The price of Bitcoin is highly volatile. No one knows how prices will evolve in the short term, let alone several years into the future. In this post we analyze 6 possible scenarios for the future of Bitcoin, and how its price could evolve in each of them.
- Future potential scenarios for Bitcoin:
Bitcoin is one of the most popular assets of the last decade. The dramatic price increases, its unprecedented volatility, and what it represents have made attracted the attention of the investing public. As a result, a lot more people have started to consider cryptocurrencies as a viable option for their investment portfolio.
The main question people ask themselves is: What is the future of Bitcoin? It is difficult to imagine how things will look like with any degree of certainty. What every would agree on is that it is an asset that offers both tremendous upside potential and a lot of downside risk.
For this reason, we will analyze 6 possible scenarios for the future of Bitcoin. Any of them could happen within the next decade. Although not all of them are equally likely.
1) Bitcoin as global reserve currency
The most optimistic scenario is for Bitcoin to become the global reserve currency in the future. In such a case, Bitcoin would replace the US Dollar as the main currency in which citizens, companies and governments carry out most of their transactions and keep their savings in.
That does not mean that other currencies would disappear. They would continue to coexist. But the main currency would be Bitcoin and, as a result, the issuers of the other main currencies, especially the United States and the Euro Zone, would lose the option to expand their money supply with hardly any consequences.
This scenario would cause very important social, economic and geopolitical changes. It would make the world much fairer. The era of large public deficits and debt would come to an end. All countries would be equal when it came to international trading. And saving would begin to be a priority over borrowing.
Some things that could happen if Bitcoin became the global reserve currency:
- We travel all over the world and can pay in Bitcoin virtually everywhere.
- China buys oil from Russia and pays in Bitcoin.
- Bitcoin is the main currency in which countries have their foreign reserves.
- A South African company listed on the London Stock Exchange presents its annual results in Bitcoin.
Consequences for the price of Bitcoin: extremely positive.
2) Bitcoin as a store of value
Another option is that Bitcoin does not manage to replace the US Dollar as the global reserve currency but consolidates itself as a reputable store of value. In this scenario, people would still use mostly Dollars, Euros, or other fiat currencies to transact, but would consider using Bitcoin as a savings vehicle, very much like they use gold.
Governments and central banks would maintain their power to expand the money supply if they want to. This means large public deficits would remain. And inflation would continue to erode the real value of people’s savings and wages.
Nonetheless, people would be able to invest their money in Bitcoin to protect it from currency devaluation. While the price of Bitcoin would fluctuate continuously, it would have ceased to be so volatile. And the long-term trend would be bullish.
Bitcoin’s capitalization and liquidity would have increased to such an extent that large institutions, including many governments, could buy and sell large amounts without hardly moving the market.
In this second scenario, Bitcoin would have a role like that of gold today. It is a diversifying safe haven asset, capable of maintaining its long-term purchasing power. Bitcoin could be used as a form of payment in many places, but payments would mainly continue to be in done in other currencies.
Gold would probably maintain its important place in the financial system. In fact, in a scenario like this, there would be room for both assets. If we look at historical data, we will see that gold today represents a much smaller percentage in investors’ portfolios than was the case many decades ago. As a result, there is space for both gold and Bitcoin to the detriment of stocks, bonds and cash.
Consequences for the price of Bitcoin: very positive. The price of Bitcoin would have gone up quite dramatically.
3) Bitcoin as a speculative asset
In this third scenario, Bitcoin would remain an important asset but of speculative nature. Speculative does not mean bad. It just means that it has a lot of risk due to its elevated volatility.
Although we may think that we would now the future of Bitcoin in 10 years, that is not such a long time. As a result, we many questions can remain open.
Changes in the regulatory landscape, potential bans, adoption by companies and individuals, the state of the world economy, and monetary policy, are all things that could affect the price trajectory of Bitcoin, either positively or negatively.
In this scenario, it is still possible that the long-term price trend remains to the upside.
Consequences for the price of Bitcoin: quite positive.
