Bitcoin is becoming a large asset with a market capitalisation to be reckoned with. Knowing this, some investors have second thoughts about the future prospects of the leading cryptocurrency. Will BTC be able to endow us with the same yield and grow at the same pace as before? Let’s try to figure it out.
In economics, there is something called the law of diminishing returns or the law of diminishing marginal productivity. It states that as one factor of production (land, capital, stocks or technologies) increases while the others are constant, the return from this factor decreases. So, if we increase a factor by N times, the profit from production or investment grows not by less than N times. For Bitcoin, this law can be formulated thus: will the price and, therefore, the capitalisation grow at the same rate as before? It is interesting to see whether this factor of increasing the market cap in Bitcoin works or not. Now, the capitalisation of the first cryptocurrency has come close to $1 trillion (~£734 billion), and investors are getting concerned about this asset’s integrity. Will such a high figure hinder further growth of the coin? It’s the growth rate that falls into question, rather than earning in itself. Let’s try to wrap our minds around this.
To answer this question, let’s take a look at a graph with a logarithmic scale, the value axis of which shows the capitalisation of Bitcoin expressed in powers of two.
As can be seen from the graph, to grow its capitalisation from $512 million (~£376 million) to $1 trillion (~£734 billion), Bitcoin took about the same time as for the growth from $64 million (~£47 million) to $128 million (~£94 million). That signifies that this law does not work with BTC. In other words, with the growth of capitalisation, BTC needs about the same time to double it. However, it is necessary to take into account the periods of the bear market, when, obviously, the interest in Bitcoin diminishes, and its capitalisation falls.
To predict the fate of Bitcoin, let’s take Apple and its market capitalisation as an example because Apple is the most expensive company on the planet, and BTC can be compared with this company in terms of scale.
As you can see, the law of diminishing returns doesn’t work so well for Apple either: after reaching $1 trillion (~£734 billion) its capitalisation doubled even faster than it did going from $512 billion (~£376 billion) to $1 trillion (~£734 billion).
We can also compare the capitalisation dynamics of some large companies (they all happened to be tech companies): Amazon, Apple, Google and Microsoft.
Again, we see that the growth rate of the companies hasn’t halved. In fact, it’s approximately the same for these tech giants. This table shows how long it took companies to double their capitalisation:
As we can see, only Microsoft stands out with almost 20 years on the $512 billion (~£376 billion) to $1 trillion (~£734 billion) stretch. The rest of the tech leaders don’t follow the law of diminishing returns in terms of their capitalisation.
Firstly, to some extent, Bitcoin can be attributed to the tech giants by capitalisation – it is growing in the same way as the other companies and isn’t going to follow the law of diminishing returns.
Secondly, going online in 2009, BTC gave all the tech giants a significant head start. Yet it is now approaching Google, Amazon and others by market cap. If we compare the graph of the capitalisation of Bitcoin with the tech giants, the picture will be crystal clear:
Investors are sure not to lose money if they invest in the first cryptocurrency, preferring it to large companies.
It sure is a good investment, but let’s dig a bit deeper into the market and compare BTC with the best performing altcoins. If it is maximum alpha you are after, here are a few alts that should pique your interest. In the table below we take the past year as the timeframe, as many cryptocurrencies are still quite young, and it makes no sense to take a five-year interval for comparison.
As you can see, alts have a much higher yield than Bitcoin. Of course, this is not a manifestation of the law of diminishing returns, but the trend is obvious: BTC has less potential than other cryptos, and provides us with some food for thought.
Crypto is more than just Bitcoin. If we want to make good money, it makes sense to opt for altcoins in a bull market, but in a bear market, it’s better to sit it out in BTC and ETH.
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I am sure that crypto assets are a new type of economy. We are at the origins of the crypto revolution. Right now, it is worth studying what cryptocurrencies and the blockchain are in order to make the most of this knowledge and these skills in the future.
The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.
|BITCOIN (BTCUSD) ₿||$23,185.91||-2.67%|
|ETHEREUM (ETHUSD) Ξ||$1,708.00||-3.96%|
|IMM. US (REIT)||$2,591.30||0.68%|