While Bitcoin, the first digital currency to scale, has enjoyed significant visibility and widespread adoption, one economist has stated that there is a good chance its price will go to zero.1)Retrieved 10 July 2018 http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining

The economist was not alone in providing such warnings, as a Goldman Sachs note predicted that it was “unlikely” that “any of today’s cryptocurrencies will survive over the long run.”2)Retrieved 10 July 2018 http://fortune.com/2018/02/07/bitcoin-price-usd-prediction-goldman-sachs-cryptocurrency/

Argument For Bitcoin Price Reaching Zero

In an op-ed piece, Vanguard economist Joe Davis wrote that there is a “decent probability” that Bitcoin’s price would fall to zero.3)Retrieved 10 July 2018 http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining He made this statement while maintaining that blockchain technology holds promise.

Davis explored whether digital currencies are in fact currencies, coming up with mixed results.4)Retrieved 10 July 2018 http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining He argued that Bitcoin is not a store of value, emphasizing its volatility. Davis claimed that these price fluctuations make vendors more hesitant to accept the digital currency, thereby hindering adoption.

The economist stated that cryptocurrencies do function as a medium of exchange, but that their price fluctuations only interfere with this use, and that only a fraction of merchants accept them as a means of payment.5)Retrieved 10 July 2018 http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining Davis emphasized that digital currencies function as a unit of account, giving these digital assets at least one of the qualities needed for them to function as a currency.

The aforementioned Goldman Sachs note, which featured a Q&A with Head of Global Investment Research Steve Strongin, stated that most of these digital assets are “too primitive” to be practical over the long haul, and predicted that their value will therefore fall to zero.6)Retrieved 21 July 2018 http://fortune.com/2018/02/07/bitcoin-price-usd-prediction-goldman-sachs-cryptocurrency/

He said that digital currencies have security vulnerabilities, and their transactions can be both time-consuming and expensive.7)Retrieved 21 July 2018 http://fortune.com/2018/02/07/bitcoin-price-usd-prediction-goldman-sachs-cryptocurrency/ Strongin has reasonable cause for concern, as the average time needed to confirm a Bitcoin transaction approached 12,000 minutes (20 hours) in January 2018.8)Retrieved 21 July 2018 https://www.blockchain.com/charts/avg-confirmation-time

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Counter Arguments

Amid these criticisms, several market observers have provided counter arguments as to why Bitcoin’s value will never hit zero. The digital currency has “historical evidence,” Balaji Srinivasan, a serial entrepreneur and former board member of Andreessen Horowitz, told CNBC during a January 2018 interview.9)Retrieved 21 July 2018 https://www.cnbc.com/video/2018/01/25/earn-com-ceo-why-bitcoin-is-not-going-to-zero.html

There is a large community of individuals who have held the currency through very tough times, such as the more than 85 percent decline that Bitcoin suffered between January 2014 and January 2015, Srinivasan said.10)Retrieved 21 July 2018 https://www.cnbc.com/video/2018/01/25/earn-com-ceo-why-bitcoin-is-not-going-to-zero.html He predicted that in the long-term the digital currency’s market capitalisation (or total market value) will continue to push higher.

Further, some market participants have started using Bitcoin as a “disaster hedge,” investing in the digital currency during times of geopolitical turmoil, ARK Invest analyst Chris Burniske told CNBC during an interview.11)Retrieved 21 July 2018 https://www.cnbc.com/video/2016/06/27/markets-using-bitcoin-as-a-disaster-hedge-ark-invest-.html Burniske predicted that more investors will begin using Bitcoin for this purpose because the digital currency does not correlate with more traditional asset classes.

Summary

In spite of Bitcoin’s great success in generating visibility and drawing investors, some market observers have predicted that the digital currency’s value will eventually fall to zero. However, others have disagreed, providing multiple reasons why this will never materialise.

These Bitcoin enthusiasts have emphasized that many investors have held onto the digital currency even when it suffered sharp price declines. In addition, some market analysts have noted that Bitcoin can function as a disaster hedge, because its price movements frequently don’t follow those of other assets.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

References   [ + ]

1, 3, 4, 5. Retrieved 10 July 2018 http://www.etf.com/sections/etf-industry-perspective/vanguard-bitcoin-presents-quandary?EXCMPGN=EX:PC:FAS:Sustaining
2. Retrieved 10 July 2018 http://fortune.com/2018/02/07/bitcoin-price-usd-prediction-goldman-sachs-cryptocurrency/
6, 7. Retrieved 21 July 2018 http://fortune.com/2018/02/07/bitcoin-price-usd-prediction-goldman-sachs-cryptocurrency/
8. Retrieved 21 July 2018 https://www.blockchain.com/charts/avg-confirmation-time
9, 10. Retrieved 21 July 2018 https://www.cnbc.com/video/2018/01/25/earn-com-ceo-why-bitcoin-is-not-going-to-zero.html
11. Retrieved 21 July 2018 https://www.cnbc.com/video/2016/06/27/markets-using-bitcoin-as-a-disaster-hedge-ark-invest-.html