Bitcoin is a Natural Digital Monopoly

By John Banks

Bitcoin is a natural digital monopoly. It doesn’t have real competition. Some people wrongly assume that it does, but it doesn’t.

There is nothing else that does what Bitcoin does, in the same way it does it. The use case Bitcoin fulfills is incredibly valuable and important — and there is no other asset with the same profile.

At the same time, there is no real prospect for a competitor to step up. Bitcoin is a natural digital monopoly here and now, and is quite likely to remain one into the far distant future.

That is what makes the value proposition for Bitcoin compelling. It has a built-in scarcity factor juxtaposed with a tide of demand that just keeps rising, creating a supply-demand imbalance that will send the price chart up and to the right, on balance, for years to come.

If Bitcoin had any real competitors, the picture would be different. But it doesn’t.

The reality of competition helps explain why bubbles burst. Take Tesla (TSLA) and Snowflake (SNOW) for example, two hot names with arguably the bubbliest valuations on the planet.

The problem for both of these companies — and their impossible valuations — is that the competition they face is absolutely brutal, which means their implied profit trajectories are in no way sustainable.

As we have detailed before in these pages, the electric vehicle (EV) space is a bloody red ocean of competition. Giant automakers on multiple continents are pouring tens of billions into their EV strategy playbooks.

Meanwhile in Europe, arguably the most important EV market in the world, Tesla is getting lapped by not one, not two, not three, but four other players (Volkswagen, Renault, Hyundai, and Kia).

Because of competition, the EV business is going to mature into a large-scale, low-margin affair. Hence we agree in spirit with analyst Ryan Brinkman of JPMorgan, who has a grinch-like TSLA share price target of (don’t laugh) $90.

In cloud computing services, investors expect Snowflake to grow its revenue by tens of thousands of percent while booking world-class profit margins — all while going head-to-head in the cloud with three behemoths named Amazon, Google, and Microsoft, in a business where competitive advantages of scale will inevitably lead to price wars (a specialty of Amazon) and a wildly expensive, never-ending innovation race (with the juggernauts collectively spending tens of billions annually on research and development).

Bubbles that inflate via hope and hype go bust because of the inevitable gap between lofty expectations and competitive downward pressure on profit margins.

Competition eats away at profit margins, making them slimmer. This is not an accident, it is one of the crucial features of a free market system.

When competitors go head to head, they fight to deliver ever-greater levels of value for money. This causes profit margins to shrink. Consumers win as a result — but investors see booms turn to bust.

As the noted venture capitalist Peter Thiel has said, competition is not the ideal state. What you really want, if you can swing it, is a monopoly. With a monopoly, your stellar profit margins don’t erode because nobody can truly compete with you.

Monopolies are hard to create and harder to sustain, with governments taking strides to bust them up.

The most famous monopoly in history was probably John D. Rockefeller’s Standard Oil Company and Trust, which was broken up in 1911 and led to offspring like Exxon, BP, and Chevron. AT&T had a monopoly on U.S. telephone service in the 1970s, resulting in a 1974 antitrust lawsuit that led to breakup and the creation of the “Baby Bells” 10 years later. Microsoft had a quasi-monopoly with its Windows operating system in the 1990s, leading to antitrust action — and so on.

The best monopoly of all, though, is one that the government can’t mess with, either because it doesn’t know how or there isn’t any substitute for the product or service in question.

That is the position Bitcoin is in. As a natural digital monopoly, there is nothing else that compares. 

More than 18 months ago, we laid out the case for TradeSmith Decoder subscribers why Bitcoin was compelling as a form of “digital gold.”

We explained how Bitcoin’s store-of-value use case, coupled with a superior ability to store, transport, and spend BTC in comparison to cumbersome physical metal, would give Bitcoin the capacity to take a significant chunk of gold’s market share, sending the BTC/USD market cap into the trillions as institutions got on board.

That is exactly what has happened, though the story has a long way to go. The thing to understand is why Bitcoin has no true competitors on the horizon.

Bitcoin is definitely in competition with gold. But gold is not digital, giving Bitcoin the edge in that match-up. As Wall Street now acknowledges, Bitcoin is taking market share from gold, and could do so for a while via ease-of-use factors and accessibility of payment rails (think PayPal and Square).

A common assumption is that central bank digital currencies (CBDCs) will compete with Bitcoin. But this is a case of mistaken identity. Central banks will never be in the store-of value-business.

CBDCs will enable the rise of programmable fiat currency, but there won’t be a cap on supply. What is the maximum number of Bitcoin that will ever be created? Approximately 21 million. What is the maximum number of digital yuan or dollars or euros? The sky’s the limit. No algorithmic scarcity factor means no competition on the store-of-value front.

Another common assumption is that a more technologically advanced competitor could replace Bitcoin. But that assumption overlooks the power of global consensus and network effects.

Think about the QWERTY layout on Western keyboards. The QWERTY configuration is 146 years old, dating back to the Sholes and Glidden Typewriter launched on July 1, 1874.

Why is QWERTY still being used after all this time? Because of global consensus. Almost everyone is used to using it, and so the standard doesn’t change.

As a digital store of value, Bitcoin has a level of global consensus comparable to the QWERTY lock-in. At the same time, the robust simplicity of Bitcoin’s architecture is coupled with an active community of developers all working to upgrade and improve the Bitcoin ecosystem.

How do you improve on that? You don’t, for the same reason you don’t replace a QWERTY keyboard.

Bitcoin is also the only global consensus digital asset with a decade-plus transaction history underscoring its incumbency advantage, with new layers of infrastructure and payments architecture — exchange traded derivatives products, custodial service arrangements, investment charter amendments, pro-Bitcoin state legislation, and more — accumulating with each passing day.

To get a sense of a monopoly’s strength, try to imagine replacing it or recreating it. How would someone go about building a Bitcoin from scratch today? They wouldn’t.

And what store-of-value innovation baked into some new, unknown competitor would be worth abandoning Bitcoin’s 10-plus-years’ worth of transaction history, a global retail consensus, and a flywheel of institutional interest? There isn’t one.

Bubbly companies with sky-high valuations have competitors who will ensure out-of-this-world profit expectations are not met.

A scarce asset with a natural digital monopoly, on the other hand, has no real competitor to lessen the demand imbalance (gold, remember, is not digital). That is what it comes down to, really: Credible competition versus the absence of it.