Are you wondering whether to buy bitcoin at $38,000? To help you with your decision, here are three visualizations of the future path for the price of bitcoin.
Path 1 (Bitcoin-as-money): A popular view among the bitcoiners is that bitcoin is ascending the rungs of monetization. That is, the stuff is slowly becoming money.
Yes, the orange coin is volatile right now, goes their story. But that's only because the world is still in the process of discovering bitcoin's incredible monetary properties. The price of bitcoin will continue to rise throughout this discovery process, and as it does so its volatility will decline (see chart below). At some much higher price in the future ($1 million? $10 million?), bitcoin will fully transition to universal money. Everyone will have some on hand for spending purposes. Bitcoin will no longer be volatile. It'll be as boring as the dollar.
Path 2 (Bitcoin-as-bubble). Critics like Paul Krugman, Steve Hanke, Nouriel Roubini, Warren Buffett, and Nassim Taleb have suggested a different price path. Bitcoin is a bubble, they say. The bitcoin price will rise, peak, and finally collapse back to its fundamental value of $0 (see chart below). It's beanie babies and tulips all over again.
Path 3 (Bitcoin-as-game). The third path for the price of bitcoin is based on the idea that bitcoin is neither a monetary asset nor a bubble. It is a new kind of gambling game.
Think of bitcoin as a multi-nested mind-game in which one set of players tries to anticipate if & when another set of players will buy more bitcoin. By correctly anticipating and buying ahead of time, these early birds "win" by selling out at a higher price to the latecomers. Complicating things is the fact that this second set of players is simultaneously trying to anticipate if the first set of players will buy. To play bitcoin is to play an infinite level game in which A must anticipate what B will do, which is a function of what B anticipates A will do, which is a function of what A thinks B will do, ad infinitum.
People like to gamble. It's fun. Gambling games also offer desperate punters the chance to make quick, potentially life-changing money. (Boring old stocks and salary-based income don't do this.) Faro and basset, two gambling games once popular in Europe, are obsolete. But other games like poker, roulette, and lotteries have remained popular over the centuries. Likewise, bitcoin could stay around for a very long time, as long as it provides a gambling experience that people value.
The reflexive nature of the bitcoin guessing game implies several things for bitcoin's price, as illustrated in the chart below.
Bitcoin's volatility will not fall over time. The prices generated by this multiplayer recursive mind-game will never stabilize. There will always be big cascades downwards and huge crescendos upward. Bitcoin's wild price movements are what make it such an exciting game. They are also what prevent bitcoin from ever serving as a generally-accepted form of money.
Bitcoin won't fall to zero. Bitcoin will perpetually undergo rapid 80-90%
declines. But new game players will re-enter to play, re-anchoring
bitcoin's price and setting the stage for the next ramp up.
Bitcoin's price is capped. For bitcoin to rise in price, additional players must keep buying in. But it's unlikely that more than 10-15% of the world will ever play bitcoin at the same time. (Around 5% of the world is playing right now). For the next 10, 20, or 50 years, bitcoin's price will continuously hit a terminal ceiling ($50,000? $200,000?) dictated by its maximum participation rate.
So if you are wondering whether you should buy some bitcoin at $38,000, you need to ask yourself which of the above three scenarios is the right one.
Under the bitcoin-as-money scenario, buying bitcoin at $38,000 and holding is a good strategy. One day it'll be worth $1 million. But if bitcoin is a bubble, buying at $38,000 could be disastrous. Eventually it'll be worth zero. If bitcoin is a game, you need to consider whether you are early or late. If you are late, then buying in at $38,000 means you're getting in near the top of the ceiling, and it could be years before you see that price again. If you are early, then entering the game at $38,000 means you'll be able to sell to another player at $100,000 or $200,000.