The Fall and Rise of Bitcoin

It has been quite interesting to watch Bitcoin as it has gone through one bubble, and consistently risen since. Many people thought that Bitcoin was finished after its stratospheric rise in 2011, and it’s subsequent collapse to $3. Can Bitcoin survive such a massive devaluation?

Image courtesy of Bitcoin Charts

Image courtesy Bitcoin Charts

Recently Bitcoin has achieved quite a bit of attention, because of WordPress.com announcing that they will accept payment in Bitcoin. More recently, Reddit has decided to accept Bitcoin. The more interesting (and perhaps) exciting development is that you can now buy pizza with bitcoins.

Another important sign is that Amazon is planning to launch its own currency later this year. I think this will have a huge influence on the Bitcoin market. Hundreds of millions of people will start using Amazon coins, and that will make Bitcoin feel much more natural and less risky. In addition, if Amazon pegs its currency to the dollar, then Bitcoin will be perceived as store of value, instead of just another inflated currency.

Many people think that this is the real value proposition of Bitcoin: the US and governments around the world are printing money at a rate never seen in the history of the word, and the number of Bitcoins is forever limited to 21 million. The US M3 money supply is estimated to be $16 trillion at the moment. What would happen if the demand for those $16 trillion moved into Bitcoin?

The value of bitcoin would rise to $1,450,000 per bitcoin. Why? Because there are only 11 million bitcoins in existence at this time. And, there will only be 21 million ever created. This will take 20 years, and the rate of creation currently is 1 million per year.

Is it possible that demand for US dollars will collapse and shift towards Bitcoin? I think it is not only possible but likely. The US government is bankrupt, with over $72 trillion in unfunded liabilities for Social Security and Medicare. The government is running massive deficits, paying a large percentage of its income to debt payments, and it unlikely to recover from its huge debts.

At this time, most governments around the world still hold dollars and believe that the US dollar is strong. But within a few years they will realize that the government is printing its way out of debt. And the massive sell-off will begin. Instead of holding dollars in reserve, governments and people alike will get rid of their dollars and buy stores of value: gold, silver and Bitcoin.

Can I guarantee that this is what is going to happen? No. You have to do your own research and decide for yourself if this scenario makes sense.

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