While the naysayers say Bitcoin’s price is ultimately going to zero, a new report from the St. Louis Federal Reserve examines the long-term prospects for Bitcoin’s price, saying the nascent asset is unlikely to fall to zero.
The price of Bitcoin fell nearly 85% in 2018 and is now hovering around $3,700. With such a substantial decrease in price, naysayers have been calling for Bitcoin’s demise, saying it has nothing to back up its value and is fundamentally flawed. They’re just waiting for the rest of the market to realize this and move on.
However, these people couldn’t be more wrong.
The Federal Reserve economic synopsis for Bitcoin’s price and its long-term prospects as an investment stated both the bullish and bearish case for Bitcoin, and ultimately resided with a case somewhere in between.
“The bullish case is that Bitcoin will appreciate indefinitely due to its capped supply and an ever-growing demand. The bearish case is that Bitcoin’s price will fall to zero, as it’s an intrinsically worthless asset. We think the future price path is more likely to remain bounded between these two extremes.”
The Perceived Bullish Case for Bitcoin
The St. Louis Fed thinks the bullish case mentioned above is too optimistic, stating that the dollar value of Bitcoin will largely depend on how its exchange rate fluctuates relative to other cryptocurrencies.
The bullish case for Bitcoin is that it should appreciate relative to other cryptocurrencies throughout time due to its limited supply and growing demand.
However, the Fed pointed out that there is an ever-expanding supply of alternative cryptocurrencies, and if Bitcoin doesn’t appreciate relative to its competitors, or even equivalently, the price will remain constant over time and even dwindle down.
So, the Fed believes that an increasing supply of altcoins could depress the price of Bitcoin as well as prices across the overall market.
The Perceived Bearish Case for Bitcoin
As for the bearish case, the Fed thinks its too pessimistic and negligent to state that Bitcoin is intrinsically worthless. The Fed states that an asset can trade above its fundamental value, without that value ever being zero. Using both the US dollar and gold as an example, the Fed said they both trade above their fundamental value.
Moreover, the report suggests that Bitcoin is like a database management system, offering the capabilities of storing and transferring money. Therefore, the Fed truly believes that Bitcoin has fundamental value, even going as far as recognizing that its permissionless and decentralized properties are a strong suit for Bitcoin.
For as long as people value these features and properties of Bitcoin, its price will never go to zero. Concluding their synopsis, the St. Louis Fed said:
“The fundamental demand for Bitcoin derives from the fact that there are at least some people who value [decentralization and permissionlessness] features. This fundamental demand provides a non-zero lower bound on the price of Bitcoin.”
Final Thoughts
To sum up the St.Louis Federal Reserve’s long-term price prospects for Bitcoin, they are not overly bullish on its long-term price due to the rise and continued issuance of alternative cryptocurrencies, but they also say Bitcoin is unlikely to fall to zero. Therefore, the Fed has a rather neutral view of Bitcoin’s price and longevity.
To conclude the report, the Fed states:
“Economic theory predicts that the price dynamic of an unbacked asset is likely to be highly volatile and inherently unforecastable.”
What do you think of the Fed’s outlook on Bitcoin’s price? Do you agree that alternative cryptocurrencies will suppress Bitcoin’s price? Or will they simply fuel the market and lead to Bitcoin’s increase in price? Let us know what you think in the comment section below.
