Why the Bitcoin Price Matters

People much smarter than myself have written with a great deal more eloquence (means they think and write real good-like) that I am able to muster on why the price of bitcoin is the least interesting thing about it, or why it just doesn’t matter much.

Some of them have even kept their heads during this latest runup (though it looks like Marco and Eric are a bit conflicted):

Though these are somewhat tongue-in-cheek, now is a good time to point out why the price of bitcoin does matter (other than GETTING RICH!)   I intend to lay them out below in a succinct list.  giphy

Who pays too much attention to the price?

There are two main groups of people that have an unhealthy obsession with the price of bitcoin. First are the people who pay too little attention, a group that comprises nearly the entire world.  This group has no knowledge of the developments within the community or the underlying technology but can easily understand the straightforward barometer of price.

The second group that pays too much attention to the price of bitcoin is comprised of bitcoin fanatics, traders, and those who earn their living in the bitcoin space (on the financial side).

To both of these groups, a suggestion to care a little less about the price is helpful advice.  There are a number of members of the bitcoin community that like to think of themselves as price agnostic.  Maybe I’m writing for them to remind them why the price of the bitcoin token (on the Bitcoin blockchain) matters.

So, Why does the price matter?

  1. Hype cycles and virtuous circles: The attention that bitcoin gets in the media (aside from the REALLY entertaining stuff which usually doesn’t paint it in the best light) is generally dependent on an increase in price.  Every time someone outside of the bitcoin community hears about bitcoin outside of the drug and crime stuff, it’s because “the price of bitcoin did X.”  All-time-highs attract attention and new users.  Expanding the network of bitcoin users leads to an increased number of nodes, decentralization in mining and transaction-processing, and more evangelists for the use of bitcoin (Yes, bitcoin resembles a pyramid scheme, more on that later).
  2. Preventing against attack: Two of the more feasible vectors for a bitcoin attack right now are a 51% hashing-power grab and an attack where bitcoin on all exchanges are sold to $0 (thought the second is conspiracy territory).  The first attack is prevented as the bitcoin network’s hashing power increases. Generally, the higher the price of bitcoin, the more hashing power is dedicated to mining the bitcoin blockchain. (Hashing power is a factor of three main factors: the efficiency of the chips used to mine, the number of chips used to mine, and the electricity devoted to mining.  If you assume that the first two are commoditized, the cost of electricity is the main factor in the growth of hashing power.  The more bitcoin is worth, roughly, the more electricity a miner is willing to purchase),   When bitcoin had a $10 million market-cap in 2010, the government of Barbados could have successfully taken over 51% of the network and double-spent bitcoin.  Now that the currency has a market cap of over $5B, the number of entities in the world which could successfully execute such an attack has dwindled to 0-10 depending on who you ask.  With a $50B market cap, it’s very likely that the potential for this sort of attack to be successful would be lowered to a statistical zero.  There’s a big caveat here, and that is that over the past two years, despite a declining price, the hashing rate increased tremendously.  That’s good news for bitcoin.  If given a choice between increasing price and increasing hashing power, a fan of bitcoin should choose the latter.  The second possible attack is one in which bitcoin is purchased by a malicious actor and dumped across exchanges with the goal of suppressing the price and disillusioning its supporters.  It’s a tinfoil hat theory, but to the extent that it is a threat, it is suppressed by a larger bitcoin market capitalization.
  3. Cementing status: Bitcoin vs Peercoin vs NXT vs Ether vs Litecoin vs SomethingCoin that I’m sure will rear its head in the future.  Bitcoin is likely to go to zero or $10,000.  If it cements its first-mover status, the latter is much more likely than the former.   If the bitcoin is like the internet, then its strength is signaled by its hashing power, the number of people connected to the network, and the applications built upon it.  The traded bitcoin currency is most analogous to the price of a domain name.  If you took a one-way trip to 1995 knowing what you know now, the best investment you could make would be purchasing .com domain names.  The reason this investment was not entirely obvious 20 years ago was because people weren’t sure this internet thing was going to catch on. In the same way, bitcoin may look like an obvious investment 20 years from now, but only if bitcoin succeeds in cementing its status as “the” digital value protocol.  The quickest way to cement that status is to be worth a lot more money than its competitors.
  4. Begetting Investment: Bitcoin’s hype cycle also extends to investment in bitcoin/blockchain applications.  First, greater hype attracts larger investments from more prestigious funds and companies.  Second when investors that hold bitcoin see the value of their holdings increase, many will use the profits to fund bitcoin companies.
  5. Stability: While a rising price is inherently unstable, it leads to a higher market cap.  A higher market cap is less susceptible to volatility by its nature.  A bitcoin-powered remittance platform, of which there are already dozens, is much more successful when a $10,000 purchase or sale does not move the bitcoin price significantly.
  6. It’s what Satoshi wanted: Bitcoin is to banks, governments, and lawyers what the cell phone was to the land-line.  In the same way that undeveloped countries were able to skip the costly installation of telephone wires and move straight to cell phones, bitcoin will enable developing countries to skip the creation of brick-and-mortar banks, municipal property registries, and burdensome legal industries and move right into a world with digital money, property, and contracts.  This will result in marginal increases in efficiency for developed countries such as the United States, but transformational changes in the developing world.  In this equation, the already-developed world plays a crucial role elegantly assigned by the creator of bitcoin, Satoshi Nakomoto.  It is incumbent on the speculators, investors, and even those fools looking to become instant millionaires to invest fungible currency like US Dollars into bitcoin in the hopes of instant (or patient) returns.  This is what drives all the aforementioned positive developments in the bitcoin ecosystem and transforms the world.  Without the evil speculators, there is very little incentive for Western countries to invest in building consumer bitcoin applications.

Conclusion:

The bitcoin price matters, though it matters less than other factors, including network strength, development of applications, and the size and activity of the network.  However, those three attributes are directly related to the price of bitcoin.  While these important metrics can improve despite a declining bitcoin price, it is unlikely that they will decrease in an environment with a rising bitcoin price.

So, now that we’ve established why price matters, I will give you my argument as to why I am completely certain that in the next three months bitcoin’s price will