‘Bitcoin will still bite the dust’
Kevin Dowd, Professor of Finance and Economics in the Business School at Durham University, stands by his 2015 paper predicting the failure of the #1 digital currency.
A recent article by CoinDesk discusses research by an economist that suggests Bitcoin cannot survive long term, due to two key factors.
Kevin Dowd reached his conclusion back when the price of bitcoin was less than $400 – but he stands by it now, more than 3 years and 10x in price later. ‘My reasoning is based on two simple economic arguments. The first is that the bitcoin mining industry is a natural monopoly and a natural monopoly undermines bitcoin’s core value proposition. The second is that in markets with zero regulatory entry barriers, an inferior product cannot survive long-term. Either of these arguments is sufficient to produce my conclusion that the price of bitcoin must go to zero in the long term.’
Dowd’s arguments are well-reasoned, as you’d expect. (He’s not the first to predict bitcoin’s demise, of course.) And he states that no one has been able to refute his conclusions. ‘I have also yet to hear a single intelligent challenge to this argument from the bitcoin community. Instead, the typical response has been personal abuse. Name-calling is no substitute for a reasoned response, however.’
Now, we find it almost unbelievable that Crypto Twitter would treat anyone with less than total respect, but we’ll let that pass for now.
At this point, we’ll explore just one of the points of Dowd’s argument: ‘the price of bitcoin must go to zero because an inferior product cannot survive long-term in the absence of regulatory barriers to entry’.
Dowd states that ‘I field tested my reasoning on various people who are economically literate. None disagreed.’ Given the apparent and shocking failure of Crypto Twitter to offer anything meaningful, we don’t pretend to have all the answers ourselves and will be satisfied simply to open a conversation around the second point for now:
Imagine you have a market with no entry barriers. The first firm to enter the market has 100 percent of the market share, as bitcoin once did. Competitors then come along and make inroads into the market.
Some of these offer products that are superior to the product produced by the first firm, not least because their producers have learned from some of the design flaws in the first firm’s product. And eventually superior rivals displace it completely and the market share of the first product goes to zero.
It’s a reasonable argument, and Dowd supports this argument by quoting bitcoin dominance figures, which have slipped from 94% when he first wrote his paper to 52% today. But we’ll make a couple of observations.
Dominance, or percentage of market cap, isn’t a good metric for success or failure. Apple has lost its dominance in the smartphone market since it launched the first successful device back in 2007. That doesn’t make the company a failure. The proliferation of altcoins – useful or otherwise – necessarily detracts from bitcoin’s market share. It doesn’t mean bitcoin is becoming less useful or less-used. Bitcoin has grown in value 10x since Dowd’s first article, and hashrate and adoption have similarly soared. It’s just that the overall crypto ecosystem has grown more – and much of that is down to a ‘long tail’ of smaller, less worthy projects, many of which doubtless will not last the distance.
It ignores the possibility of improvements to the Bitcoin Protocol and ecosystem. This might occasion a wry smile, because Bitcoin development and upgrades to the protocol are notoriously slow. But it’s not like Bitcoin is fossilised in time: updates
occur, the most significant of which recently was SegWit. That is arguably one of the strengths of Bitcoin: unpopular changes cannot be forced through easily.
We can’t discount Dowd’s arguments, and the history of technology suggests that – at some point – most products will be replaced by something better. Facebook replaced MySpace. Lambos replaced the Model T. Iron replaced Bronze. Mammals replaced dinosaurs. The issue isn’t If, but When. It’s just that ‘When’ – as products like gold demonstrate – can be a really long time in the future.
We’ll end by paraphrasing a quote from Fight Club: ‘On a long enough timeline, the survival rate for every investment drops to zero.’
We agree with Dowd. We just differ on the timeline.
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