Investment demand itself will drive bitcoin to success

[johnyj]

At a higher abstraction level, all the investments are to give some return for invested capital. In order to do this, the invested project should produce something that satisfy certain kind of customer demand, and the production cost should be lower than the price paid by customer, to ensure the investment will get some positive return

From this view, investment in bitcoin is because bitcoin can satisfy customer's long term saving and anti-inflation demand. And the cost now (measured by fiat money) will be lower than the price paid by future customer

Actually, investors don't really produce this service, the anti-inflation feature is already built-in for bitcoin. However, if you don't inject your capital into a company, the company would never produce anything, no matter how profitable it can be. Similarly, without people's investment in bitcoin, bitcoin's anti-inflation ability will not be shown clearly

So, all the capital invested into bitcoin through mining or purchasing will directly or indirectly raise its cost and price, a rising cost/price will further strengthen its anti-inflation promise, give people more confidence to further invest

Money thrown into a company might produce products at much higher cost than price, then cause bankrupt. But money invested in bitcoin will all drive up its cost/price, contributing to its long term anti-inflation promise, which is the ultimate feature that customers seek

For example, many people bought above $500, but their purchase reduced the sell pressure and kept the price high for a while, so that more mining investment followed and eventually pushed bitcoin's cost/price to a much higher level than last bottom


This is not Ponzi or pyramid scheme, because even the user base does not increase at all, e.g. every month, same amount of people enter and leave, thus the monthly investment capital never increase, it would still defeat inflation after 4 years due to reward halving

This decentralized consensus is building up quickly. Once the consensus is widely spread, everyone will invest in bitcoin at a well defined pace: periodically buy and hold, cash out late and small, thus make it a top anti-inflation product

Unlike bitcoin, most of the other things in the world do not have continuously shrinking supply and total limit, they can not give the same promise (Land maybe similar but the supply of habitable land is continuously increasing)


Some people might question the validity of the artificial scarcity, because it is man-made. But does it really matter if it is man-made (bitcoin) or nature-made (gold)? As long as the scarcity is impossible to change, it is enough

The fear maybe comes from the fact that artificial scarcity can be changed if the protocol is changed. But then the general consensus of the participants will make sure that will never happen, protocol change of the scarcity rule will be discarded by almost every participants

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[jonald_fyookball]

nice post. 

right now the challenge Is crossing the chasm to where early adopters will start using it, not just innovators.

[LiteCoinGuy]

good post, well - written. thx.

[NUFCrichard]

The fear maybe comes from the fact that artificial scarcity can be changed if the protocol is changed. But then the general consensus of the participants will make sure that will never happen, protocol change of the scarcity rule will be discarded by almost every participants

I'm not sure that this is a fair fear in the case of Bitcoin.  I mean it is obviously possible, but bitcoin is basically a global democracy, and if the admins make some stupid changes, like increasing the number of coins mined per block, then major miners can ignore that change and continue on the old blockchain.

The press are always very keen to point out that bitcoin is ruled by a few people, but they couldn't really be more wrong. Granted an active dev team was a good thing to start with, but now is too late to make major changes, so I expect, block size aside, no hard forks in the near future.

[amiryaqot]

that is good post i also agreed with your point of view about the bitcoin is not a Ponzi or pyramid scheme, bitcoin is real invention through the next generation crytpo and the future of the currency at the moment after a long struggle to prove its existence now bitcoin making solid progress with real adopters and huge acceptance by large merchants. 

[dragone]

The fear maybe comes from the fact that artificial scarcity can be changed if the protocol is changed. But then the general consensus of the participants will make sure that will never happen, protocol change of the scarcity rule will be discarded by almost every participants

I'm not sure that this is a fair fear in the case of Bitcoin.  I mean it is obviously possible, but bitcoin is basically a global democracy, and if the admins make some stupid changes, like increasing the number of coins mined per block, then major miners can ignore that change and continue on the old blockchain.

The press are always very keen to point out that bitcoin is ruled by a few people, but they couldn't really be more wrong. Granted an active dev team was a good thing to start with, but now is too late to make major changes, so I expect, block size aside, no hard forks in the near future.

In your post you highlighted a greater issue. Bitcoin is controlled in fact by the miners, which isn't a good situation either... people who own it have no say in it unless they mine it.

[jonald_fyookball]

The fear maybe comes from the fact that artificial scarcity can be changed if the protocol is changed. But then the general consensus of the participants will make sure that will never happen, protocol change of the scarcity rule will be discarded by almost every participants

I'm not sure that this is a fair fear in the case of Bitcoin.  I mean it is obviously possible, but bitcoin is basically a global democracy, and if the admins make some stupid changes, like increasing the number of coins mined per block, then major miners can ignore that change and continue on the old blockchain.

