Tuesday, February 1, 2022

Three potential paths for the price of bitcoin

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.  

Good luck!


  1. Yes, if BTC were the only game in town. (I'm tipping my hand.) But there are an infinite number of fully game-able and fully dilutable new coins that are being minted all the time, to keep the casino in play. Of course, with each new coin minted, the total funds available to all coins is diluted, and thus, the ultimate cap on any one coin is tamped down.

    None of the above really gets at the issue of incentives to miners, and whether pricing of coin and cost of doing business change in a way which upends the whole racket.

    We shall see. In general, I feel really bad reading articles about the BTC whales buying up properties in Puerto Rico, built off the fleecing of so many desperate retail buyers with no clue as to what they are really participating in.

    1. Sure. The analysis probably still stands in that case, using total valuation of the crypto scene instead of just Bitcoin's, to make it robust to occasional flippenings.

    2. "Of course, with each new coin minted, the total funds available to all coins is diluted, and thus, the ultimate cap on any one coin is tamped down."

      It'll be difficult for new gambling coins to compete with bitcoin, especially if they offer the same gambling experience. As the first gambling coin, Bitcoin has the advantage of having already attracted a lot of liquidity. Large and small players can easily get in and out of bitcoin. A new coin lacks that liquidity advantage.

  2. Again, very nice post. But I miss one scenario, a chart that would be terminally look like a volatile stock index (i.e. the Nasdaq). A rather liquid commodity (as defined by Menger) but not liquid enough to ever become money due to its supply inelasticity (and therefore inherent volatility).

    Given the name of this blog, "Moneyness", it always has been shocking to me that you always argue Bitcoin becoming money as a black/white dichotomy without considering any scale of grey at all (I don't consider "as a game" as any degree of grey/moneyness)

    1. "Given the name of this blog, "Moneyness", it always has been shocking to me that you always argue Bitcoin becoming money as a black/white dichotomy without considering any scale of grey at all"

      I disagree, there is an implicit moneyness scale in this post. In my bitcoin-as-game scenario, I suggested that bitcoin would never become a generally-accepted form of money. That doesn't mean it can't serve as a form of money to a few people. That is, bitcoin would have a degree of moneyness.

  3. Great Post, JP. I like these 3 types of "believers" . The Bitcoin As Money Crowd wrongly believe they are in early on "limited supply of Bitcoins" They believe the "printing by central banks" result in direct appreciation of their coin because of the "limited supply". If you told these people the value of their coin could not (would not go up) but would stay steady, how many of those dollars stay put? How many leave? You see, Bitcion (crypto in general) is the ultimate hot money bet. It leaves the real economy and enters the "metaverse". An atomic bomb could hit in the metaverse, and you and I wouldn't feel it. Back in 2008 they were betting on Subprime Mortgage Bonds. Remember they ended up being called "toxic"? So these hot money bettors like to call them selves sound money people. They are moving money over from Gold. They think Central Bank printing = bitcoins go up.

    Now the second group is the most interesting to me. The Bitcoin is a Bubble Group. I always point out that Warren Buffett, at any time could have owned most or all of the Bitcoins in existence. But yet somehow, after being the right hand man for Barack Obama at the White House, he owns none. Along with every single member of the Fed. Why do you think that is? Why does Warren not own any? An interesting bit of game theory if you think about it.

    Now the final option of Bitcoin as a game is the most intriguing because it does not seem that group #1 (bitcoin as money) group knows it is really a game. If they (when they) find out, I think they, along with the hot money bettors who thought they could have fabulous profits, decide to cut bait and bet on something else. When Mike Saylor goes underwater, it will be a lesson.
    That brings me to the question, why does IMF not want El Salvador not to use Bitcoin? If there was a 4th option, Bitcoin as a Hot Money Release Valve. Collecting all the speculative dollars (keeping them away from traditional markets (think Housing & Oil)). I bet you green money all those bitcoin HODLers spent less this month. Imagine if all that hot money from Coins were in stocks and bonds? We would have a bubble explode for certain.

    Bitcoin as a Central Banker created distraction is the most likely scenario, since we have seen how Mark Zuckerberg was not allowed to have his own coin, but "Satoshi Nakamoto" can. Created within weeks of Lehman collapse. It is possible it is a central banker created distraction.

    1. "Why do you think that is? Why does Warren not own any?"

      If I recall correctly Buffett only buys financial instrument if their fundamental value is below their market value. Alas, he can't make this calculation with bitcoin -- it doesn't have a fundamental value. So according to his own rules he can't buy it.

    2. and what about why no Central Bankers (except Nayib Bukele) are not allowd to own any bitcoins? They don't have the Warren Buffett Rule to follow.

      If you can answer this one, I may jump on board with you and buy some bitcoins. If you can't answer this one, think about WHY?

      Before Bitcoins, all money had to be borrowed into existence. Not anymore.

      The final question about WHY the Fed did not allow Diem is most important. Leads to an understanding of how dangerous it is to allow a non central banker to be in control of the price and availability of money.

      You could imagine a situation where the owner of such a coin would/could be more powerful than a central banker in a situation where they break the Zero Lower Bound, and someone like say Diem, offers a slightly higher deposit rate than the bank. All the money would flood there, and Mark Zuckerberg would be the defacto Central Bank Chairman of the world. Can you discuss this particular outcome? Thanks JP!!

      By the way, My name is Alejandro Reyes, it says I am anonymous, but I am not. I am @reynmaker23 on Twitter.

  4. Great post! BTW plenty of central bankers and official institution staff own bitcoin and other crypto-assets. I know plenty of IMF and World Bank staff who do. Maybe not enormous amounts, but with the likes of Fidelity telling us that every investment portfolio should have some small exposure (2-5%) to crypto-assets, it may seem like the prudent thing to do. In fact, despite crypto's high proportional price volatility, its absolute valuation volatility is probably less than that of the other 95-97% invested in stocks and other risky assets. Mind you I'm not a big believer in central banks, as an institution, investing in anything but government and government-backed assets. Leave the risk taking to individual tax payers.

    1. Thanks, John.

      Fidelity takes the view that bitcoin is money:


      Of course, Fidelity is marketing financial products to clients. It can't describe its bitcoin offering as type 3 asset. If bitcoin is a gambling game (and I think it is) it wouldn't be the first time that a gambling product has been dressed up as something less gauche. Wall Street has a long history of marketing gambling products as investing products -- 3x levered ETFs, Vix options, etc.