Bitcoin's Inherent Volatility May Doom It to Zero Returns

Bitcoin's volatility and lack of utility as a medium of exchange are inherent to its design, and not just a result of recent market fluctuations. The cryptocurrency's proponents often point to its surges in value as evidence of its success, but these gains only serve to render it less useful for everyday transactions. In fact, the very concept of bitcoin is rooted in neo-Austrian and neo-monetarist ideologies that misunderstand the nature of money and inflation.

According to a fair-value model proposed by Claude Erb, a former commodities portfolio manager at TCW Group, bitcoin's long-term return may be close to zero. This is based on Metcalfe's Law, which assumes that the value of a network is proportional to the square of its members. The model suggests that bitcoin's price will eventually reach $120,000 when it hits its algorithmically determined limit of 21 million coins in 2140, but thereafter the price would not increase any further.

While some may view this as a bleak outlook for bitcoin, there is a silver lining: a flat price would help support bitcoin becoming a medium of exchange, which was the original use case for the cryptocurrency. This is because a stable price would eliminate the need for capital-gains tax bills on transactions. However, it's worth noting that several threats to bitcoin's value exist, including security concerns and inflation.

Despite its trillion-dollar market cap, bitcoin remains vulnerable to various risks. Its security concerns are less dire than headlines suggest, but a 51% attack or quantum threat could still pose significant challenges. Additionally, the cryptocurrency's inflation rate has fallen below gold's mining-based inflation rate, which may impact its value-building tool.