What’s Next For Bitcoin: 2019 And Beyond – Part 2

This is the second in a series of articles. In Part 1, I wrote that bitcoin will only be used as a medium of exchange when it can function as a store of value and that bitcoin will only be able to function as a store of value if there is increased and constant demand for bitcoin.

Notwithstanding that it is unlikely that bitcoin will function as a store of value in the near future, it can continue to make progress in the short to medium term.

What follows are the main themes that I think will result in increased demand for bitcoin over the coming 3–5 years.

1.Further Evidence And Understanding Of The Fact That It Is Highly Unlikely That Another Cryptocurrency Will Usurp Bitcoin As Money

The hypothesis that bitcoin can function as a store of value relies in large part on the 21 million bitcoin supply cap. This strict supply gives bitcoin the fundamental attribute that a good requires in order to be able to function as a store of value.

However, notwithstanding this supply cap, many people do not believe that bitcoin is scarce. The mindset is along the lines of “because bitcoin is open source software, it can be downloaded, changed slightly, redistributed and the new coin will serve as a substitute for bitcoin.” For a lot of people, bitcoin is not scarce because “you can just create another cryptocurrency, and then there are 42 million coins, and another cryptocurrency, and we’ll then have 63 million coins, etc.!” If we look at the number of cryptocurrencies that have been created to compete with bitcoin as money, it is clear that there are also a lot of people within the space that go along with this thinking.

However, this mindset does not take into account the facts that: (i) a free market in money tends to result in a ‘winner takes all’ outcome; and (ii) the features that make bitcoin valuable are enhanced as the economic realities of a free market in money play out.

(i) A free market in money tends to result in a ‘winner takes all’ outcome

Bitcoin’s very existence creates a free market in money (supply and demand rather than regulation dictates which money is held, spent and accepted). When there is a free market in money, everyone will only hold the money with the strongest purchasing power (the most valuable money). If at any point in time anyone is holding a money that is declining in purchasing power relative to another money, then they will switch to the stronger money. They do so because there is too much to lose by holding the weaker money. The example of the people in Zimbabwe moving over from the local currency to the USD is a good example of this reality.

Then, as people switch over to the money with the greater purchasing power, their actions simultaneously increase the demand for the stronger money and decrease the demand for the weaker money, strengthening and weakening the purchasing power of the respective moneys even further. This plays out over time with more and more people being forced to switch in order to preserve their livelihood.

The end result is that the ‘winner takes all’ and the losing moneys are left worthless once the winner has captured all of the value.

(ii) The features that make bitcoin valuable are enhanced as the economic realities of a free market in money play out

Bitcoin is open, borderless, decentralized, censorship resistant and immutable (unchangeable) and no other cryptocurrency (or any other form of money) comes close to it in this regard. These features allow the Bitcoin system to: (i) resist censorship from anyone, including the powerful central banks, existing financial system and governments who have a lot to lose if bitcoin is fully monetized; and (ii) maintain a predetermined supply cap and deflationary monetary policy.

As the purchasing power of bitcoin increases relative to other money (as a result of the dynamics explained above), additional network participants are economically incentivized to join the Bitcoin network. As these additional participants start contributing to the network (by, for example, running a full node or contributing hash power), their actions further enhance and guarantee the important features of decentralization, censorship resistance and immutability.

As the Bitcoin system’s important features are enhanced and exaggerated, bitcoin becomes even more valuable which ultimately results in an increased purchasing power and then the cycle repeats.

Bitcoin’s Virtuous Cycle


Increasing purchasing power results in enhanced and exaggerated decentralization, censorship resistance and immutability, which in turn makes bitcoin more valuable, which results in an increased purchasing power and then the cycle repeats.

It is still very early and not a lot of people completely understand what they are participating in but there is clear evidence of the fact that bitcoin is already a long way ahead of the competitors in this ‘winner take all’ competition. At the time of writing, the total wealth stored in bitcoin is 61 billion USD, while the total wealth stored in the closest challengers, XRP and Ether, is 13,5 billion and 9,7 billion respectively. Furthermore, the Bitcoin system currently moves anywhere between 2–5 billion USD of value per day whereas the XRP and Ether chains only process 20–220 million USD and 500 million — 1 billion USD respectively (data from coinmetrics.io).

