What is the long term value of Bitcoin and Litecoin?

A big question that’s debated in the Bitcoin community is “How much will Bitcoins be worth in the long term”.

Here’s how I approach this question. First, I agree with the common sentiment that in 10 years, bitcoins will either be worth nothing or a lot more than they are now — there is no middle ground.

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Arguments on the side that Bitcoin will succeed include: it’s incredibly viral — once you start using it, you want to use it as much as possible; you can use it to protect your wealth from government seizure, which is a big deal in many parts of the world; it has lots of great properties — negligible transaction fees, no regulatory constraints, anonymity (sort of), and the convenience of a pure digital construct; and the government will have a hard time banning it due to its decentralized nature.

However, there are various scenarios that could lead to Bitcoin’s failure. Governments could effectively ban it if they tried hard enough. And given that anonymous payments threaten the government’s ability to tax money, they may have enough motivation to try hard enough. In addition, different cryptocurrencies could succeed in their place. The Bitcoin protocol has some fatal structural fault, as well, that manifests at a larger scale. And finally, Bitcoin will remain too nerdy and too uncool to break into the mainstream.

Assuming Bitcoin does succeed, what will it then be worth? Let’s look at what specific markets Bitcoin might capture.

There are three markets that are commonly discussed:

• Store of Value. Bitcoin has many gold-like properties (limited supply, divisible, fungible) plus more (don’t have to carry it with you physically, can’t be seized, highly deflationary while its popularity increases). According to Wikipedia, the world’s gold reserve is valued at $7.65 trillion.
• Black Market. According to this study, black markets comprise 22 percent of the world’s economy (for a total currency value of $650 billion, assuming the same velocity of money as the wider economy). Bitcoin is an almost perfect currency for the black market, but not totally perfect in that it’s only pseudo-anonymous. All transactions are publicly visible, so the flow of tainted coins could be followed.
• Global Currency. While unlikely, Bitcoin could replace the world’s $3 trillion of currency value (gross world product/velocity of money). I’m not sure that would be a good thing (insert Austrian vs. Keynesian debate here), but it’s a possibility.