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Kevin Dowd is a professor of finance and economics at the Durham University Business School and coauthor of the 2015 paper "Bitcoin Will Bite the Dust".
For more information on bitcoin's tenth anniversary, take a look at our new interactive Bitcoin At 10 feature.
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In August 2014, I discovered that the bitcoin mining industry had the industrial structure of a natural monopoly. A natural monopoly is a market in which production is more efficient with a single producer.
This discovery was a shock, but the implication was clear: Bitcoin could not survive long-term. As a check, I have tested my reasoning on various people who are economically educated. Nobody disagrees.
When I arrived at that conclusion, the price of bitcoin was $ 379. Since then, its price has risen to nearly £ 20,000 and has since fallen to a value of $ 3,621 at the time of writing.
Does the subsequent bitcoin pricing behavior mean that my prediction was wrong? No. I still think that the long-term equilibrium price of bitcoin is zero. He has not bitten the dust yet.
My reasoning is based on two simple economic arguments. The first is that the bitcoin mining industry is a natural monopoly and a natural monopoly undermines the bitcoin value proposition. The second is that in markets with zero regulatory entry barriers, a lower product can not survive in the long run. One of these arguments is sufficient to conclude that the price of bitcoin must go to zero in the long run.
Together, they are more than enough to establish this conclusion.
I still have to listen to a single intelligent challenge to this bitcoin community topic. Instead, the typical response was personal abuse. However, the Name-Call does not replace a motivated answer.
Let's consider these two topics in turn.
Bitcoin Mining is a natural monopoly
To work as expected, the bitcoin system requires atomistic competition from miners who validate transaction blocks in their search for recently minted bitcoins. However, the mining industry is characterized by great economies of scale.
In fact, these economies of scale are so great that industry is a natural monopoly. The problem is that atomistic competition and a natural monopoly are inconsistent: the tendencies of centralizing the natural monopoly mean that mining companies will grow larger and eventually produce a true monopoly unless the system collapses before then.
The implication is that the bitcoin system is not sustainable. Since what can not continue will stop, it must be concluded that the bitcoin system will inevitably collapse. The only question is when.
I could go on and on about how this centralizing tendency will eventually destroy every single component of the bitcoin's value proposition, knocking them down like a row of domains: the first domino to fall will be distributed trust, the most notable attraction of Bitcoin; the system will then depend on trust in the dominant player so as not to abuse his power.
This player will become a point of error for the system as a whole, so even the "no single point of failure" feature of the system will disappear. So the pseudo-anonymity will go, as the dominant player will be forced to impose the usual anti-anonymity rules justified as a means of stopping money laundering and things like that, but which are actually designed to destroy financial privacy.
Even the bitcoin protocol, the constitution of the system, will eventually be subverted. Each component of the bitcoin value proposition will be destroyed. The bitcoin system will then become a house of cards: there will be nothing left in the system to maintain trust in the system.
A lower product can not survive
There is also the argument that the price of bitcoin must go to zero because a lower product can not survive in the long term in the absence of regulatory barriers to entry.
Imagine having a market without barriers to entry. The first company to enter the market has 100% of the market share, as the bitcoin once did. The competitors then arrive and make incursions into the market.
Some of these offer products that are superior to the product produced by the first company, partly because their manufacturers have learned from some of the design flaws in the product of the first company. And in the end the superior rivals completely eliminate it and the market share of the first product is zeroed.
There is some evidence to suggest that this process is working in the bitcoin market: according to CoinMarketCap, the bitcoin share of the cryptocurrency market had fallen to 94.29% by April 28, 2013 (the first date they provide data) to 52.29% by today.
This decline was not uniform, we would not expect it, but the direction of the journey is clear: the bitcoin is losing its market share. If its market share will continue this downward trend and will gradually fade or suddenly become pop it will be another problem. I suspect the end will come when something triggers a selloff that brings the price of Bitcoin down to its natural long-term level of zero.
The history of innovation also supports my belief that bitcoin can not last indefinitely.
The innovators – the first engines of a market – rarely survive in the long term under conditions of free entry. An example is the Ford Model T. This car was produced for the first time in 1908 and soon came to dominate the market. But competitors have learned from design flaws and built better cars, which eventually stole its market share. The Ford Model T now only survives as an ancient.
The difference between the Ford T model and the bitcoin, however, is that the bitcoin has no ancient value. Do you still think that the bitcoin will bite the powder? You bet.
Rusted machine via Shutterstock
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