Editor’s note: This guest post was written by Radoslav Albrecht, co-founder of peer-to-peer bitcoin lending platform Bitbond.net. He has a background in economics, worked at an investment bank in London, and runs the German bitcoin blog bitcoins21.
The bitcoin price is probably the most discussed aspect about bitcoin. But only few discussions try to derive a quantified long-term price potential.
Do not mistake potential for prediction. As Yogi Berra said: “It is tough to make predictions, especially about the future.” Nobody is capable of accurate prediction. The price potential rather tells us where the price could go, given that certain assumptions will prove correct.
So if we’re not good at predicting something, why bother with an analysis about the bitcoin price potential?
Because it gives us a better understanding as to what drives the bitcoin price. It allows us to watch the identified drivers closely and refine our estimate of the potential.What determines the bitcoin price?
The bitcoin price is the result of supply and demand for bitcoin. The more demand there is, the higher the price goes. The more supply there is, the lower the price (all else being equal).
The supply side of bitcoin is fairly well known, even if we look into the future. Bitcoin supply growth will drop below 15% annually very soon.
In the year 2020 the number of mined bitcoins will have surpassed 18 million. That means, when we omit bitcoins created through lending, the bitcoin supply will grow at a predictable rate that is on a decline.
The second factor that impacts supply is the so-called velocity of money. This figure tells us how often one unit of currency exchanges hands within a given time.
We calculate it by dividing the bitcoin transaction volume by the number of bitcoins in circulation. Currently this figure is at approximately 9 on an annual basis.
That means, one bitcoin is on average spent 9 times in ...