Can Bitcoin go to 0? If it does, does it means the end of the Crypto industry or Web3? All these are questions that have crossed my mind and now that you are here, I am guessing yours too!
Before exploring if Bitcoin can go to 0, let’s try to understand why it is above 0 in the first place 😅. As we know, money is just a medium of exchanging value. What does Bitcoin enable? - A trusted, secure, permissionless, and decentralized medium for exchanging value. It does so in its native fungible token BTC. In my understanding, such cryptocurrencies derive value broadly out of 3 pillars -
- Store of value - When you buy Bitcoin hoping that you will be able to sell it to someone later at a high price who will be buying with the hope that he will be able to sell it to someone at even higher prices. Scarcity is important for such assets. Scarcity is ensured with limited supply. For instance, gold has accrued a lot of value over the years for similar reasons. Although, it does have utility but its value is primarily attributed to its scarcity. Bitcoin has also done a wonderful job in accruing value positioning itself as a store of value with its limited supply of 21 Million Bitcoins.
- Unit of exchange - With increasing acceptance and adaption, the utility and therefore the value of currency increases.
- Equity like value - if proof of stake-based chain. This directly does not apply to Bitcoin.
Let us evaluate how Bitcoin is poised on these aspects.
Bitcoin transaction fees may rise up to $50-$100.
Bitcoin currently supports ~2750 Transactions per block. This roughly translated to 7 transactions per second. Currently, the average transaction fees range generally between $2-$4 which peaked at ~$62.8 back in April’21. These are the fees paid to miners as an incentive for validating transactions and securing the blockchain. Apart from the fees, miners are also paid block rewards (Currently 6.25 BTC in each block). This forms a significant part of the current rewards.
Considering $3 transaction fees which itself is significant for retail users, the total block reward would be around $8250. Apart from transaction fees, the block reward depends on the BTC price which varies significantly but has been around $30, 000 or above since Jan 2021. This amounts to $187, 250 with very conservative calculations. Therefore, total rewards are around $200, 000 per block broadly. So, the transaction fees generally do not even form 10% of the total reward. As we know, miners secure the network. The more the incentive, the more the number of miners, and subsequently the higher security of blockchain. This is because the chances of miners colluding to do a 51% attack reduced. Therefore, to summarise, the security of the network is directly proportional to the incentives to the miners.
As evident, the block rewards constitute ~95% of the incentive. Currently, 6.25 BTC are awarded to the number of bitcoins. It halves almost every 4 years. It was last halved in 2020 and therefore, the next halving will happen in 2024. And subsequently, when 21 million BTC are mined in 2040. These block rewards will cease to exist. Therefore (Not adjusting for inflation for simplification), in order to have similar security as of now, the total transaction fees revenue needs to be equivalent to $200, 000 K (inflation not accounted for). It means a transaction fee of $50-$100. And of course, If the fees are not enough, the network will not be very secure which means it will lose all its value! With high fees, the network can be used for high-value transactions. For instance, users may be willing to pay up to 1% as the transaction fees. Therefore, transactions of $5000 and above may seem feasible.
Bitcoin transactions are slow.
However, given the capacity of ~7 TPS, even high-value transaction confirmation may take significant time. The block time in Bitcoin is 10 minutes, therefore even if your transaction gets included in the first block itself, you may have to wait up to 10 minutes to get your confirmation. This makes it infeasible to operate on a day-to-day basis when users expect transactions to be confirmed within seconds.
Bitcoin is volatile.
Bitcoin price is highly volatile. It has depreciated in value by more than 50% multiple times in the last 1 year itself. That too when its price crossed $50, 0000. It is interesting to see that such a high-priced asset class can be this volatile! There is an argument that as the industry matures the BTC price will attain stability but it is yet to be seen. At the time of writing this article, Bitcoin was trading below its Dec 2020 levels.
Bitcoin needs a scaling solution.
Bitcoin seems to be performing well on the store of value aspect. However, it seems certain that the Bitcoin network itself can’t be used for performing day-to-day transactions. This limits the blockchain from being the unit of exchange. For becoming a global currency, Bitcoin needs a scaling mechanism. A mechanism that allows for fast, cheap, and safe transactions. Lightning Network seems to be a promising solution for addressing these pain points. However, there are certain risks associated with Lightning Network. It operates via a “Channel mechanism”. It means you can open a channel with any vendor and instead of putting all transactions on the ledger, you keep on transacting off-chain and interact with blockchain at a fixed frequency or while closing the channel. A simple analogy would be if you and Starbucks near you created a channel. Each day you buy coffee and both of you keep track. Instead of paying each day, you can just sum up and pay at the end of the month recording a single transaction on the main ledger. But there are some risks associated with the system.
So where does this leave us? Using Bitcoin, users can send high-value international transactions in 10 minutes at any time across any part of the world with no currency conversion fees, no permissions, and no bank accounts. Bitcoin via design is not inflationary eliminating the concern of currency dilution. Bitcoin protects against local currency collapses due to bad governance or many external factors. For example, during the Russia-Ukraine war, the pound lost its value by 40%, and Ukrainians lost all money in their local banks as they flee the country.
There are still many structural issues with using Bitcoin as a unit of exchange. While Lightning Network seems promising for solving many of the issues we discussed but the likeliness of Bitcoin being used as a unit of exchange for day-to-day activities still seems low. But, even so, if we imagine a world where we have a valuable asset class not being controlled by any government, country, or entity. An asset class that can’t be seized, can’t collapse, doesn’t inflate, and, can be seamlessly used as a medium of exchange across borders. I believe it would be a valuable asset class. Among all other blockchains, Bitcoin has pioneered this revolution and has done exceedingly well in gaining trust and accruing value. Therefore, in my opinion, it seems unlikely that Bitcoin will ever go to 0!