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Back in August 2014, I discovered that the bitcoin mining industry had the economic structure of a natural monopoly. A natural monopoly may be a market during which production is most effective with one producer.
This discovery came as a shock, but the implication was clear: Bitcoin couldn’t survive within the end of the day . As a check, I field tested my reasoning on various people that are economically literate. None disagreed.
When I first received that conclusion, bitcoin’s price was $379. Since then, its price rose to just about £20,000 and has since fallen to a worth $3,621 at the time of writing.
Does the next price behavior of bitcoin mean my prediction was wrong? No. I still think that the long-run equilibrium price of bitcoin is zero. It just hasn’t bitten the dust yet.
My reasoning is predicated on two simple economic arguments. the primary is that the bitcoin mining industry may be a natural monopoly and a natural monopoly undermines bitcoin’s core value proposition. The second is that in markets with zero regulatory entry barriers, an inferior product cannot survive long-term. Either of those arguments is sufficient to supply my conclusion that the worth of bitcoin must attend zero within the future .
Together, they’re quite sufficient to determine that conclusion.
I have also yet to listen to one intelligent challenge to the present argument from the bitcoin community. Instead, the standard response has been personal abuse. Name-calling is not any substitute for a reasoned response, however.
Let’s consider these two arguments successively .
Bitcoin mining may be a natural monopoly
To work as intended, the bitcoin system requires atomistic competition on the a part of the miners who validate transactions blocks in their look for newly minted bitcoins. However, the mining industry is characterized by large economies of scale.
Indeed, these economies of scale are so large that the industry may be a natural monopoly. the matter is that atomistic competition and a natural monopoly are inconsistent: the built-in centralization tendencies of the natural monopoly mean that mining firms will become bigger and larger – and eventually produce an actual monopoly unless the system collapses before then.
The implication is that the bitcoin system isn’t sustainable. Since what cannot continue will stop, one must conclude that the bitcoin system will inevitably collapse. the sole question is when.
I could continue at length about how this centralizing tendency will eventually destroy every single component of the bitcoin value proposition, knocking them down sort of a row of dominos: the primary domino to fall are going to be distributed trust, Bitcoin’s most notable attraction; the system will then come to depend upon trust within the dominant player to not abuse its power.
This player will become some extent of failure for the system as an entire , therefore the “no single point of failure” feature of the system also will disappear. Then pseudo-anonymity will go, because the dominant player are going to be forced to impose the standard anti-anonymity regulations justified as means to prevent concealment and such like, but which are really intended to destroy financial privacy.
Even the bitcoin protocol, the constitution of the system, will eventually be subverted. Every component of the bitcoin value proposition are going to be destroyed. The bitcoin system will then become a house of cards: there’ll be nothing left within the system to take care of confidence within the system.
An inferior product cannot survive
There is also the argument that the worth of bitcoin must attend zero because an inferior product cannot survive long-term within the absence of regulatory barriers to entry.
Imagine you’ve got a market with no entry barriers. the primary firm to enter the market has one hundred pc of the market share, as bitcoin once did. Competitors then come along and make inroads into the market.
Some of these offer products that are superior to the merchandise produced by the primary firm, not least because their producers have learned from a number of the planning flaws within the first firm’s product. And eventually superior rivals displace it completely and therefore the market share of the primary product goes to zero.
There is some evidence to suggest that this process is at add the bitcoin market: consistent with CoinMarketCap, bitcoin’s share of the cryptocurrency market had fallen to 94.29 percent by April 28, 2013 (the first date that they supply data) to 52.29 percent by today.
This fall has not been uniform – we might not expect that – but the direction of travel is clear: bitcoin is losing its market share. Whether its market share will continue this downward trend and gradually dissolve or suddenly go pop is another issue. i think the top will come when something triggers a selloff that leads the Bitcoin price to fall its natural long-run level, zero.
The history of innovation also supports my belief that bitcoin cannot last indefinitely.
The innovators – the first movers during a market – rarely survive long-term under conditions of free entry. An example is that the Ford Model T . This automobile was first produced in 1908 and shortly came to dominate the market. But competitors learned from its design flaws and built better cars, which eventually stole its market share. The Ford Model T now survives only as an antique.
The difference between the Ford Model T and bitcoin, however, is that bitcoin has no antique value. Do I still think that bitcoin will bite the dust? and how .