The ‘winner takes all’ outcome may only play out slowly and it could take many years before we reach the end point. Nevertheless, over time it will become clearer for more and more people that there is no substitute for bitcoin. As more people come to understand, we can expect to see more demand for bitcoin and therefore more wealth being stored in bitcoin.

2. Economic Instability

For the first time in more than 10 years, on Monday 3 December 2018, the yield on a US 3-year treasury bond went above the yield of a 5-year treasury bond. In financial circles, this is the first sign of the dreaded ‘inverted yield curve’ that has preceded the past seven recessions in the USA.

It is not doom and gloom yet but if the yield on a 3-month treasury bond goes above the yield of the 10-year treasury bond, then history suggests that the USA will experience a recession. As a result of the fact that the USA has the largest economy that connects into many other economies around the world, any downturn they experience will likely also affect large parts of the world.

Treasury bond yields are determined by the principles of supply and demand in the market and you can follow the daily movements on this official government website. The spread between the 3-month and 10-year is getting closer and at the time of writing it is only 24% of what it was at the start of 2018. This is something to keep an eye on. You can read more about what causes the movement of treasury bond yields here and here.

How could the next economic downturn play out?

Ray Dalio, the Founder and Chief Investment Officer of Bridgewater Associates, has for a period of time been talking about how he expects the next downturn to play out. His view is that policy makers will not be able to swiftly rectify the situation like they did in 2008 and that we won’t see another decade of economic growth and asset value appreciation like we’ve had from 2010 to 2018.

In response to the debt crisis in 2008, central banks lowered short term interest rates to 0% and printed a lot of money to buy financial assets (the latter measure is known as ‘quantitative easing’). These measures stimulated spending and the economy recovered.

This time, however, the same levers will not necessarily be as effective or as available as they were in 2008. This is because short term interest rates are lower than they were 12 years ago (2,5% in the USA now as compared to 6% in 2007) and quantitative easing (money printing) can only be used so many times before society starts to question the value and stability of the currency (which can bring about a further set of problems that central authorities will want to avoid). Mr Dalio provides a broad overview in this short video and he has also written the book entitled “A Template For Understanding Big Debt Crises” that includes a “Compendium of 48 Case Studies”, which covers most of the big debt crises that have happened over the last 100 years.

His view is that the current situation is similar to the late 1930’s. If correct, this is significant because from that period onwards interest rates went up for 40 years. This is the opposite to what we have lived through for the past 35 years where interest rates have been declining steadily towards zero.

US Short Term Interest Rates


Short-term interest rates have been declining for the past 35 years. Source: A Template For Understanding Big Debt Crises, Ray Dalio.

If you are wondering what interest rates are like in other major economic hubs, they are at about 3% in China, 0% in Japan and 0% in Europe.

What does this mean for Bitcoin?

With increasing interest rates, the late 1930’s and early 1940’s was a period of low growth and low returns on assets. If we look back at the specifics, stock prices in the USA topped in 1937–1938, fell by 50% and then took a decade to recover and reach the values that they previously had. The value of real estate also fell. If Ray Dalio is correct and something similar plays out over the next 3–5 years then the world will experience something that not many people are familiar with.

Currently, people buy stocks, real estate and bonds to store their income and wealth. However, if the returns on these assets are negative for an extended period of time then a lot of people may look for alternative ways to invest their wealth. If by this time bitcoin has again been increasing in value (even if only for a short period of time) then it may well look very attractive to people looking for alternatives. Bitcoin has, after all, been providing the best risk adjusted returns as compared to US stocks, US real estate, US bonds, gold and emerging market currencies if held for a period of 4 years.


Source: woobull.com

It is also important to keep in mind how the people that have lost out over the last 35 years will view Bitcoin during an economic downturn (see my article The Big World Problem For Bitcoin To Solve for more information on the wealth and income gap that has been created).

