The Inevitable End of the Bitcoin

Bitcoin seems to be all the rage right now. While many of its proponents believe that it will continue to climb upward, I believe that Bitcoin will eventually fail. One day, and that day could be very soon or years away (if not decades), Bitcoin will not be considered a viable investment or currency.

This is not due to Bitcoin’s inherent flaws or its lack of credibility as a currency. Rather, it is due to the way the governments will try to discredit its legitimacy and stifle its adoption into mainstream finance.

Here, we have analyzed various scenarios on what could happen to Bitcoin in the future. As you will see, we believe one way or the other, Bitcoin’s end is inevitable.

The General Expectations of Bitcoin (Market’s Point of View)

Ever since its inception in January 2009, Bitcoin has been heralded as a currency free from the restrictions and manipulations of any government and its central bank.

While this opinion was shared by a small number of outcasts in the financial community initially, Bitcoin has almost achieved widespread adoption by the beginning of 2021. Furthermore, it has catapulted numerous other cryptocurrencies into the limelight, many of which offer significant benefits over Bitcoin.

The price of Bitcoin has been on a rapid rise. At the time of writing, Bitcoin was trading at around $60,000. For reference, Bitcoin hit a price of $1 in February 2011, just over a decade ago.

However, that doesn’t mean that Bitcoin’s rise has been consistent. Rather, it has been marred by volatility, and the vast majority of the gains have been in the last 12 months or so. This has caused many to wonder whether Bitcoin is an actual store of wealth that could eventually replace fiat currency or just another bubble.

Factors Driving Bitcoin’s Price

Bitcoin is extremely volatile. Its price can move by a significant number of percentage points in a single day. While that would not be that irregular for a high-risk investment, it is not ideal for a currency.

A currency needs to be relatively stable. This is because people need to use it to exchange goods and services. If Bitcoin were to be used by a business for most of its transactions, it would expose that business to an immense level of currency risk. While there are businesses out there that are heavily transacting in cryptocurrency, they have no option but to hedge the aforementioned currency risk as of now.

Apart from this, inflation has been continuously weakening the US Dollar. While the effects of money printing during the pandemic have not been completely felt as of yet, people believe that it is only a matter of time before they become apparent.

This is why people have been heavily investing in Bitcoin recently. The faith in the US Dollar is perhaps at an all-time low due to the extensive printing by the FED, and many consider Bitcoin to be the best alternative, as well as investing in physical gold.

Market’s Estimate of the Future

Those currently investing in Bitcoin believe that the inflation rate in the US will continue to rise for the next few years. This will cause the Dollar to weaken, and thus holding USD is not optimal right now.

Bitcoin, on the other hand, has a limited supply. Furthermore, the rate at which more Bitcoins are added to the blockchain automatically reduces itself after a certain amount of time. This process is known as halving.

The fact is that it is extremely easy to predict the total number of Bitcoins that will be a part of the blockchain at any point in time. This makes Bitcoin akin to gold in some ways. However, Bitcoin and gold are actually quite different, and must not be confused as a substitute for each other.

Based simply on the belief that the Dollar will weaken as time goes by, Bitcoin’s price has been driven up by investors over the last few months. However, that synopsis may not be correct. In my opinion, two main scenarios are likely to happen, both of which will eventually cause the downfall of Bitcoin.

Scenario 1: The FED Fights Back

In the first scenario, the US FED may try to fight back against the decline in the Dollar. In this case, the FED will not only reduce the amount of money they print but also increase the interest rates.

An increase in the interest rates makes the cost of debt go up, meaning businesses will require a higher rate of return on their earnings to compensate for the increase in interest payments. This causes the stock market and the real estate market to decline, as many businesses (especially those that are highly leveraged) will face trouble paying back their debt.

Considering the massive increase in both of these markets in the last year, it is more than likely that this approach will cause the markets to crash. People will pull out their investments, opting to save their money at the bank instead.

What Will Happen to Bitcoin?

The stock market and  precious metals is considered by many to be a good hedge against inflation. This is because as the prices of goods rise, so do the profits of businesses.

