Disclaimer: I am long Bitcoin. This article should not be taken as legal investing advice, I am wrong 100% of the time. The choice is yours whether to invest in any asset or not.
You may have heard that Bitcoin has just hit all-time highs. For those of you who know me well, I’ve been babbling on about Bitcoin to anybody who will listen for some time now. Well, the time has come to properly explain what Bitcoin is and the case for buying it. This article should have been written months ago, but better late than never.
What is Bitcoin?
First of all, what is a Bitcoin? If you already know feel free to skip this section. Bitcoin is a cryptocurrency (Crypto) created in early 2009. Bitcoin is a digital asset for all intents and purposes. Some call it a digital currency, some call it digital gold. Essentially Bitcoin is money. Money in the sense that it represents value. In today’s society money (United States Dollar (USD)) is a standardized measure of value. Money can be exchanged for ‘goods and services’ (the value). Money is a way to measure value. However, in order for something to represent value, people have to trust that it is valuable and will stay valuable.
Throughout history money has had many different forms. From sea shells, stones and glass beads several thousand years ago, to gold and gold coins in the last few millennia. Lugging around Gold bars every day was heavy and awkward though. After Gold came paper money (backed/ redeemable by gold), which was much easier to transport, and finally in 1971 ‘Fiat money’ was developed. Fiat money are modern day currencies, which include: the USD, Canadian Dollar, the Euro, British Pound, the Yen and so on…). Fiat currency, such as the USD was previously backed/ redeemable at the bank by a certain amount of gold. However, since 1971 in the US, the USD is now backed by nothing other than the confidence of the dollar and the government that backs it.
Fiat money is centralized, which means that you have a central authority who controls and issues the currency such as a Central Bank or Government. The supply of fiat money is limitless in that governments can always print more money (more on that later).
I could go down a big rabbit hole here on money and its history, but if you really want to dig into this subject just read the Bitcoin Standard by Saifedan Ammous or listen to the audiobook here. It’s an eye opener and definitely worth your time. Now, back to Bitcoin.
Bitcoin is money in the sense that it is a digital asset, which can be traded for Fiat money. Digital assets (such as digital dollars) are common in today’s society. When you use your Visa card, your debit card or buy anything off of Amazon, you are using digital Dollars. How much physical cash is in your wallet or do you transact with on a week-to-week basis? I’m guessing the number isn’t high and is less than it was a year ago. Bitcoin is a peer-to-peer electronic money system. A transparent ledger (ledger: a book or other collection of financial accounts) without a central authority (aka Decentralized). All transactions on the Bitcoin Network (anybody sending Bitcoin to another) are recorded on the Bitcoin ledger every 10 minutes in a block/node. The first computer which verifies all transactions in 10 minutes receives the reward of new bitcoin, often called mining. Anybody can access the Bitcoin ledger and see what transactions are taking place at any time. The only thing you can’t figure out is who owns which transactions and who is sending to who. Bitcoin is also decentralized. There isn’t just one (1) computer that holds the ledger, but is made up of a network of thousands of computers. Every computer that participates in the system also keeps a copy of the ledger (commonly called ‘the Blockchain’). Because Bitcoin is a digital asset it has high portability, meaning you can transfer and/or transport large sums of money with very minimal costs and effort. Bitcoin is also divisible down to 8 decimal points. Therefore, amounts as small as 0.00000001 BTC can be handled in a transaction creating high divisibility, a requirement for any good money system. Lastly, Bitcoin is what we call a hard asset. There will never be more than 21,000,000.00 Bitcoin (BTC) in circulation ever. Ever, ever, ever! EVER! This is written into the Bitcoin code and to properly explain will foster a large discussion about mining bitcoin and ‘halvening’. For the purposes of this article, and for simplicity, we will consider Bitcoin a hard asset/ scarce asset. Today, approximately 18,572,000.00 BTC are in circulation. About 88% of the total supply of Bitcoin is in circulation today.
Bitcoin is an alternative to Fiat money, which can’t be controlled by a government or bank. Some say the invention of Bitcoin is to money what the internet was to information.
The Case Against Buying Bitcoin
To argue the case for buying Bitcoin, lets first address the arguments out there against Bitcoin. It’s a Ponzi/ Pyramid scheme, it’s too volatile, it’s a bubble/ some reference to Tulips circa 1600s, governments will ban it, it is used by criminals for illegal activities. These are the main ones so let’s dive in.
It’s a Ponzi/ Pyramid Scheme: In a way, this argument is the most relevant of all of the con Bitcoin arguments, although still not valid. Bitcoin, like all assets, money and currencies require acceptance by all parties using it that it has value. The price of Bitcoin (and increase of price) is largely dependent on new Buyers and new money entering the space.
