Will Ogden Moore
Last Updated: 9/7/2023 | 16 min. read
Bitcoin today functions as a scarce digital commodity and an alternative to physical gold. Compared to the size of the investment market for gold, Bitcoin is still relatively small. We expect that Bitcoin will continue to take market share from gold as a store of value asset more suited for our digitized age.
But Bitcoin’s possible uses are not limited to its role as a potential gold substitute, as falling transaction costs–via Lightning Network adoption or other solutions–may help Bitcoin compete with fiat currencies in parts of the global economy, and new and continued innovation on the network (e.g. NFTs and the development of Layer-2 protocols for smart contracts) may contribute to Bitcoin’s potential over time.
The collective size of these addressable markets can imply there is substantial room for growth in Bitcoin’s valuation over time.
Even though Bitcoin is more than 14 years old and is owned by tens of millions of people[1], there are still debates about the network’s possible uses. At some level this is not surprising: because Bitcoin was so different from what came before, it has taken time for the core technology and the ecosystem around it to mature. For investors, this has meant that the asset’s addressable market – the existing economic structures that the technology can disrupt – has always been a moving target. While we can quantify certain aspects of Bitcoin’s market opportunity, innovation is always expanding possibilities for the world’s first public blockchain. We see a progression of potential use cases: from a digital store of value, to a medium of exchange, to a settlement layer for non-monetary blockchain activity.
Bitcoin as a Store of Value
Today, Bitcoin is already established by some as a scarce “store of value” asset and digital competitor to gold. This use case was apparent from its beginning – Bitcoin creator Satoshi Nakamoto compared the token to a scarce base metal with a special property: that it “can be transported over a communications channel.”[2] Although gold has been around longer, Bitcoin has certain features that its holders find attractive, especially its portability; Bitcoin is available anywhere in the world as long as holders have access to the internet and their private key. The economic conditions since Bitcoin’s creation–the financial crisis, the pandemic, the surge in inflation–have accelerated demand for instruments that might help protect the real value of assets, and have supported Bitcoin’s adoption as a digital alternative to gold.
Exhibit 1: Bitcoin still small compared to investment gold market
Bitcoin as a Medium of Exchange
Bitcoin’s intended use case was as a peer-to-peer electronic cash system, but Bitcoin has been slower to take off as this digital medium of exchange. This likely reflects a variety of factors, including its historical volatility, the network benefits of existing monetary systems, and Bitcoin’s transaction costs. In the network’s early history, Bitcoin transaction costs were relatively low, and the token was often used as an experimental medium of exchange. As network usage increased and blocks began to fill up, its transaction costs became much higher and more volatile (Exhibit 2). These fees are a function of transaction complexity–the number of bytes they take up in the block–rather than their Dollar value. Therefore, Bitcoin transactions are more cost-effective for high-value payments, and in fact may be cheaper than traditional payments systems, but are not cost-effective for low-value or retail payments.
Organic adoption may increase as a result of efforts to reduce Bitcoin transaction costs via the Lightning Network, a “Layer 2” protocol. Layer 1 blockchains are the base level database, or “digital ledger,” where transactions settle. Layer 2s are additional protocols that exist alongside Layer 1 chains and benefit from its consensus mechanism and security. Layer 2s typically provide additional application functionality and/or lower costs.
Exhibit 3: Lightning Network development improves prospects for transaction use case
As noted above, we do not expect Bitcoin to become a major transaction medium for retail transactions in developed market economies, as we predict that stablecoins are more likely to fill this role. But not all types of “money” are the same, and there will be segments of the existing stock of money-like assets that should be easier to displace.
Consider international uses of the US Dollar: The Dollar is widely used outside of the United States, including in transactions that do not include US residents. These uses may be more easily disrupted by a blockchain-based medium. In a domestic economy, the national government can control the public’s use of specific currencies through rules and regulations (e.g. by demanding that taxes be paid in the domestic currency, or limiting the amount of foreign currency that can be held in bank deposits). In contrast, in international markets, the de facto medium of exchange and store of value is a matter of choice, and determined by public demand. For this reason, the dominance of any one international monetary medium can change over time.
Exhibit 4: Bitcoin could compete with the Dollar as an international currency
Bitcoin as a Settlement Layer
While Bitcoin was originally envisioned for financial applications, the potential uses for the network might extend beyond these in the longer-term. Over the past year, smart contracts and NFTs on the Bitcoin network have gained traction, effectively broadening the network’s reach.
Exhibit 5: NFTs on Bitcoin May be Here to Stay via Ordinals
A Progression of Use Cases
From its prevailing status as a digital counterpart to gold to its usage as a means of payment and future potential relevance in other areas, Bitcoin’s utility and significance have and will continue to evolve. For now, we expect that Bitcoin will likely continue to grow as a store of value, capturing an even greater portion of the global gold investment market. Looking further ahead, assuming the substantial adoption of scaling solutions, such as the Lightning Network, Bitcoin’s usage as a means of payment could open up the network even larger markets, and Bitcoin’s status as the first and most-trusted cryptocurrency may also make it a formidable competitor to other smart contract platforms, which could unlock the opportunity of several new markets.
Bitcoin’s addressable market can only be crudely estimated, and naturally there is a very wide range of uncertainty when providing this sort of estimate, as Bitcoin is only one asset, and it will need to compete with other cryptocurrencies (or unknown future innovations) to capture market share from gold and fiat currencies. Moreover, as the experience with Ordinals demonstrates, it can be difficult to predict how developers might apply the Bitcoin network in the future. That said, Grayscale Research is optimistic about the multiple pathways for Bitcoin’s continued growth.
[1] As of August 2023, there were about 40 million Bitcoin addresses with a balance greater than $1; Source: Coin Metrics.
[2] Bitcoin forum, August 27, 2010.
[3] As of September 7, 2023.
[4] Data on above ground gold stocks in tonnes in 2022 from the World Gold Council, valued at current market prices.
[5] Chivo is a Spanish language digital token wallet.
[6] For details see “El Salvador: Staff Report for the 2021 Article IV Consultation”, International Monetary Fund, January 2022.
[8] Grayscale estimate based on data from national sources for 2022 or latest available year, depending on data availability by country.
[9] In Uruguay, for example, about 75% of deposits and 65% of loans are denominated in foreign currency, according to the IMF’s Financial Soundness Indicators.
[13] Total Value Locked (TVL) is a measure of the dollar value of digital assets deposited in smart contracts.
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Stablecoins are digital assets that are pegged to the value of a fiat currency or commodity, such as the US dollar or gold. Total Value Locked (TVL) is a metric used to measure the total value of digital assets that are locked or staked in a particular decentralized finance (DeFi) platform or distributed application (dApp).
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