The press are always very keen to point out that bitcoin is ruled by a few people, but they couldn't really be more wrong. Granted an active dev team was a good thing to start with, but now is too late to make major changes, so I expect, block size aside, no hard forks in the near future.

In your post you highlighted a greater issue. Bitcoin is controlled in fact by the miners, which isn't a good situation either... people who own it have no say in it unless they mine it.

not entirely true. miners need people to buy the coins.  if miners did something very unpopular, price would drop because the demand wouldn't be there, thus hurting them.

[crazyivan]

+1 to this post.

Now we can only wait for this to happen.

[bitnanigans]

It also begs the question, should bitcoin be seen as only an investment or also a currency to be spent?

[johnyj]

Some other debate about artificial scarcity

1. There are many financial products with limited supply, for example stocks, why bitcoin?

There are also speculative bubbles for stock, but those financial products are all issued by some entity, and can only be traded on certain exchange, means the owner doesn't really have the full control of his asset. This greatly reduced the ability to liquidate the asset anywhere anytime. If you want some asset that you have 100% control, bitcoin is a better choice. If you consider bitcoin as a company's stock, its company structure and profit model is very transparent



2. There are many altcoins with limited supply, why bitcoin?

Bitcoin is essentially a consensus: People invest in a crypto currency with limited supply to protect their wealth from inflation and get some potential gain in future. So, from investor point of view, to maximize the chance of success, he would invest in one most adopted crypto currency

The success of the investment is dependant on most of the investor's consensus: If everyone decided to adopt different coins, then everyone's investment will fail, due to more and more alt-coins, thus crypto currency inflation. Crypto currency inflation will destroy their most attractive feature (anti-inflation), and make them impossible to sell to future investors

[johnyj]

It also begs the question, should bitcoin be seen as only an investment or also a currency to be spent?

In my experience, most of the bitcoin purchases are for investment purpose. Bitcoin also has the payment function, that is a plus, so in future when your investment matured you can spend it easily

Every day some of the early investors are realizing their gains, they need to sell bitcoin or spend bitcoin, those demands are driving the exchange service and merchant adoption

There are some businesses exclusively use bitcoin as payment method, but many of those are typically running underground or in grey area of the law, mostly violate AML/KYC rules, they are creating negative public image of bitcoin, but scale are small comparing with the investment usage of bitcoin. International remittance could also be a powerful usage, but the scale is also small

[Kprawn]

Steady investment injection will eventually lubricate the gears for the development of a super killer APP. This will open the doors for mainstream adoption and more VC investments.

We have already seen mayor companies entering the Bitcoin scene and also banks being interested in Blockchain technology.

What is a concern to me, is the amount of merchants who started to accept Bitcoin and are now not accepting it anymore. Who are doing research to see why these companies are doing this and what can be done to retain them?

[johnyj]

In an ideal situation, an investor bought 10 bitcoin and hold it for 10 years, then spend them, those 10 bitcoins will be picked up by the next investor, at higher exchange rate. So, a constant inflow of new investor is enough to keep the balance. There are 370K new baby born every day, there will always be plenty of new investors. The whole system is quite self-sustainable

However in real world, every time a speculative bubble hits, it will dramatically increase the amount of people that invest in bitcoin. Quickly raised price will make many investors reach their target earlier, thus cause large scale of spending, and burst the bubble. After bubble burst, the amount of new investors will drop quickly, cause the coin price to dive. This whole bubble process will distort the long term price development trend, thus in some degree hurt the anti-inflation character of bitcoin: It is not easy to see the anti-inflation effect if you don't hold it for more than 4 years

And even worse, if one day a bubble is large enough to attract more than 50% of the existing population to invest, then you might never find enough population to absorb the sell pressure when those people have reached their target. The burst of such a large bubble might end up broke the promise of anti-inflation. E.g. bitcoin exchange rate makes a lower low after 4 years. Of course we are still far from it, but worth noting. And by that time, people might not need to sell bitcoin on exchanges, they just spend them, maybe the crash can be avoided

[MicroGuy]

This is the problem with bitcoin at the moment and all other emerging cryptocurrencies.

Consumers are not going to take an extra step to buy Bitcoin, so they can then go out and buy something that they could have already bought with the debit card in their pocket. This is not going to ever happen. It would be like asking someone to go to the store and buy a can or petrol for their lawn mower, when they already had a can of petrol in their garage.