In contrast to the current financial system of government money and central banking, the Bitcoin system, and its native currency, bitcoin, separates money and state and it has no history of favouring the wealthy minority at the expense of the poorer majority. If the prevailing income and wealth gap is combined with an economic downturn then it is likely that bitcoin will resonate with the poorer majority in these times.


The recent violent demonstrations against taxes and the wealthy elite in France are another example of the growing discontent by the poorer majority.

3. Custody Solutions And A Bitcoin ETF

The bitcoin asset is a digital bearer instrument and it can be exchanged peer-to-peer in near real-time. Further, the decentralization of the Bitcoin system and the economic incentives that are inherent in the system means that transfers are for all intents and purposes final.

There were a number of failed ETF applications in 2018 but one application has a chance of being approved in 2019. This is the Van Eck/SolidX application. By looking at the papers generated through the application, the further questions put to Van Eck by the US Securities and Exchange Commission (SEC), as well as the SEC’s responses to other applications, it appears as though there is only one outstanding question that needs to be addressed before this specific ETF can be approved.

The last piece of market infrastructure that is outstanding is for a number of the cryptocurrency exchanges to enter into surveillance-sharing agreements with a regulated market of significant size. This will enable parent exchanges and regulators to detect any market manipulation and ultimately protect investors and the public interest.

Based on a recent interview of Gabor Gurbacs (who is leading the Van Eck application) on the What Bitcoin Did podcast it appears as if this final step is being actioned with the Nasdaq stock exchange entering into these agreements with a number of cryptocurrency exchanges. It is likely that we will see a bitcoin ETF in 2019.

Custody Solutions

In 2019 we can expect two very established firms, Fidelity Investments and Northern Trust, to launch their custody services for institutional investors. There have also been suggestions that solutions from Goldman SachsJP Morgan, State Street and Bank of New York Mellon could be available in the not too distant future as well.

The provision of custody solutions by traditional players will be welcomed by large institutional investors because it will enable them to meet their obligations (legal and otherwise) and easily allocate capital to bitcoin.

Bitcoin ETF

There have been a number of failed ETF applications in 2018 but one application has a chance of being approved by as early as 27 February 2019. This is the Van Eck/SolidX application. By looking at the papers generated through the application, the further questions put to Van Eck by the US Securities and Exchange Commission (SEC), as well as the SEC’s responses to other applications, it appears as though there is only one outstanding question that needs to be addressed before this specific ETF can be approved.

The last piece of market infrastructure that is outstanding is for a number of the cryptocurrency exchanges to enter into surveillance-sharing agreements with a regulated market of significant size. This will enable parent exchanges and regulators to detect any market manipulation and ultimately protect investors and the public interest.

Based on a recent interview of Gabor Gurbacs (who is leading the Van Eck application) on the What Bitcoin Did podcast, it appears as if this final step is being actioned with the Nasdaq stock exchange entering into these agreements with a number of cryptocurrency exchanges. If this is in place by February then there is no reason why this EFT application can not be approved. In any event, it is likely that we will see a bitcoin ETF in 2019.

What does this mean for bitcoin?

Custody solutions and a bitcoin ETF will make it easy for the largest organisations like Bank of America, JPMorgan, Morgan Stanley, UBS etc. to access bitcoin and invest capital. I don’t think we can expect these traditional players to allocate tens of billions of dollars immediately, but over the coming years, as bitcoin’s value propositions become more widely understood, we should expect to see some meaningful participation from these organisation who manage and allocate large parts of the world’s wealth.

Next week I will be writing about when bitcoin might function as a store of value and a medium of exchange.

Note that the themes highlighted in this article are not the only relevant themes and there are others that can also play a role. By way of example, the continued growth of the lightning network can serve as evidence of the fact that bitcoin can scale to serve billions of people and this will go a long way to addressing the residual uncertainty in this area.

Disclaimer: The comments, views, opinions and any forecasts of future events reflect the opinion of the quoted author, do not necessarily reflect the views of Switch or other professionals at Switch, are not guarantees of future events or results and are not intended to provide financial planning or investment advice.

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