Bitcoin: A buyer's and seller's guide

Why invest real money in digital coin? Because the payoff a decade from now could be enormous.

Bill Barhydt: I think there’s a few things that need to happen for cryptocurrencies to become kind of a global replacement for either reserve currencies, global money transfer vis-à-vis like swift wires via your bank.

First of all the system needs to be massively liquid. If you think about dollar as a reserve currency, there’s trillions of dollars in circulation. It’s globally liquid across tens of thousands of banks, across 185 countries, etcetera, etcetera. That’s not totally true of cryptocurrencies yet.

If you take Bitcoin, which is the most successful cryptocurrency, its market cap is around $200 billion as of today. It’s tradable in 100 plus countries, but the liquidity of bitcoin versus even the U.S. dollar is relatively low, which means it needs to be worth a lot more if it would become let’s say a “digital gold”.
Gold is worth trillions of dollars in the aggregate. Bitcoin is not yet worth that much. And that’s important because if it’s not worth trillions of dollars and billions of people want to use it there’s not enough to go around. So you need to be able to break it up into tiny pieces so everyone can use it, just like gold.

And that’s not true until it’s worth a lot more money than it is today. But it becomes a circular discussion because the usage will also drive the price higher, just like speculation sometimes can drive the price higher.

So over time it should get there by its ability to be fungible with fiat via these exchanges as kind of an onramp into digital currency, but also it should meet the liquidity requirements that we need, meaning the price should be high enough, the ability to get in and out via traditional money should be reasonable globally over the next few years, and then I believe you can really have a viable discussion about using a cryptocurrency like bitcoin as a viable reserve currency.

So cryptocurrencies eventually will look like traditional commodities in my opinion, whether it’s gold or platinum or other metals is probably the best. But it could look like oil and gas and things like that.

And so they are starting to trade in a fashion that’s more and more similar to traditional commodities. But the difference right now is they’re not as liquid yet. So that means that the price is very inefficient, or the markets for cryptocurrencies are very inefficient.

So most people who are holding cryptocurrencies are long term holders, they’re not selling. So that actually means that the price of Bitcoin and Ether, for example, is largely driven by the volume of buyers.

So if there’s large volumes of buyers coming into the market it drives the price higher, because there’s not a lot of sellers. But if the buyers dry up then the price goes down regardless, because there’s still not a lot of sellers.

So that will change over time because if the price skyrockets – so, for example, if institutional money starts to come into the cryptocurrency market in large numbers—which I think it will—that will force the price higher because there’s not enough cryptocurrency to go around. And that will also cause some of the holders to loosen up their purse strings because they’re going to want to reap the profits that they’ve been waiting for for 10-15 years by the time that happens.

And that will also create more liquidity in the system which will create a really positive feedback loop which should drive the price even higher.

The other thing that I think is very relevant is you’re starting to see more traditional types of financial products being applied to cryptocurrencies – derivatives, options, nondeliverable forward contracts, things like that that actually will help make the cryptocurrency market more efficient over time, close a lot of what we call arbitrage loopholes which is kind of like free money in the system for traders. And as those loopholes get closed the market becomes more efficient, more liquid, and it becomes better for everyone.

This, I think, is a common misunderstanding with how bitcoin works: Bitcoin itself is what we call deflationary, which means that over time the amount of Bitcoin in circulation if you look at a chart would actually approach a fixed value of 21 million – never quite approach it but it will asymptotically in math terms approach that line of 21 million over time. And it does that by the amount of Bitcoin being mined or created being cut in half every so often.

Right now it’s every few years and then it’ll be every few months and then et cetera, et cetera. And so that these happenings actually create a predictable rate at which Bitcoin is created. That rate like I said will asymptotically approach 21 million over several years, and at that point though if Bitcoin is being used for money transfer applications, there’s institutional investors buying it like digital gold that will drive the price higher, but if the price shoots up to let’s say a trillion dollars and there’s only 21 million, it’s still not a problem because you can subdivide Bitcoin down to eight decimal places.

So you can get to the point where one Satoshi, which is .00000001 Bitcoin, could be worth $1,000 as opposed to today one Bitcoin is worth $5,000 or $8,000, whatever it is at today’s price.

So the ability to subdivide Bitcoin into tiny amounts called Satoshis (which are in today’s value fractions of a penny) could eventually be worth thousands of dollars in their own right. So that gives the utility of Bitcoin a lot of legroom for the long term, because even if the value goes up to trillions you’ll be able to subdivide it into small amounts to make it useful for small payments.

When it comes to Bitcoin it's all about the long game, says Abra founder and CEO Bill Barhydt. Bitcoin is flexible because you can break it up into smaller divisions, called Satoshis. In 10 to 15 years, those Satoshis alone could be $1000 a piece. It might take a while for Bitcoin to really start trading at the level of gold and silver, says Bill. Interestingly enough, says Bill, by and large, people who have Bitcoin are holding on to it, just like those precious metals. Once more of it is mined, we'll start to see the market become less volatile.

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