2017 has been the Year of Bitcoin, increasing from less than $1,000 to more than $17,000 and still going. It’s just getting started, and 2018 will be more of the same. Here’s why.
It’s Still Early
There are a lot of parallels between cryptocurrencies today and the dot com boom of the 1990s. And the cryptocurrency market today is much smaller than dot coms at their 1999 peak. The entire crypto market just crossed over $500 billion in valuation, and the dot coms had a value of almost $3 trillion before losing about 75% of that in the crash of 2000. And that’s before inflation. Factoring inflation, that $3 trillion turns into almost $4.5 trillion in today’s dollars, placing the crypto market at just over 10% the size of the dot com bubble at it’s peak. A big crypto correction is coming, but it won’t be in 2018.
Bitcoin is the Gateway Drug of Cryptos
Bitcoin’s valuation is 60% of the total valuation of all cryptocurrencies. Dominant market leaders don’t disappear overnight, and Bitcoin has become synonymous with cryptocurrencies like AOL was synonymous with the Internet in the mid 90s. More often than not the first big winner in a market isn’t the one who comes out on top (iPod wasn’t the first big digital music player, Facebook wasn’t the first big social network, and Tesla wasn’t the first big electric car), and 3 or 5 years from now Bitcoin may not still be on top. But they’ll still be there a year from now.
Bitcoin is the Reserve Currency of Cryptos
The US Dollar is accepted everywhere around the world, and it makes up 64% of all known central bank reserves in the world. That gives the USD a huge advantage as it’s all but guaranteed to be always in demand as a common currency for international transactions. This sustained high demand means the Dollar will always maintain its value as long as it’s still a reserve currency. And the same is true of Bitcoin, which has become the reserve currency of cryptos. It’s the most trusted, most widely accepted, and most recognized – which means it will continue to increase in value.
Internationalization is Just Beginning
As much as the USD gets advantage by being the world’s reserve currency, it’s still massively inefficient to exchange currency around the world. It’s true for individuals sending money internationally, as companies like Western Union extract fees as high as 10% for international transfers. It’s true for institutions transacting internationally, as each transfer takes valuable time & money, and many international transactions go through multiple banks (each of which extracts a fee) to reach its final destination. Consumer online services are now selling directly to customers worldwide, with firms like Amazon, Apple, Facebook, Google, Netflix, Disney, and Fox serving customers in dozens or hundreds of countries with dozens or hundreds of currencies. Each of these would love to use a common currency for customers around the world. Each of these international use cases will increase the use of cryptocurrencies, with Bitcoin at the leading edge.
Institutional Investors are Coming
All of Bitcoin’s gains so far have come from individual investments, with the first institutional instruments coming online this week with CBOE Futures. Bitcoin Exchange-Traded Funds (ETFs) are quickly following, including one from everyone’s favorite Bitcoin billionaires the Winklevii. And just like the advent of 401(k)s in the 1980s spurred a stock run-up as the number of investors soared, the same will happen as the amount of capital available to invest in cryptocurrencies expands. This big run-up will inevitably end in a correction as the 401k boom did in 1987, but again it will likely be a few years before that happens. 2018 is nothing but up for Bitcoin.
Bitcoin has no Burn Rate
My favorite comparison for cryptocurrencies is the dot com boom of the 1990s. New technology, huge potential, nobody quite knows how to use it, and huge skepticism from the “I’ll never enter my credit card number online” crowd. But the biggest difference between Bitcoin and Pets.com is Bitcoin has no burn rate. The burn rate is the rate at which a company spends money in excess of its revenue. Say Pets.com has expenses of $10mm/month and revenue of $1mm/month, so it’s burn rate is $9mm/month. The dot com boom went bust because startups had too many expenses (employees, rent, marketing, foosball tables) and too little revenue (actual paying customers). If a company has a $9mm/month burn rate and $45mm in venture capital invested, they only have 5 months or runway before they run out of money and need more investment or they go out of business. Bitcoin is a distributed currency with no employees and no expenses, so there’s no external financial shortfall that can cause it to go out of business.
Here Comes Lightning
Two of Bitcoin’s biggest problems are the slow speed of confirming transactions and the high energy consumption of the computational power needed to run the network. Lightning is a new layer that promises to run on top of Bitcoin that will address these two issues by leaving Bitcoin as the store of value but using Lightning as the means of exchange for the majority of (mostly smaller) transactions. This essentially keeps Bitcoin as the long-term savings account (which is what it’s best at) and makes Lightning the daily checking/debit card account (which is what it’s best at).
These are the primary reasons why I believe Bitcoin will surpass 100,000 in 2018. And there are just as many reasons why The Bitcoin Bubble will Burst in 2018.