The future of bitcoin

Bitcoin’s future is uncertain. Find out what the future could hold for the cryptocurrency, including what will happen when all 21 million coins have been mined, and where its price and market capitalisation could be headed.

Bitcoin
Source: Bloomberg

Bitcoin was launched in January 2009 when its mysterious creator — Satoshi Nakamoto — distributed a download link for the cryptocurrency’s software via the 'Cypherpunks’ mailing list, an email chain read only by those with an interest in computer science and cryptography. Adoption was initially very slow and many of the first transactions were carried out to test the software, rather than to transfer any value (bitcoin’s price was under $0.01 throughout 2009). In fact, it wasn’t until May 2010 that the first real-world transaction was carried out using bitcoins, when 10,000 of them were used to buy just a couple of pizzas.

Yet despite these modest beginnings, the cryptocurrency has grown over the last decade to become a household name, with its price peaking at almost $20,000 a coin in December 2017. But with bitcoin’s price falling substantially in 2018, speculation is rife over what the future holds for the cryptocurrency and its network. Some believe that it will always be the market-leading cryptocurrency, and that its price will rise to peak at levels substantially higher than before, while others believe that it is only a matter of time before its market capitalisation is exceeded by an altcoin — an event that would be known as the ‘flippening’.

Is bitcoin the future of money?

In its current form, bitcoin does not appear to be the future of money and it seems unlikely to replace traditional ‘fiat’ currencies any time soon. There are several reasons for this.

Firstly, bitcoin transactions are much slower than payment systems such as SWIFT because its blockchain is designed to process a set of transactions only around once every ten minutes. This problem has been exacerbated in recent years, as the capacity of the network has been pushed beyond its limits. This has led to some transactions remaining ‘pending’ for days before they have been collated into blocks on the blockchain.

Secondly, while bitcoin can be exceptionally secure for those that understand the technology and know how to use it, this security has proven to be a bit of a double-edged sword for many others. Wallets, for example, are secured by a 256-character ‘private key’, which cannot be retrieved if lost or stolen because there is no third party securing transactions or confirming identities. These private keys have proven to be unwieldy for some users and a large number of bitcoins have been lost irretrievably due to user error and theft hardly surprising, when you consider that most people are only used to looking after a four-digit pin.

Thirdly, bitcoin’s price has proven to be very volatile, which means that anyone looking to accept payments in the cryptocurrency needs to continually adjust their prices to make sure that the figure is reflective of the real-world value of their goods. Very few venders accept bitcoin because of this, with research by Morgan Stanley suggesting that less than 1% of the top 500 online retailers were accepting the cryptocurrency in 2017.

Fourthly, there is also an issue with bitcoin mining, which consumes approximately the same amount of electricity per annum as some small countries. For this reason, bitcoin seems unlikely to scale to the extent required to replace a fiat currency.

Finally, bitcoin faces stiff competition from rival cryptocurrencies, many of which have features that exceed its capabilities — for example, by offering faster transaction speeds and more efficient mining. These technological advancements could see some other cryptocurrencies become more widely adopted in the future.

However, it is worth mentioning that a large number of developers are currently working on possible technical solutions to many of the issues facing bitcoin, which could see its own adoption soar. Any change is likely to involve edits to bitcoin’s software, through a process known as forking.

What will the supply of bitcoin be in the future?

There are currently more than 17 million bitcoins in circulation, but that number is set to increase until there are a total of 21 million. New bitcoins are created through a process known as mining, whereby computers in the network compete to add new blocks (containing transactions) to the blockchain by solving cryptographic puzzles.

The reward for mining a new block the ‘block reward’ is currently 12.5 new bitcoins, which are generated by the software automatically. This reward halves every 210,000 blocks (roughly every four years), so this number is likely to be reduced to 6.25 bitcoins sometime in 2020. Users generating new blocks also receive transaction fees, paid by the users whose transactions are included in the block.

What will happen to bitcoin when all 21 million are mined?

Current estimates suggest that the last bitcoin will be mined in the year 2140, or thereabouts. At this point, there will be a fixed supply of 21 million coins. Miners will continue to mine new blocks but will not receive a ‘block reward’. Instead, they’ll only receive the transaction fees paid by those sending funds.

However, as some bitcoins will inevitably be rendered irretrievable by users who forget their private keys or send the cryptocurrency to non-existent addresses, the number of usable coins is likely to decrease over time. As a result, bitcoins will become increasingly scarce, which could see them rise in value.

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What is bitcoin’s market capitalisation and where it is heading?

Bitcoin’s market capitalisation is calculated by multiplying the cryptocurrency’s current price by the total number of coins in circulation. Bitcoin’s market cap has gone from close to $0 when it launched in 2009 to a peak of $300 billion in December 2017. However, for most of 2018 its market cap fluctuated between $100-$200 billion. This extreme volatility means it difficult to make predictions about its future market capitalisation.

However, putting this major caveat to the side for a moment, bitcoin’s market capitalisation could rise if technological advancements can overcome some of the issues discussed earlier — for example, if a fork improves transaction speeds or the network’s capacity. Its price and market capitalisation are therefore very likely to move in response to any forks that are widely adopted by the network.

Equally, its market capitalisation could fall if the network cannot reach consensus on a way to improve bitcoin’s underlying software. This is because many of its biggest competitors use more advanced technology, which could see them more widely adopted in the future. If a ‘flippening’ were to happen, bitcoin’s price would be likely to fall dramatically.

Bitcoin price predictions

It is difficult to make bitcoin price predictions because cryptocurrencies are a new asset class and it is not yet clear how the market will develop. Some think that bitcoin has peaked and is now on the decline, while others insist that the bitcoin revolution has only just begun and that each coin has a ‘true value’ that greatly exceeds its current price.

For example, Tim Draper — the founder and managing director of venture capital firm Draper Fisher Jurvetson — once forecast that its price would reach $250,000 per coin by the end of 2022. Steve Strongin, the head of global investment research at Goldman Sachs, on the other hand, has said that he expects the majority of first-generation cryptocurrencies to eventually fall to $0, as they are ‘too primitive’ to remain competitive in the long run.

What these examples illustrate is that there is no consensus about where bitcoin’s price is headed — the only thing that seems certain is that its price will be volatile. For this reason, if you are planning to trade bitcoin, you should learn about the factors that can affect its value, including press coverage and industry adoption, and how to manage your risk using stops and limits.

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