4) Bitcoin replaced by another cryptocurrency
In another potential scenario, Bitcoin could be replaced by another cryptocurrency as the main token in the space. Historically, Bitcoin has represented somewhere between 50 and 80% of the combined market capitalization of all cryptocurrencies in existence, well ahead of Ethereum and the rest.
The biggest advantages of Bitcoin are that it was the first cryptocurrency created, and hence enjoyed great adoption, and its decentralization.
The network effect resulting from its adoption makes it very difficult for another cryptocurrency to take over its crown. It would be like replacing Facebook or Twitter as the leading social media platforms. While possible, it would be a very difficult undertaking.
Should Bitcoin be replaced by another cryptocurrency in the future, this new cryptocurrency could be one in existence today or one yet to be created. It would need to have most of its positive features, along many more.
Consequences for the price of Bitcoin: quite negative. Bitcoin would continue to exist and the cryptocurrency market would likely continue to grow. But Bitcoin’s price could take a hit.
5) The need for Bitcoin disappears
Bitcoin was born out of the need to have a currency that would be fair and not respond to the interests of any country or government. In other words, a currency that could not be abused by anyone.
The most important feature in this regard is that Bitcoin cannot be created out of thin air. As a result, no one has the power to devalue it unilaterally. Because of the need for assets that would maintain its purchasing power, historically gold, and to a lesser extent silver, have been used as money throughout history.
However, we need to bear in mind that gold has not always been used as money by everyone all the time. There have been periods of even a few decades in which people used and trusted fiat currencies.
Of course, all societies have eventually gone back to gold. But in the short and medium term, fiat currencies can also work. Until governments end up abusing their power and creating too much of it.
In this scenario, central banks would manage to raise interest rates and keep them elevated. This could lead to inflation being under control and asset prices deflating. The wealth gap could be reduced. People would have the option to save money again, without having to invest in risky assets just to keep up.
This is what happened in the early 1980s. After an entire decade of inflation and currency devaluation, where everyone thought the US Dollar was doomed, the Federal Reserved managed to raise interest rates so much that it made saving in US Dollars attractive again.
The result was that gold and silver prices went down uninterrupted for a period of 2 decades. Why buy precious metals when US Dollars pay high interest rates and do not lose much value?
The same thing could happen again. And while it would be negative for the price of Bitcoin and precious metals, it would certainly be positive for society as a whole. Very few people deny the prosperity experienced in the West throughout the 1980s and 1990s.
Consequences for the price of Bitcoin: very negative.
6) Bitcoin disappears or is irrelevant due to government actions
Finally, the sixth possible scenario for Bitcoin is the most negative, both for the cryptocurrency and society itself. We are talking about almost all governments prohibiting the use or possession of Bitcoin. To accomplish this, they could start to criminally prosecute those people who do not follow the law.
Some readers would simply say that Bitcoin is totally unconfiscatable, but that is not the point. Governments can introduce measures of all kinds to boycott all connections between Bitcoin and traditional finance. They can also set heavy penalties for those transacting in and owning Bitcoin.
Admittedly, it would still be possible to go to a third world country and use Bitcoin there. However, most important are not that going to do that. If the government announces bans and even jail time for owning Bitcoin, people and businesses will simply stop using it.
In such a scenario the price of Bitcoin may fall to practically 0. Although if that scenario were to take place, the price of Bitcoin would be a secondary problem. People would have to worry a lot more about the level of government intervention in the economy and people’s lives.
Consequences for the price of Bitcoin: extremely negative.
Calculating a target price for Bitcoin is an extremely complicated task. We could even say impossible. There are many variables at play, and the situation is constantly changing.
One thing we can try to do is estimate what the price of Bitcoin would be in each of the 6 future scenarios we have just discussed. After that, we could estimate the probability of each of the 6 scenarios taking place.
In any case, while it is useful to do those simulations, especially if we want to plan our investments and strategize our next steps in life, we should take the actual price estimations with a grain of salt.
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And if you want to read a comparison between gold and Bitcoin, check out the following link:
Comparison between Gold and Bitcoin