The Bitcoin value and the long run

At the end of 2021, it is popular to think about the past year and make crystal balls to predict the future Bitcoin price.

But first, one of my favorite thoughts about the future in general comes from Jeff Bezos.

“I very often get the question ‘What will change in the next 10 years?’ And that’s a very interesting question; it is a very common one. I almost never get the question ‘What won’t change in the next 10 years?’ And I contend that this second question is actually the more important of the two – because you can build a business strategy around things that are stable over time … when you have something that you know is true also in the long term You can afford to put a lot of energy into it. “

For Amazon, Bezos meant that nothing would change for them, that customers want a wide range of products, low prices, and fast delivery. That’s what they built Amazon on.

So how does that apply for the coming year and for Bitcoin? As the year 2022 begins, we are living in an extremely uncertain world with COVID-19, record debt, rising inflation, socio-economic inequalities and mounting geopolitical tensions. Again, let me underline to you that Bitcoin’s monetary policy and general structure is one of the very few things on the planet that won’t change in the next 10 years, the next 20 years, or even the next 30 years. And that stability is a source of strength for anyone who owns Bitcoin and a major incentive for anyone considering a long-term position.

Let us consider this 30-year period for a second in the broader macroeconomic context. As of this writing (December 7th), the yield on 30 year US Treasuries is around 1.7% per annum. This suggests that if we buy a 30-year government bond and hold it through 2051, it will make 1.7% a year, or about 66% compounded. If it were topped up at that rate, $ 1,000 would become $ 1,660 in 2051.

Although these government bond yields are labeled “risk free”, we cannot predict the purchasing power of those dollars 30 years from now. Nobody can tell. And if you want to imagine how far away the year 2051 is, consider that 1991 is 30 years ago. We are talking about a world shortly after the fall of the Berlin Wall, the Gulf War (the first), from Mikhail Gorbachev from President George Bush (senior!); All of this was before the Internet explosion and when cell phones were scarce and only for “yuppies”.

What would an investor have faced with a 30-year treasury investment in 1991? The approximately 30-year return was 7.4% per year at the end of the year. That is now 1.7%, as already mentioned. The prices are the inverse of the yields, so today’s bond prices are sky high compared to 30 years ago. And since other asset classes (stocks, real estate, etc.) are valued relative to the risk-free rate, it is not surprising that we are in an everything bubble.

Because of this, big names like Preston Pysh and Greg Foss predict that Bitcoin may penetrate global bond markets. It doesn’t matter that Bitcoin doesn’t have a risk-free return if more and more bonds are yielding negative real returns. And for a long-term investor, what are the odds that $ 1,000 worth of bitcoin will likely bring in more than $ 1,660 in 30 years? If you think it could be significantly higher, even if you give a chance that Bitcoin will die completely, then you may have a position size issue.

So what about the future bitcoin price? I like the analogy of Bitcoin as an economic battery that charges as adoption increases and depreciates in value during times when owners are racing around the mountains. The price is simply a snapshot where the buyer meets the seller at the margin to agree on the latest price to purchase the use of this battery for a certain amount of bitcoin. For each participant, their possessions could also be viewed as a two-dimensional function of how much Bitcoin they hold and how long they hold it. Call it “Bitcoin years” (210 million of them per decade) or “Satoshi seconds” (significantly more!). All buyers continuously choose their holding period as desired.

Given that supply is fixed, the only element that determines price is demand – from new buyers who don’t yet own bitcoins, but also continued demand from existing owners that continues to accumulate and hold – i.e. how long is this period? It is nearly impossible to accurately predict future demand from newcomers or the continued demand from current bitcoiners. Hence, any models attempting to predict future price are almost by definition rubbish, including stock-to-flow (listen to Cory Klippstein for far better details on this). For this reason, too, Michael Saylor says: “All your models are disabled”.

That’s not to say that I’m not very bullish. It’s just that bitcoin price predictions are a bit of a waste of time. Back to the Bezos mood – instead of trying to predict exactly what will change in the world in the future, focus more on the core elements of Bitcoin that will not change.

This is a guest post from BitcoinActuary. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.


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