I purchased this wine using the Lightning Network, built upon the Bitcoin Network.
The stock market is up about 40% in 2023. Not bad, but Bitcoin was better, up about 160%. No doubt to the ire of those who keep publicly predicting the demise of Bitcoin (474 times to be exact), based on their faulty premise that the demand for Bitcoin is entirely speculative in nature.
I disagree, and here are three reasons why even after this year’s price run-up, there may be even more demand for Bitcoin. And if combined with limited supply, may result in even higher prices.
Reason #1, Global Inflation
Consider this recent post, where Niall Ferguson (my favorite economist), made the observation that “of the 191 countries in the world for which data are available from the International Monetary Fund, only 22 have seen consumer prices rise by less than 10% since 2019.”
Here is the breakdown:
Milton Friedman was right of course when he stated that in the long term, “inflation is always and everywhere a monetary phenomenon.” Meaning that it is the direct result of government over-spending and reserve bank over-accommodation.
As all governments continue to deflate their respective fiat currencies, while enforcing laws that restrict the transfer of wealth, why would ordinary citizens not seek an alternative asset to shield their legally obtained wealth from confiscation via the invisible inflation tax?
If this global fiat currency devaluation increases, one should expect the demand for Bitcoin to increase.
Reason #2, The Bitcoin ETF’s
What is missing is a convenient and secure method for the average investor to buy, hold and sell Bitcoin, being just another part of their investment portfolio. This will soon change as the SEC appears to be on the verge of approving a Blackrock managed Bitcoin ETF, plus at least three other Bitcoin ETF’s.
Each of these ETF’s will require a reservoir of Bitcoin, enough to absorb the ETF buy orders. The initial filling of these reservoirs, accomplished by buying Bitcoin on the open market, will temporarily increase the demand for Bitcoin. In the long term, as investors place additional FTF buy orders, even more Bitcoin will have to be purchased on the open market to replenish these reservoirs, creating even more demand.
Reason #3, The Lightning Network
Slowly but surely the Lightning Network Payment System, built upon the Bitcoin Network, is coming to life. Whereas Bitcoin is not an efficient payment system, Lightning payment transactions are instantaneous and very cost-efficient. Very similar to purchasing products using the debit card stored on your device, the difference being that you will not be making the credit card companies even richer.
Product evolution can be so inconvenient for the entrenched.
Payments over the Lightning Network require the creation of many “payment channels”. The creation of each of these channels requires a one-time purchase of Bitcoin, in that moment creating additional demand for Bitcoin. When a payment channel is closed, and that can take years, the Bitcoin is sold, reversing that demand. However, as the usage of the Lightning Network increases, as more and more payment channels are created, more Bitcoin will need to be purchased, and stored “off-chain”.
The capacity of the Lightning Network, as measured in the amount of Bitcoin allocated to payment channels, can be found here. This also can be thought of as a “Bitcoin Reservoir”, and that every time it increases in size, there is additional demand for Bitcoin. And vice versa.
Don’t Forget About the Supply
Like any other financial asset, the price of Bitcoin is established at markets, a balance between supply and demand. And like many other assets, most Bitcoins are held in cold storage, like homes that are not on the market. Just as only some homes are listed for sale on any given day, only some Bitcoins are available for sale at any given time.
It is this limited supply, combined with demand, that establishes the price. If the supply remains constant, then any increase in demand increases the price. However, logic tells us that as the price increases, more are likely to “cash out”, thus it should be expected that as the price increases, the supply also increases, thus dampening any further price increase. If the supply increases more than the demand increases, the price will then decrease.
This is true for any financial asset.