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As Bitcoin enthusiasts and investors, we can’t let Bitcoin run unbridled across the financial landscape without trying to define it every chance we get. Luckily, there are a variety of eponymous laws, principles, effects, and maybe a razor or two that seem to govern how Bitcoin grows, changes, and interacts with we humans. These laws were not developed specifically to apply to Bitcoin, but they often describe Bitcoin’s behavior or demonstrate the principles behind it spectacularly well. And sometimes we just try to force a correlation because it’s in our nature to look for meaning even when there isn’t any. The reason any of this works is that Bitcoin is so closely tied to and dependent on human psychology. In this series, we’re going to look at some of these laws and how they apply or are misapplied to Bitcoin.
In 1965, Gordon Moore, the founder of Fairchild Semiconductor and CEO of Intel, projected that the rate of growth of components on integrated circuits would double every two years. This has been dubbed Moore’s Law and has been surprisingly accurate. It has also been loosely applied to many different aspects of circuits, processing power, computer memory and almost any other phenomenon in the digital realm. Bitcoin is no exception where it is applicable to computing power in general and therefore cryptocurrency mining, the development of ASIC’s (Application Specific Integrated Circuits), hashrate growth, and even to adoption rates since Bitcoin’s inception.
But it’s much more interesting when Moore’s Law is applied to the price of Bitcoin itself as if there must be some coefficient that defines Bitcoin’s price growth.
Is that appropriate? Moore’s observation is based on technological advances and applications of engineering not the price action of a commodity. But Bitcoin, unlike physical commodities and fiat currencies, is so intimately linked to the technology behind it. It’s instructive to see why people find it tempting to apply Moore’s Law to Bitcoin’s price.
Based on the Nov. 8, 2010 Bitcoin price of $0.25 to the $4,000 we’ve seen in recent months, Bitcoin’s price has doubled approximately 14 times in 9 years, every 7 months on average. Of course, Bitcoin’s price did not rise through that period in a straight line. It went through several bull and bear cycles. But could we expect that overall growth rate to continue at the same pace?
Not exactly. Bitcoin’s price action, its bubble and bust patterns, can skew the apparent growth rate depending on what dates and prices you choose to measure it with. For example, if you choose the December 2017 high of nearly $20,000 as a marker, you’ll get a different average rate of doubling than if you choose today’s price of $3400. That bit of knowledge alone can be used to prove or debunk just about any price theory depending on how you want to spin it. Aside from that, there is no doubt that the price has doubled many times over those years.
But, a direct application of Moore’s law is not valid because if we look closer at those doublings it becomes clear the pace of doubling has slowed over that ten-year period. From 2010 to 2013, Bitcoin’s price doubled approximately nine times, roughly every four months. In the following six years, from the April 15, 2013 price of $100 to a 2019 price of $3200, the Bitcoin price doubled five times, roughly every 14 months. Even ignoring the bear market and using the high of $20,000 still results in a noticeably slower growth rate.
The fundamental factors supporting Bitcoin — a perceived imminent mass adoption or institutional investment for instance — are very different today than they were in previous market cycles. Another bubble could return the average growth rate to the earlier pace, or an extended bear market could slow it further.
For an investor, the value of being able to apply something like Moore’s Law is that it gives a rough marker for predicting prices, a favorite pastime of Bitcoin pundits. Most Bitcoin HODLers are patient but some can’t achieve moon soon enough. Here, Moore’s Law gives way to Hofstadter’s Law — “It always takes longer than you expect, even when you take into account Hofstadter’s Law.”
But a slowing growth rate should be expected. It’s a natural result of exponential growth when it is applied to nearly anything. It simply can’t continue at the same pace forever, growth must slow at some point. And while it was not built into Gordon Moore’s original prediction, he knew that.
Moore initially claimed in his 1965 paper that the doubling of components on circuits would last about a decade as technological limitations would be reached. He was shocked to discover that it kept going for several more decades, eventually 50 years. But, understanding that exponential growth can’t continue forever, Moore himself, as well as others such as physicist Michio Kaku, have stated that Moore’s Law must end.
In the case of Moore’s original application, components on a circuit, it’s a matter of physics. Eventually, as components get smaller and smaller, they approach the molecular and atomic levels where quantum physics presents certain barriers that are insurmountable using the same technology. Today’s cutting edge seven-nanometer circuits are expected to be the limit until some new paradigm is developed.
That doesn’t mean that progress can’t continue, however. The growth of processor speed ground to a slow crawl after reaching two GHz about ten years ago. It has barely doubled in the last ten years. The industry overcame that limitation by introducing multiple processor cores. It was a creative solution that ensured that aggregate performance of computers continued to meet Moore’s Law projections and the end-user hardly even noticed anything had changed. Necessity is the mother of invention.
We must be aware of the same kind of limitation when Moore’s Law is applied to anything else such as the price of Bitcoin. It can’t double at the same pace forever. Eventually, the fundamental financial and economic systems would have to change for the price to advance further. To a certain extent, that’s exactly what many Bitcoin investors are counting on. The Tokenization of Everything, De-Dollarization, or the failure of sovereign fiat currencies are all events which could fundamentally shift the balance of power in favor of Bitcoin as a world reserve currency or induce mass adoption. That could continue Bitcoin’s demonstration of Moore’s Law for a while, but mathematically, that too must slow or stop.
We are in a new digital age when the pace of change is in years rather than centuries. With Bitcoin now a decade old, we’re already reaching meaningful limits of Moore’s Law as it applies to Bitcoin. We can watch history playing out. Will it play out in Bitcoin’s favor? Will Bitcoin keep doubling in price, and if it does, for how long? The good news for us is that we won’t have to wait too long to get our answer. With this new accelerated rate of change, we’ll likely see it play out in our lifetimes, if not in the next few years.