That's why currently, people are interested in Bitcoin for three primary reasons: speculation, novelty, and making darknet purchases (places debit cards don't work). In my view, the way to change this is for the community to embrace and promote services/methods that allow consumers to receive their wages in Bitcoin.

[Amph]

This is the problem with bitcoin at the moment and all other emerging cryptocurrencies.

Consumers are not going to take an extra step to buy Bitcoin, so they can then go out and buy something that they could have already bought with the debit card in their pocket. This is not going to ever happen. It would be like asking someone to go to the store and buy a can or petrol for their lawn mower, when they already had a can of petrol in their garage.

That's why currently, people are interested in Bitcoin for three primary reasons: speculation, novelty, and making darknet purchases (places debit cards don't work). In my view, the way to change this is for the community to embrace and promote services/methods that allow consumers to receive their wages in Bitcoin.

you forgot gambling, in gambling bitcoin is much easy to use than credit card, which also require for some legal site in your country, to compile a form and send it to your local autorithy

with bitcoin instead with 1 click and 30 sec you are ready to play and gamble in every website that accept it

this is another reason why bitcoin will never die, but will find only its niche market if something goes wrong in the future

[johnyj]

This is the problem with bitcoin at the moment and all other emerging cryptocurrencies.

Consumers are not going to take an extra step to buy Bitcoin, so they can then go out and buy something that they could have already bought with the debit card in their pocket. This is not going to ever happen. It would be like asking someone to go to the store and buy a can or petrol for their lawn mower, when they already had a can of petrol in their garage.

That's why currently, people are interested in Bitcoin for three primary reasons: speculation, novelty, and making darknet purchases (places debit cards don't work). In my view, the way to change this is for the community to embrace and promote services/methods that allow consumers to receive their wages in Bitcoin.

True, consumers are not going to take an extra step to buy bitcoin and then make purchases. Even if they receive bitcoin as salary, they will store it and get some fiat to spend, since fiat will drop in value while bitcoin will rise in value

However, once they have some bitcoin holding, things will change. They will participate in bitcoin related activities to promote its usage and raise its value, so that their holding will become more valuable (more usage will cause a shortage of coin on the market, thus raise its value indirectly), and to make sure that they can spend their coin easily in future when their investment matures An easy way to make bitcoin worth millions of dollars

As a fiat money user, your action have almost no influence on fiat money's value, because central bank have dominance influence. But as a bitcoin user, your action (especially a consensus reached among many participants) can affect the value of bitcoin significantly, that is a big difference. By holding and buying bitcoin to purchase things, its value will rise. You can imagine, if the major players in the space like large exchanges and mining pools all decided to tighten money supply, they will achieve basically the same result as FED's open market operation

Central banks are doing such kind of operation constantly to stabilize the value of currency. In bitcoin world, everyone is a distributed central banker. If enough people reach consensus, their action will directly affect the money supply in bitcoin monetary system: If 1 million people hold 1 coin each, then the bitcoin money supply will reduce by 10%, cause a 10% increase in currency's value. And if 1 million people spend 1 coin each, then the bitcoin money supply will increase by 10%, cause a 10% drop in value

[hasmukhrawal]

nice guide on investment . i was thinking of getting to an investment scheme and this is a good knowledge that you provided.

[AtheistAKASaneBrain]

nice post. 

right now the challenge Is crossing the chasm to where early adopters will start using it, not just innovators.

People give way too much value to their hard earned BTC's to spend on frivolities.
It's not the same having 3 BTC for example, than having 10000. If you have 3 BTC you give it way more value than it's inmediate equivalent in fiat, and you would rather use fiat than BTC to buy stuff.

[LiteCoinGuy]

And even worse, if one day a bubble is large enough to attract more than 50% of the existing population to invest, then you might never find enough population to absorb the sell pressure when those people have reached their target. The burst of such a large bubble might end up broke the promise of anti-inflation. E.g. bitcoin exchange rate makes a lower low after 4 years. Of course we are still far from it, but worth noting. And by that time, people might not need to sell bitcoin on exchanges, they just spend them, maybe the crash can be avoided

which target? when you can buy eveything in bitcoin in 10-15 years there is no target. you buy it for BTC and the seller will use BTC too...

[BTCevo]

It also begs the question, should bitcoin be seen as only an investment or also a currency to be spent?

From what I see bitcoin is going to be a good investment for know, although it still being debated that it is going to be a long term or just a short term due to of its volatile price. And if later on this is going to be mass adoption may be one day it can be a currency but there is too much problem with fiat and bitcoin so my point is there is so many pros and cons with bitcoin we just can wait and let them to grow with the time