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Bitcoin is still biting the dust

Kevin Dowd is Professor of Finance and Economics at Durham University's Business School and co-author of the 2015 "Bitcoin Will Bite the Dust" newspaper.

For more information about Bitcoin's 10th anniversary, visit our new interactive feature Bitcoin At 10.


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 with a single manufacturer is most efficient.

This discovery was a shock, but the implication was clear: Bitcoin could not survive in the long run. As a check, I've tested my reasoning on several people who are economically educated. Nobody contradicted.

When I came to this conclusion, the price of Bitcoin was $ 379. Since then, the price has risen to nearly £ 20,000 and dropped to $ 3,621 at the time of writing.

Does the subsequent pricing behavior of Bitcoin mean that my prediction was wrong? I still think that the long-term equilibrium price of Bitcoin is zero. It 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 core value of Bitcoin. Second, in markets without regulatory barriers to entry, an inferior product can not last long. Each of these arguments is enough to conclude that the price of Bitcoin must be zero in the long term.

Together, they are more than enough for this conclusion.

I have not received a single smart challenge for this argument from the Bitcoin community. Instead, the typical reaction was personal abuse. Name calling is not a substitute for a well-founded answer.

Consider these two arguments in turn.

Bitcoin mining is a natural monopoly

To work as intended, the Bitcoin system requires atomic competition from miners who validate transaction blocks when searching for re-stamped bitcoins. However, mining 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 uneven: the built-in centralization tendencies of the natural monopoly mean that mining companies are getting bigger and bigger – and eventually create an actual monopoly if the system does not break down first.

The result is that the Bitcoin system is not sustainable. Since what will not continue will stop, it must be concluded that the Bitcoin system inevitably collapses. The only question is when.

I could talk at length about how this tendency toward centralization will ultimately destroy every single component of the Bitcoin value proposition and knock it down like a series of dominoes: the first falling domino will distribute confidence, the most notable attraction of Bitcoin; The system will then trust that the dominant player is not abusing his power.

This player becomes a point of failure for the entire system. Therefore, the function "no single fault point" of the system disappears. Then, the pseudo-anonymity will disappear as the dominant player will be forced to abandon the usual anti-anonymity provisions, which are legitimate as means of ending money laundering and the like, but destroying financial privacy.

Even the Bitcoin protocol, the constitution of the system, is finally undermined. Each component of the Bitcoin suggested value is destroyed. The Bitcoin system then becomes a house of cards: there is nothing left in the system to gain confidence in the system.

An inferior product can not survive

There is also the argument that the price of Bitcoin must go to zero, because an inferior product without regulatory barriers to entry can not survive in the long term.

Imagine, you have a market without barriers to entry. The first company to hit the market has 100 percent of market share, just like Bitcoin once did. Competitors then come along and invade the market.

Some of these products offer products that are superior to the one produced by the first company, not least because their manufacturers have learned from some design flaws of the product of the first company. And ultimately, superior competitors completely displace it, and the market share of the first product is close to zero.

There is evidence that this process is ongoing in the Bitcoin market: According to CoinMarketCap, Bitcoin's share of the cryptocurrency market had fallen to 94.29 percent by 28 April 2013 (the first date data are submitted) ) to 52.29 percent from today.

This decline was not consistent – we would not expect that – but the direction of travel is clear: Bitcoin is losing market share. Another question is whether the market share will continue this downtrend and gradually fade out or suddenly pop up. I suspect the end will come when something triggers a sell-off that results in the Bitcoin price falling to a natural long-term level, zero.

The history of innovation also confirms my belief that Bitcoin can not last indefinitely.

The innovators – the early movers in a market – seldom survive long-term free entry. An example is the Ford Model T. This car was first produced in 1908 and soon dominated the market. The competitors, however, learned of their design flaws and built better cars that eventually stole their market share. The Ford Model T survives only as an antique.

The difference between the Ford Model T and Bitcoin, however, is that Bitcoin has no ancient value. Do I still think Bitcoin will bite the dust? you bet

Rusted car over Shutterstock


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