Bitcoin Will Still Bite the Dust
Kevin Dowd is a professor of finance and economics at Durham University's Business School and co-author of the 2015 paper "Bitcoin Will Dite Dust".
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In August 2014, I discovered that the Bitco mining industry has a natural monopoly structure. Natural monopoly is a market where producers produce the most efficiently from a single producer.
This discovery was shocking, but its meaning was clear. Bitcoin could not survive in the long run. As a check, I tested my logic for several economically savvy people. Nobody agreed.
When I first arrived at the conclusion, the price of the bit coin was $ 379. Since then, the price has risen to almost £ 20,000 and has since dropped to $ 3,621 in writing.
Does the subsequent price action of the bit coin mean my prediction is wrong? no. I still think that the long-run equilibrium price of bit coin is zero. It did not bite the dust yet.
My reasoning is based on two simple economic arguments. The first is that the bitco industry is a natural monopoly and the natural monopoly undermines the core value proposition of Bitcoin. Second, inferior products in markets without regulatory barriers can not survive for long. One of the arguments is enough to conclude that the price of a bit coin should be zero in the long run.
Together, they are enough to establish that conclusion.
I also have not heard a single intellectual challenge to this debate in the Bitcoin community yet. Instead, a typical response is personal abuse. However, name calls can not replace reasonable responses.
Let's take a look at these two arguments in turn.
Bitcoin Mining is a Natural Exclusive
To operate as intended, the bit coin system requires atomic contention on the miner side that validates the transaction block when retrieving the newly issued bit coin. However, mining is characterized by economies of scale.
In fact, the economy of this scale is so large that the industry is a natural monopoly. The problem is that nuclear competition and natural monopoly do not coincide. The built-in convergence trend of natural monopolies means that mining companies will grow bigger and bigger and eventually produce real monopolies unless the system collapses.
The implication is that the bitcoin system does not last. We have to conclude that the bit coin system will inevitably collapse because things can not continue. When is the only question?
This centralized trend can eventually last a long time as to how to destroy every single component of the bit coin value proposition and knock it out like a series of dominoes. The first Domino is the most notable attraction of distributed trust, Bitcoin. The system will rely on trust in the dominant player to avoid abusing power.
Since this player is a failure point for the entire system, the "no single point of failure" function of the system is also lost. The anonymous anonymity is then applied because the dominant player has no choice but to enforce the general semi-anonymity rules justified as a means to prevent money laundering, but in fact it is intended to destroy financial privacy.
Bit coin protocol, even the configuration of the system will eventually be overturned. Every component of the bit coin value proposal is destroyed. The bit coin system will be a card house. There is nothing left in the system to maintain trust in the system.
Inferior products can not survive.
It is also argued that bit-coin prices should be zero because inferior products can not survive in the absence of regulatory barriers.
Imagine there is a market without entry barriers. The first company to enter the market was Bitcoin, which once accounted for 100% of the market share. Competitors enter the market and enter.
Some of them offer superior products than those produced by the first company. This is because the creator has learned some of the design flaws in the first company product. And eventually the excellent competitors will replace it completely and the market share of the first product will go to zero.
According to CoinMarketCap, bitcoin's cryptocurrency market share dropped to 94.29% to 52.29% by April 28, 2013 (the first date that data was provided). Until today.
This fall was not constant. We do not expect that. But the direction of the trip is clear. Bitcoin is losing market share. Whether the market share will continue to decline, gradually disappear or suddenly pop up is another matter. I think it will end when the price of the bit coin triggers a selloff that drops to the natural long-term level of zero.
The history of innovation supports my belief that bitcoin can not last indefinitely.
The innovator – the early actor of the market – can hardly survive under free entry conditions. The example is the Ford Model T. This car was first produced in 1908 and soon came to dominate the market. However, competitors made better cars due to design flaws and eventually took over market share. The Ford Model T now survives only as an antique.
But the difference between the Ford model T and the bit coin is that the bit coin has no antique value. Do I still think the bit coin would bite the dust? I bet.
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