Yesterday, @thecryptofiend, whose opinion I treasure, posted about why he believes Bitcoin might still be undervalued and has a lot potential to grow in value. This post came from a discussion we started on another post.
As sound as his points might be, I still do not agree. Even though it is easier replying than stating, I'll have to do so. Good old data venia.
Let me start off saying I'm a Bitcoin fan. Please do not get me wrong, I'm 100% pro-crypto. But I try not to let my fandom impair my judgement.
Why I think Bitcoin might be currently overvalued
First I'll say why I believe some of @thecryptofiend 's points won't hold true in the future.
He states that:
1. Security:
Despite it's problems bitcoin is the most secure blockchain. That makes it harder to attack and more trustworthy since it is almost impossible (or getting to be) to carry out attacks which falsify transactions, double spending etc.
I believe he means it is the most secure because Bitcoin is the most adopted coin, thus it should be the most decentralized. To my view that's circumstantial and highly due to adoption. With a large amount of bitcoin hardforks out there, there is no technical reason to believe bitcoin is safer. Adoption is something that can quickly change. Moreover, we know that, pool-wise, bitcoin mining is somewhat concentrated.
When thinking about the long run, I tend to evaluate a coin's safety by their technical aspects rather than adoption. Although, on the short term, adoption might be even more important.
2. Real world effort:
A considerable amount of real world money, energy and infrastructure goes into mining it. In a sense that creates a certain base level of value.
Given. But I for one, believe that mining is approaching its end. I believe Proof-of-Stake might take its place, or some other solution, since PoS isn't yet perfect. I don't believe it makes sense to spend the amount of energy we currently do for mining, and PoS seems a good enough solution to solve the problem for now.
3. Branding:
Bitcoin is arguably the only cryptocurrency "brand" that has recognition in the real world.
I honestly think that this is the strongest point pro-bitcoin. But it is worth remembering that a brand can slow down some sort of transitionn, but not prevent it. Bitcoin might be the usual first entry to the crypto-world, but once you're in it, it's quite easy to switch to other alternatives. Once that happens on a massive scale, recognition will come.
4. Community:
Bitcoin probably has the largest community backing - you would be hard pressed to find someone who is into cryptocurrencies who doesn't support it.
True. Something similar could be said about Litecoin, Ethereum and Ripple though.
5. Segwit 2X:
It seems likely that Segwit 2X will now pass. This won't solve the scaling issues forever but will help.
It does indeed. But it might be just easier to switch to other alternatives and avoid the whole discussion and the hardfork risks, the next time something like the current scaling debate happens.
6. Gateway to the Crypto World:
Bitcoin is the primary gateway to all other cryptocurrency tokens and investments - and it will likely stay that way for some time. If you have no other cryptocurrency and want to buy "Token X" you will in most cases need to buy Bitcoin first.
Also true. Easily changeable though. An exchange that lists a pair BTC/Whatever can easily change it to XRP/Whatever for example. Their structure can handle it with little fine tuning.
7. Scarcity Without Some of the Disadvantages:
Bitcoin is very scarce compared to most other cryptocurrencies and monetary systems. Yes you can divide it up into tiny units without problems but that does not take account of how people psychologically deal with numbers.
Further even at it's slowest, bitcoin is infinitely easier and faster to transport than commodities like gold.
You can also secure it and hide it more easily than physical money or gold - reducing (but not eliminating) the risk of being robbed.
Sound. But the same can be said about any crypto. Also, commodities like gold have intrinsic value (due to some rare and desirable properties of the metal), whereas bitcoin doesn't. So it is easier to just switch from Bitcoin to Litecoin, than from Gold to Silver, for instance.
Government issued crypto-currency would have value because they would be backed the same way fiat currency is.
My thoughts
Despite all the abovementioned replies, that's not why I really think Bitcoin might be overvalued. I just stated why I don't think it is undervalued.
I see two paths down the road:
#1 : Crypto takes over. Governors, banks and regulators are not able to stop it and we have a free world.
#2 : Old economy adopts a new protocol. Central banks issue tokens instead of bills, blockchain becomes the standard transaction protocol (overcoming Swift), and equity-like tokens are used as a new security, alongside with equity shares, bonds and derivatives.
I wouldn't dare to say what is going to happen, but I analyze the odds from an incentive perspective.
Who strongly benefits from each scenario:
#1: The lay average man. The one who is a dentist, perhaps a fireman, and is usually unconcerned with economic technical issues; and the crypto community obviously.
#2: Governments, Banks and broad Financial Institutions. Who live off of economic technical issues.
Clearly, my point is: there will be more work-power dedicated to head us to scenario #2 rather than #1. Since I believe Governors, Financial Institutions and Regulators largely overcome the crypto-active community in both size and influence.
In scenario #2, we have the same old economy, with sovereign currencies, with new clothing. Singapore, for instance, has taken its first step towards it, by planning to issue singapore dollar tokens. I believe Bitcoin does not have a place in such a scenario.
I usually decide my Bitcoin potential target price by making an assumption of how much (%) of the world's financial system will run on Bitcoin, and simply divide this amount by the current amount resulting in its expected appreciation. Something along the lines of what is done in this comparison of world's money. During the past weeks I've been slowly decreasing that projection.
Obviously Bitcoin is not going to disappear completely, but I don't think it will be the dominant currency, or even a legal currency for that matter. Its value might even approach zero. And that's why I believe Bitcoin might be currently overvalued.
Done !
I'm not telling anyone to panic. This day is still far away from now (if ever it comes), and I am myself long Bitcoin. I'm just not in it for the long run anymore.
Also, even when you think an event is unlikely (like I feel about Bitcoin dominance), its payoff may make it reasonable to hold a position on it.
Hopefully you guys will have some evidence and arguments to support or to challenge mine and @thecryptofiend 's points.
Cheers !