The case for the $1 million bitcoin

Thursday 08 May 2014

Will bitcoin prices hit USD $1M each in this decade? Will the price of bitcoins collapse, heading toward or actually reaching zero?

BitScan: Bitcoin worth $1million

This is not purely an issue of faith, there are logical reasons for holding either of those views - but it seems likely that only one of those scenarios will come to pass. 

Many people believe bitcoins will appreciate in value substantially in the years to come. They often point out that investing in bitcoin and holding for one year or more at any point in its five-year history would have earned the investor a substantial return. Aside from that historical evidence, which of course is no predictor of future events, there are sensible reasons to believe that the price may rise dramatically in a few short years.

Xapo CEO Wences Casares, during an interview with the Wall Street Journal, boldly predicted that in ten years one bitcoin would be worth between half a million and one million US dollars. He cited bitcoin's stickiness in many developing nations as the primary driver, and described his experience growing up in Argentina. His family lost their savings once due to runaway inflation, once to government seizure, and once again as a result of currency devaluation.

Bitcoin offers great value in many parts of the developing world, where it is the most convenient and efficient alternative to failed national currencies. In authoritarian regimes with strict capital controls it can be accumulated and spent without anyone's permission, and transferred across borders quickly and quietly. People everywhere want to have the ability to save their earnings – for retirement, to send their children to school, to relocate to a place with more promise, and so on. Even a volatile store of value is very attractive when your national currency is hopeless. This utility should generate persistent demand over time.

Henry Blodgett, CEO and Editor-In Chief of Business Insider, also believes that we could see one million dollar bitcoins. He explains the rationale for investors to look favorably at the risk/reward ratio. "I have explained why Bitcoin speculators are just laughing at everyone who thinks they are idiots for buying Bitcoin," he says. Mr. Blodgett believes that could happen "because Bitcoin's price could theoretically rise 1,000%, 10,000%, 100,000%, or more, whereas the most you can lose on your Bitcoin investment is 100%."

Mr. Blodgett makes a great point. Supply and demand will dictate the market price, and those two forces seem to be diverging. The thing about bitcoins is they are relatively scarce, and demand continues to grow at a frantic pace. Meanwhile there is a hard-coded limit that caps the total bitcoins that will ever be issued. By 2140 all the coins will have been mined, and the sum total of those bitcoins will be just under 21,000,000.

Losses and thefts

BitScan: Bitcoin leakBut if we take a closer look, it seems obvious that lots of bitcoins will get "lost" over time. MtGox famously lost hundreds of thousands of bitcoins, according to its CEO Mark Karpeles. Were the private keys needed to spend all these bitcoins lost through sheer incompetence? Were millions of dollars worth stolen by Karpeles, destined never to be spent? Many people are watching the blockchain carefully, eager to see if and when large blocks of "lost" bitcoins start moving to new addresses.

In fact, large numbers of bitcoins are lost or stolen with alarming frequency. Stolen or lost funds associated with failed exchanges, for example, barely make the news now unless they are massive. At the end of last year alone there were several huge incidents including this apparent hack of BIPS, a European bitcoin exchange. Another alleged attack resulting in 4,100 missing bitcoins occurred at, an online wallet provider the same month.

Even larger robberies occurred last year, like the infamous sheep marketplace heist. Sheep marketplace was yet another post-Silk Road marketplace, not unlike Silk Road 2 and many others. But it was lucrative, and the operators of this black market appear to have swept all funds from all accounts, including funds held in escrow for pending transactions. This sort of thing is bound to happen in black markets, right? But this theft was noteworthy because it involved about £60,000,000 worth of bitcoin.

These very visible crimes are only part of the story. Anecdotal evidence suggests that people commonly lose their private keys simply by accident. There are the classic tales of woe, like last summer's story of James Howelss. This poor soul accidentally threw away a hard drive that had a wallet containing some 7,500 bitcoins!

There are enough stories of theft, incompetence and accidents to spawn a hundred novels. Granted, thousands of bitcoins is not enough to put much of a dent in the eventual total supply of nearly 21 million, but just from the highest profile incidents last year, it is obvious that the number of coins lost, stolen, and otherwise inaccessible is in the order of at least hundreds of thousands.

Less obvious than the huge amounts of bitcoins lost to thieves and misfortune

are the many less obvious ways bitcoins can leak from the ecosystem.

Increasingly there are new, compelling reasons to remove bitcoins from the economy.

It's hard to guess how far this trend will go, but it is worth mentioning a few of these.


For starters, it has been estimated that Satoshi Nakamoto might hold the private keys associated with nearly a million bitcoins. If they never emerge to spend those bitcoins, in order to to preserve anonymity, only 20 million should be considered to be in play. One interesting way people may deliberately remove bitcoins from the economy is called Proof of Burn. This refers to an issuance mechanism where people buy into a crypto currency by sending bitcoins to unspendable addresses.

Without diving deeply into the details (although there is an excellent explainer video here) it's highly unlikely that these "burned" bitcoins can be spent again. The reasoning behind this strategy is that people who make a personal monetary sacrifice will, by definition, have a vested interest and a stake in the currency. Chancecoin is one such currency, launched in March. There have also been discussions among various "meta coins" developers about using this (currently) unusual approach.

Then there are sidechains, and perhaps tree chains and more. Sidechains are associated to the main bitcoin blockchain in a particular way such that a bitcoin transferred to some sidechain will effectively be in an unspendable state, and will remain "out of circulation" until such time as they can be moved back onto the main blockchain. In order to do so, the user must provide proof of their right to spend that amount of the sidechain coin; in other words, show a path of previous transactions which result in the coin being spendable by this user, not unlike how a bitcoin spend requires identifying specific funds which can be used for the desired transaction.

Bitcoins can and will get trapped on sidechains, with no method for migrating them back onto the main bitcoin blockchain. The sidechains may often be prone to accidents, hacks, destructive bugs and all the typical results of innovation and experimentation. This is their purpose. But it provides yet another way bitcoins can slip through the cracks and become unspendable. Perhaps considering the eventual size of the economy to be 21 million bitcoins is impossibly optimistic. It seems far more likely that we'll end up with something in the neighborhood of half that amount, a little less than the coins mined to date. We may soon live on a planet with nine billion people and only ten to twelve million bitcoins. That leaves on the order of one bitcoin per thousand people.

The case for million dollar bitcoins seems compelling indeed!

Mike Ward

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