As such, it comes as no surprise that stocks and Bitcoin are closely correlated. During times when the FED is going off the rails with its printer, both stocks and Bitcoin see a massive rise. It makes perfect sense that once the FED tightens the monetary policy, both Bitcoin and stocks will suffer as a result.

However, one thing that you must remember is that Bitcoin is driven a lot more by market sentiment as compared to stocks. As an asset, this is much more volatile, and a single major event can drive its price downward significantly. This is evident by the fact that Bitcoin has experienced numerous market crashes despite its relatively short-lived existence.

Due to this, Bitcoin will probably fall by a huge amount. While it will probably not go to zero, it will still suffer huge setbacks.

Scenario 2: The FED Caves in

In the second scenario, it is possible that the FED does not try to fight back against the inflationary pressures that have been levied as a result of the printing. Instead, it decides to cave in and reduce the value of the Dollar.

A Dollar devaluation will have a lot of benefits for the government. For one, it will make debt payments easier, as the intrinsic value of the dollar will now be much less while the debt payments will remain the same.

Secondly, it will not require the FED to reduce growth by increasing the interest rate. Businesses will still be able to acquire debt at comparatively low-interest rates and will be able to achieve their growth targets (for the most part).

What Happens in the Short Run?

In the short run, we will see both the stock market and the Bitcoin rise even more. If history is anything to go by, then the price of Bitcoin will skyrocket, hitting new all-time highs, whereas stocks will experience a gradual rise.

The price of Bitcoin will not only increase because of the investment thesis that Bitcoin excels where the US Dollar fails, but also because of the market sentiment. Amateur investors with no knowledge and no way to gauge the intrinsic value of the coin will pile their money into it, pushing the price even further.

The Major Problem

Just because Bitcoin will rise in the short run, doesn’t mean it will continue to rise.

The main reason for this is simple: No government will allow the public to have a currency over which it has no control. If the major way that people exchange value is a decentralized currency, the government will have no choice but to use that currency to fund its projects. As we know, with the amount of money printing that governments around the world do to fund their expenses, this will be impossible.

As such, the governments will have one of two choices. The first one will be to do nothing and accept that crypto is here to stay. This would require most governments around the world to significantly reduce their expenses. There will be huge levels of unrest as governments will be unable to fund most of their social programs including education, healthcare, and public works.

This will force the governments to follow the second approach: Banning cryptocurrency and force people to use a different coin. We have already seen governments exercise this step, as cryptocurrency is banned in numerous countries at the moment.

So, What’s the Future of Bitcoin in This Scenario?

If Bitcoin is banned in the US, it is more than likely that other countries will follow suit. Right now, there are two major reasons why the price of Bitcoin is continuing to rise. The first is the bullish sentiment of the public, and the second is the increased number of institutions that are investing in the coin.

If the currency is banned, the institutions will have no choice but to pull out of the currency, causing major selloffs across the board. This will also cause the bullish view of the individual investors to change, further causing the price to plummet.

In all likelihood, an outright ban of the currency will cause Bitcoin to crash. Chances are that within a few months after the announcement, the price of the coin will be something close to zero.

It is also possible that the US government issues its own cryptocurrency. Many people believe that this is the next major step in the evolution of blockchain technology. Nobody can deny that cryptocurrency has inherent benefits over fiat currency. However, the major problem of the governments is that they do not have any control over it.

The US issuing its cryptocurrency will solve such problems and cause other countries to follow suit. What the specifics of that currency will be, we do not know. In all probability, it will not be a decentralized currency like Bitcoin. However, the US will probably have to restrict some of the freedoms that they have when it comes to printing if they do switch to a crypto-based Dollar.

Conclusion

The end result for Bitcoin, however, will still be the same. No matter which route the government ends up going, the long-term future of Bitcoin looks bleak.

It is important to remember that this hypothesis is my opinion, and not all of the aforementioned predictions may end up being true. However, it is unlikely that any government would allow a currency to exist that they have no control over. As such, those investing in Bitcoin should be wary of the consequences.