Bitcoin: The Next Wave — An Evolutionary Perspective

TL;DR: After one of the most bruising retreats in the short and volatile history of Crypto, the dust seems to have settled and the unmistakeable scent of male cattle is once again in the air. But as the animal spirits prepare for another charge, the buzz this time around is focused not on millennials, but on Wall Street.

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Back in 2014, someone clever — I haven’t been able to find out who — compiled a nifty log chart of the Bitcoin price and added a regression curve that fitted the price line very nicely. They also added in the yearly gains and some major milestones. It’s a great chart. Here it is:

Perhaps you remember it. Bitcoin, it suggested, would hit $1,000 (again) in early 2015, and $10,000 in December 2017.

I put this old chart into a graphics editor and added the 2014–2018 price data (from Blockchain.info). It looks like this (you can ignore the image stretching — data relations are preserved):

The $10,000 milestone turned out to be almost spot on, as were many of the pre-2014 marks, but for most of the time since mid-2014 the actual price line has remained well below the regression line, so it looks as if the curve might need to roll off a bit more than the original author intended. But only a bit — the crash that followed the late 2013 spike was deep and long, but there has still been tremendous growth. Moreover, the price line has been highly volatile since inception, so trying to be overly precise is futile. If the regression curve is even close to correct we should expect to see the start of another substantial rally within the next year or so. I very much doubt we’ll see a Bitcoin selling for $21,000 (the predicted price for Christmas 2018) in the next few months, but the idea that one might fetch $40,000 by Christmas 2019 isn’t so far fetched. And if that comes to pass, who would bet against Bitcoin reaching $100,000 the Christmas after?

My conjecture here is two-fold: first, that the next rally will indeed come sooner rather than later, and second, that it will be bigger than we might suppose. I predicate this forecast on two observations: firstly that the Bitcoin price is highly reflexive (in the Soros sense), and secondly that a great deal has changed in the crypto world since the nadir of the 2014–2015 bear market; in particular that the fitness landscape for Bitcoin is much less hostile than it has been for most of its history.

What is a “fitness landscape”? In evolutionary biology, “fitness” has nothing to do with strength, endurance or physical condition. Fitness is meant in the sense of how a key “fits” a lock. The better the fit between key and lock (or an organism and its environment), the more fitness it has. Evolutionary fitness is generally measured in terms of reproductive success or failure compared with competitors in a given environment — if you leave more great-grandchildren than a competitor, you (or at least some portion of your genome) is said to have greater “inclusive fitness” than that competitor. When Darwin’s cousin Francis Dalton coined the phrase “survival of the fittest” he simply meant that “those best adapted to their environment leave more descendants.”

The “environment” in evolutionary biology also has a special meaning: it includes the physical constraints of topology, climate, temperature, chemistry, etc that we usually think of as “the environment”, but it also includes more changeable, dynamic factors such as the ever-shifting numbers of competitors, predators, pathogens, and so on. This complicated relationship between fitness and the various adaptive pressures of the environment is often portrayed as a three-dimensional chart that resembles a “landscape” of hills and valleys. The peaks represent higher-fitness strategies, while the valleys are the environmental limits below which the organism cannot go. It is best thought of as a kind of very-slow-motion movie.

Let’s borrow this model for a moment and apply it to Bitcoin. If we consider Bitcoin as a kind of organism, with human culture as its principal environment, and the number of owners as a measure of its fitness (the BTC price being a rough-and-ready proxy for this), we can see right away that the fitness landscape has become much more complex than it was in 2010 , when there was no competition, no predators etc. Bitcoin is also much more established and robust than it was eight years ago: it has more resilience; it has spawned over a thousand competitors; hundreds of millions of people (and probably more) have heard about Bitcoin; tens of millions actually own some. This radical change in Bitcoin’s environment has also been accompanied by changes in Bitcoin’s protocol, or (to continue the evolutionary metaphor) its “genome”. Bitcoin has adapted, and is continuing to adapt, to better fit its environment, and as a result of this wildly successful and rapid evolution it has even begun to change its environment. Nature is full of examples of such profound and interactive relationships — the only reason we’re breathing oxygen, for instance, is because photosynthetic micro-organisms have been pumping the stuff out for billions of years. And just as there are numerous examples of how one species can evolve to become central to another’s fitness (so-called symbiotic relationships), so too could Bitcoin become essential to the financial fitness of very many people. We may be on the verge of a development that would put Bitcoin, and perhaps crypto more generally, at the heart of modern finance: adoption by commercial investment funds, and beyond that, by sovereigns.

Examples of central banks, or commercial banks, experimenting with blockchain are nothing new. As I write, the central bank of Azerbaijan is reported to be engaged with IBM on a new project. But most current examples are specialist private chains that have little or nothing to do with Bitcoin or any other public blockchain. The main exceptions being those projects associated with Ripple or the Ethereum Blockchain Alliance. The question of whether any of these institutions might buy an existing cryptocurrency — most likely Bitcoin — as a reserve holding or to streamline international remittances, has been touted increasingly over the last year or so, and there are some grounds for thinking that this might be at hand. Several banks are already experimenting with existing or bespoke coins, and countries with very unstable currencies or highly indebted public finances are widely considered the most likely to jump in and buy BTC as a reserve, not least because they have little to lose and the most to gain from such a move. But even some highly stable countries such as Switzerland and Japan are watched closely for any sign that they have begun to amass a BTC reserve.

Switzerland’s central bank has become a large holder of equities — a highly irregular tactic for a central bank — which leads some to think that a move into crypto is more likely there than in some other countries. Japan’s central bank, likewise, is an enormous holder of both shares and ETF securities — another unconventional purchase for a central bank — and given these countries’ long and warm embrace of crypto, all eyes are on their central banks for any sign that they might start buying BTC next. Make no mistake, even if the central bank of a poor country is known to be buying Bitcoin, the market will explode. Commercial banks (some at least) would take that as a green light, and other institutions would follow. That would mean billions of dollars flowing into the market in short order. At that point the IMF will have to add BTC to its reserve index, the so-called Special Drawing Right or SDR. By then, other central banks and all the commercial banks would feel obliged to get on board. In other words, if this fuse gets lit, the world’s financial system will be forever changed.

Part 2 to follow…