin will continue to have its run and hit a high of $500,000 in future? I think at this point nobody can say that for sure, but here are some of the concerns around bitcoin that can prevent it from doing so -

• Volatility - the price of bitcoin has been highly volatile, as mostly it has been driven by retail investors. The financial institutions have started to find bitcoin more interesting only now and more such activity will give more credibility to bitcoin and help calm the volatility slowly.
• Government regulations - government regulation is a double edged sword for bitcoin, as more government interference will only undermine the legitimacy of bitcoin and erode the trust as a neutral and safe currency. On the other hand, no regulation isn't good either because there are issues related to tax reporting, transaction audit, terrorist activities etc. that still need to be handled. In the past some governments cracking whip on cryptocurrencies has led to crashing of bitcoin and other cryptos.
• Future technologies and innovations - as we know the rate of technological innovation has been rapid in last few decades, and if the trend is any indicator, it is only going to get furious. It is hence a possibility that sometime in future, a better technology (or a better digital currency) can come and either replace bitcoin in its entirety or prove it worthless. Quantum computing, for example, has the potential to render much of the current cryptography ineffective, thus potentially undermining bitcoin which derives much of its value from cryptography. On the other hand, it is also possible that future innovations can make bitcoin more valuable by solving some of the concerns being faced by it today.

Much of the humankind's history till now has been in a physical world. The agricultural revolution and industrial revolution although helped make huge shifts in human life and possessions, however, it remained physical, and the value of gold made sense in that physical only world. Today on the other hand, we are moving more and more towards a digital world, fueled by iPhones, Facebook, Cloud computing and such, and a digital only currency only makes sense in such a world. So, time will tell whether bitcoin reaches $500,000, or anywhere near it, or not. However, bitcoin does have some of the characteristics that made gold valuable and might just be the currency and trusted safe haven that the world needs.

Comments, feedback and corrections are welcome and please feel free to reach out to me at manishchaitanya@gmail.com in case you want to exchange ideas.