11 February 2022

---

Bitcoin and the Tinkerbell Effect

Author: Luigi Campopiano

---

In Peter Pan's tale, Tinker Bell (Tinkerbell) is believed to exist because children believe it exists. Same thing for the value of Bitcoin: it will continue to rise and fall depending on what people believe it is worth. Bitcoin has been declared dead about 400 times since 2010 (peaking in 2017), but its value (after several more or less large ups and downs) has reached a new high of over $ 60,000. Deutsche Bank Research points out that one of the most important factors driving the increase in demand for bitcoin has been the entry of hedge funds and institutional investors. In the long term, Bitcoin will have to transform its potential into results to support its value proposition: to date we are at over $ 1 trillion, which is about 100% of the yen in circulation, 65% of the euro, the 53% of the dollar and 900% of the pound. Yet the average number of Bitcoins traded in dollars daily is equivalent to just 0.05% of the pound and 0.06% of the yen. The finished and pre-programmed supply of all bitcoins determines the value of each bitcoin: the maximum number of bitcoins will be just under 21 million (today over 18.7 million bitcoins have been mined). About 89% of the total bitcoin supply is in circulation, and it is unlikely to increase dramatically in the short term. Interestingly, the supply of bitcoin appears to have remained constant, regardless of the market value.

If the current mining rate continues, the percentage of total bitcoins in circulation will remain on a plateau of around 89% for several years and another 10% will likely be discovered by 2028 (by which time 20 million bitcoins will have been discovered). The last million will be mined slowly, and at this point, the Bitcoin system will become a transaction-only system (transactions are not brokered by a bank and this can make them very cheap, but overall the cost of implementing a network can be extremely. expensive due to the processing and energy costs of some validation processes). Future generations could usher in the mass adoption of bitcoin: around a third of millennials believe cryptocurrencies are replacing cash and credit or debit cards. With a market capitalization of over $ 1 trillion and the potential for continued price increases, cryptocurrencies are too important to ignore - central banks and governments are now aware that they are here to stay, so they should start regulating them. (sadly, transactions and marketability are still limited). The real debate is whether rising valuations alone can be reason enough for Bitcoin to evolve into an asset class or whether its illiquidity is an obstacle. It should be noted, however, that small changes in the general perceptions of investors about Bitcoin can have a large impact on its price, especially since relatively few bitcoins are in circulation. So, if several large trillion dollar investors decide to allocate small percentages of their wallets to one cryptocurrency, this could have a very big impact. Will the Tinkerbell effect turn into a self-fulfilling prophecy? Central banks are reacting by accelerating research and starting pilot projects, launching their own digital currencies. In the long run, central banks are unlikely to give up their monopolies, and as long as governments and central banks exist to hold the power to regulate money, there will be little room for cryptocurrencies (as a means of payment) to replace traditional currencies.