{"id":303,"date":"2018-04-13T21:03:04","date_gmt":"2018-04-13T21:03:04","guid":{"rendered":"http:\/\/meanreversion.org\/?p=303"},"modified":"2018-04-13T21:03:04","modified_gmt":"2018-04-13T21:03:04","slug":"bitcoin-bubble-or-beginning-both-part-ii","status":"publish","type":"post","link":"https:\/\/meanreversion.org\/index.php\/2018\/04\/13\/bitcoin-bubble-or-beginning-both-part-ii\/","title":{"rendered":"bitcoin – Bubble or Beginning? Both! Part II"},"content":{"rendered":"

When I\u00a0last wrote<\/a>\u00a0on bitcoin, the price was somewhere in the vicinity of $4,500. Bitcoin’s price continues to defy gravity. Not just defy gravity, the price has gone up vertically! It has more than tripled in three months since I last wrote. I don\u2019t know of any other asset\/currency that has moved up in value so fast….ever.
\nIs this a bubble?<\/strong>\u00a0Even if one considers the possibility that this is not a bubble, one is left with the unanswered question what could have possibly changed over the last year (1500%+), month (100%+), or week (40%+) to have warranted such drastic changes in value.
\nThere can be a handful of potential reasons:<\/p>\n

    \n
  1. there has been a\u00a0rapid adoption<\/strong>\u00a0of the bitcoin “currency”<\/li>\n
  2. it is in the “design<\/strong>” of Bitcoin system<\/li>\n
  3. we are witnessing\u00a0mass speculation<\/strong>\u00a0on the bitcoin “asset”<\/li>\n<\/ol>\n

    I think we can safely agree the explanation\u00a0cannot be rapidly growing adoption<\/strong>. To justify a $15,000 value for a bitcoin, assuming it has the same velocity\u00a0as a US dollar, it would need to represent 6% of all transactions. That is far from true today: even the lead users might not use bitcoin that frequently.
    \nOf course, as discussed in a\u00a0    previous blog<\/a>, the velocity of bitcoin is far slower and it only represents a much smaller share of transactions. This “slow velocity” or constrained supply of bitcoin is what I believe is responsible for the rapid price increases. Moreover, demand from ICOs and speculators is squeezing that supply.
    \nTo cross check this understanding and\u00a0the design of the network<\/strong>, I researched bitcoin mining economics, and here is what I found. Most of this data comes from\u00a0    Blockchain.info<\/a>and is readily available to anyone to replicate these calculations.<\/p>\n

      \n
    1. Bitcoin is a very poor payment system. The cost of running the Bitcoin network is ~$6.5M\/day and the transaction fee covers only $3M\/day. The fee doesn\u2019t cover the cost of running the network despite the fee per transaction already being an insane $50+\/transaction. Per some observers, the cost per transaction on the bitcoin network is 1000x more expensive vs Visa\/Mastercard network.<\/li>\n
    2. Mining today (at $15,000 per coin) is very profitable, but only because of the mining reward. The reward for confirming a block for the network is\u00a012.5 bitcoins. This represents today 80% of the revenue that the network makes. With this reward there is a strong incentive to mine coins (75%+ gross margin), without this reward, there is no incentive to mine.<\/li>\n
    3. And in case you wonder who pays for this mining reward, it is everyone who owns a bitcoin. Mining reward (today) corresponds to an annual 3.5% tax on all bitcoin owners.<\/li>\n
    4. But the long term supply of bitcoin is limited to 21M coins, and the system is designed such that the mining reward for solving the block should half every four years.<\/li>\n
    5. Here in lies the\u00a0the circularity. There are only two ways to keep the mining network running economically<\/li>\n<\/ol>\n