Bitcoin: A buyer's and seller's guide | Bill Barhydt | Big Think

I think there’s a few things that need to happen for cryptocurrencies to become kind of a global replacement for either reserve currencies, global money transfer vis-à-vis like swift wires via your bank.

First of all, the system needs to be massively liquid. If you think about the dollar as a reserve currency, there are trillions of dollars in circulation. It’s globally liquid across tens of thousands of banks, across 185 countries, et cetera, et cetera. That’s not totally true of cryptocurrencies yet.

If you take Bitcoin, which is the most successful cryptocurrency, its market cap is around $200 billion as of today. It’s tradable in 100 plus countries, but the liquidity of Bitcoin versus even the U.S. dollar is relatively low, which means it needs to be worth a lot more if it would become, let’s say, a “digital gold.” Gold is worth trillions of dollars in the aggregate. Bitcoin is not yet worth that much.

And that’s important because if it’s not worth trillions of dollars and billions of people want to use it, there’s not enough to go around. So, you need to be able to break it up into tiny pieces so everyone can use it, just like gold. And that’s not true until it’s worth a lot more money than it is today.

But it becomes a circular discussion because the usage will also drive the price higher, just like speculation sometimes can drive the price higher. So, over time it should get there by its ability to be fungible with fiat via these exchanges as kind of an onramp into digital currency.

But also, it should meet the liquidity requirements that we need, meaning the price should be high enough. The ability to get in and out via traditional money should be reasonable globally over the next few years, and then I believe you can really have a viable discussion about using a cryptocurrency like Bitcoin as a viable reserve currency.

So, cryptocurrencies eventually will look like traditional commodities in my opinion. Whether it’s gold, platinum, or other metals is probably the best, but it could look like oil and gas and things like that. They are starting to trade in a fashion that’s more and more similar to traditional commodities.

But the difference right now is they’re not as liquid yet. So, that means that the price is very inefficient, or the markets for cryptocurrencies are very inefficient. Most people who are holding cryptocurrencies are long term holders; they’re not selling.

So, that actually means that the price of Bitcoin and Ether, for example, is largely driven by the volume of buyers. If there are large volumes of buyers coming into the market, it drives the price higher because there’s not a lot of sellers. But if the buyers dry up, then the price goes down regardless, because there’s still not a lot of sellers.

So that will change over time because if the price skyrockets—so, for example, if institutional money starts to come into the cryptocurrency market in large numbers—which I think it will—that will force the price higher because there’s not enough cryptocurrency to go around.

And that will also cause some of the holders to loosen up their purse strings because they’re going to want to reap the profits that they’ve been waiting for for 10-15 years by the time that happens. And that will also create more liquidity in the system, which will create a really positive feedback loop that should drive the price even higher.

The other thing that I think is very relevant is you’re starting to see more traditional types of financial products being applied to cryptocurrencies—derivatives, options, nondeliverable forward contracts, things like that—that actually will help make the cryptocurrency market more efficient over time.

These products will close a lot of what we call arbitrage loopholes, which is kind of like free money in the system for traders. And as those loopholes get closed, the market becomes more efficient, more liquid, and it becomes better for everyone.

This, I think, is a common misunderstanding with how Bitcoin works: Bitcoin itself is what we call deflationary...