So what is going on?
First, we should not be surprised that a pandemic has quickened the pace of monetary evolution. In the wake of the Black Death, as the historian Mark Bailey noted in his masterful 2019 Oxford Ford lectures, there was an increased monetization of the English economy. Prior to the ravages of bubonic plague, the feudal system had bound peasants to the land and required them to pay rent in kind, handing over a share of all produce to their lord. With chronic labor shortages came a shift toward fixed, yearly tenant rents paid in cash. In Italy, too, the economy after the 1340s became more monetized: It was no accident that the most powerful Italian family of the 15th and 16th centuries were the Medici, who made their fortune as Florentine moneychangers.
In a similar way, Covid-19 has been good for Bitcoin and for cryptocurrency generally. First, the pandemic accelerated our advance into a more digital word: What might have taken 10 years has been achieved in 10 months. People who had never before risked an online transaction were forced to try, for the simple reason that banks were closed. Second, and as a result, the pandemic significantly increased our exposure to financial surveillance as well as financial fraud. Both these trends have been good for Bitcoin.
I never subscribed to the thesis that Bitcoin would go to zero after it plunged in price in late 2017 and 2018. In the updated 2018 edition of my book, “The Ascent of Money” — the first edition of which appeared more or less simultaneously with the foundational Bitcoin paper by the pseudonymous Satoshi Nakamoto — I argued that Bitcoin had established itself as “a new store of value and investment asset — a type of ‘digital gold’ that provides investors with guaranteed scarcity and high mobility, as well as low correlation with other asset classes.”
“Satoshi’s goal,” I argued, “was not to create a new money but rather to create the ultimate safe asset, capable of protecting wealth from confiscation in jurisdictions with poor investor protection as well as from the near-universal scourge of currency depreciation … Bitcoin is portable, liquid, anonymous and scarce … A simple thought experiment would imply that $6,000 is therefore a cheap price for this new store of value.”
Two years ago, I estimated that around 17 million bitcoins had been mined. The number of millionaires in the world, according to Credit Suisse, was then 36 million, with total wealth of $128.7 trillion. “If millionaires collectively decided to hold just 1% of their wealth as Bitcoin,” I argued, “the price would be above $75,000 — higher, if adjustment is made for all the bitcoins that have been lost or hoarded. Even if the millionaires held just 0.2% of their assets as Bitcoin, the price would be around $15,000.” We passed $15,000 on Nov. 8.
What is happening is that Bitcoin is gradually being adopted not so much as means of payment but as a store of value. Not only high-net-worth individuals but also tech companies are investing. In July, Michael Saylor, the billionaire founder of MicroStrategy, directed his company to hold part of its cash reserves in alternative assets. By September, MicroStrategy’s corporate treasury had purchased bitcoins worth $425 million. Square, the San Francisco-based payments company, bought bitcoins worth $50 million last month. PayPal just announced that American users can buy, hold and sell bitcoins in their PayPal wallets.
This process of adoption has much further to run. In the words of Wences Casares, the Argentine-born tech investor who is one of Bitcoin’s most ardent advocates, “After 10 years of working well without interruption, with close to 100 million holders, adding more than 1 million new holders per month and moving more than $1 billion per day worldwide,” it has a 50% chance of hitting a price of $1 million per bitcoin in five to seven years’ time.
Whoever he is or was, Satoshi summed up how Bitcoin works: It is “a purely peer-to-peer version of electronic cash” that allows “online payments to be sent directly from one party to another without going through a financial institution.” In essence, Bitcoin is a public ledger shared by a network of computers. To pay with bitcoins, you send a signed message transferring ownership to a receiver’s public key. Transactions are grouped together and added to the ledger in blocks, and every node in the network has an entire copy of this blockchain at all times. A node can add a block to the chain (and receive a bitcoin reward) only by solving a cryptographic puzzle chosen by the Bitcoin protocol, which consumes processing power.
Nodes that have solved the cryptographic puzzle — “miners,” in Bitspeak — are rewarded not only with transaction fees (5 bitcoins per day, on average), but also with additional bitcoins — 900 new bitcoins per day. This reward will get cut in half every four years until the total number of bitcoins reaches 21 million, after which no new bitcoins will be created.