Whither the Price of Bitcoin?

Abstract

W hat are the long-run prospects of Bitcoin as an investment?The bullish case is that Bitcoin will appreciate indefinitely due to its capped supply and an ever-growing demand.The bearish case is that Bitcoin's price will fall to zero, as it's an intrinsically worthless asset.We think the future price path is more likely to remain bounded between these two extremes.Consider first the bullish case for Bitcoin.We think this idea is too optimistic even if one grants that its supply is fixed and its demand is likely to grow. 1 The U.S. dollar price of Bitcoin will also depend on how its exchange rate relative to other cryptocurrencies evolves over time in the face of an ever-expanding supply of alternative cryptocurrencies, which we refer to as Altcoin. 2 The bullish case assumes that the nominal exchange rate between Bitcoin vis-à-vis other cryptocurrencies will adjust in proportion to their relative supplies.That is, Bitcoin is expected to appreciate relative to its competitors or, equivalently, its market-capitalization share will stay constant over time.But must this necessarily be the case?Consider the following thought experiment.