The more people buying Bitcoin/ using the network and the less people selling it will affect the price to the upside. This is something called ‘Metcalfe’s Law’. The more people using the network the more valuable it becomes. Think of Facebook or a cellphone network. If I am the only person using the cellphone/ Facebook, the network doesn’t have a lot of value. More people using the network equals more value. So of course, someone who already owns Bitcoin is biased and will benefit from a new person entering the space with new money to buy. Having said that, this doesn’t make Bitcoin a Ponzi Scheme, for points that I will outline below there are a lot of reasons to purchase Bitcoin. When Facebook launched their IPO (Initial Public Offering) or when Amazon became the largest retail in the world, people weren’t yelling that these stocks were Ponzi’s. Early adopters of new companies and technologies will always benefit the most, that doesn’t mean they aren’t right. Bitcoin has been around for Twelve years now, with a market cap around $350 billion, similar to Facebook and Wal-Mart. From a market cap and ‘time since inception’ if you compare Bitcoin to a company, Bitcoin is well established both in financial size and tenure. If you look at Bitcoin as a company rather than a currency for investment’s sake, would you still feel this is a Ponzi scheme?
Bitcoin is too volatile to invest in/ Bitcoin is a bubble: This argument too has some merit, but only if the investor has a time horizon of 3.5 years or less. I was guilty in 2017 of saying that Bitcoin was a huge bubble and I begged people not to get sucked in to the hysteria and buy Bitcoin. Technically that argument was right, but the more I’ve studied Bitcoin, the more I’ve learned Bitcoin does this ‘correction’ ever four years (approximately 10-16 months from today). If your time preference is high enough and you hold Bitcoin for at least 4 years, no matter when you bought bitcoin, the value of bitcoin would have been higher than your purchase price. If you Hodl (hold) your Bitcoin for a minimum of 4 years, then the argument that bitcoin is in a price bubble historically has no merit.
Governments will ban Bitcoin: This argument was a large mental hurdle that I needed to better understand before making the decision to purchase Bitcoin. Recently, Brian Brooks (acting comptroller of the currency) has publicly gone on record stating Bitcoin won’t be banned (link: https://decrypt.co/50457/the-us-wont-ban-bitcoin-says-occs-brian-brooks). What is far more likely than a ban on Bitcoin is government regulation. I’m sure within the next 4-6 months there will be news on this. Regulation is a fancy way of saying governments will want taxes (money) from Bitcoin transactions, just like they do with all other purchases in cash/dollars. For the Bitcoin libertarians out there, this will not be popular, but it’s coming and frankly hardens the case that governments wont ban Bitcoin.
Bitcoin is used by criminals for illegal activity: This was an argument that was a lot more common 5-10 years ago. To be honest, a lot more nefarious activity occurs via cash than Bitcoin. Bitcoin is stored on a public ledger and even though you don’t know who the recipients are of each transaction, it is very easy to track the quantity of bitcoin changing hands. Combine this with the fact that Bitcoin exchanges (where most buy/sell Bitcoin) require your ID and the anonymity of recent Bitcoin transactions is far more trackable by governments than a duffle bag of cash changing hands.
If I have missed any arguments against Bitcoin, please comment below with your concerns and I’ll do my best to address them. Now let’s get to the case for Bitcoin.
The Case for Buying Bitcoin
Who puts the case for Buying Bitcoin this late in an article, you ask? I have no idea, but apparently me, so here we go!
The Smart Money (Billionaires Investors/ Institutions) are Buying Bitcoin: This I started noticing in September of 2020 and has gotten me the most bullish on Bitcoin. As a rule of thumb, Billionaire investors know how to grow their wealth, and is usually why they became Billionaires in the first place! Stan Drunkenmiller, Paul Tudor Jones, Raoul Paul, Robert Kiyosaki, and Michael Saylor, to name a few, have all bought Bitcoin in the last 6 months. Not sure the last 2 are billionaires, but they’re financially successful and you get the gist. Other institutions are following suit. Google companies like Guggenheim, Microstrategy (tech company), and Mass Mutual (which is an insurance company!). These are all companies which are adding Bitcoin to their asset holdings in lieu of some cash. In the case of Microstrategy, they converted ALL of their cash reserves (> $400M) to Bitcoin. Then they raised another $650 million in cash to buy even more Bitcoin. What is happening in the space over the last 120 days in terms of scale and speed of adoption is simply astonishing. It won’t be long for companies like Blackrock and pension funds (when the market cap for Bitcoin becomes large enough) to join in. The wall (tidal wave) of money that is going to pour into the space will be astonishing. With this much demand coming and a fixed supply of Bitcoin being created what will happen to the price? Answer: multiple x returns.
Bitcoin hedges against inflation: If for no other reason than to protect your cash from decreasing in value (due to inflation) you should buy Bitcoin. Here are some fun facts. There is over $18 Trillion (with a T!) worth of bonds that are now yielding a negative return. Did you know that 21% of all USD that has ever been printed in the United States were printed in 2020? 21% in one year! As a comparison, 900 Bitcoins are mined/created in 2020 per day. In 2021, there will be 328,500 Bitcoin mined/created. With today’s supply at roughly 18,572,000.00 BTC, new coins will be produced at a growth rate of 1.7% in 2021. I would personally rather hold the asset where the new supply grows at 1.7% vs 21%.
There won’t ever be more than 21,000,000 Bitcoin ever created. Ever! Why is the stock market at all time highs in the US right now with a 6.7 % unemployment rate? Because the currency is being debased due to excessive money printing. Aka it costs more dollars to buy a stock share than it did last year. Google ‘Weimar Germany’, Venezuela or Zimbabwe to learn more about this or read Ray Dalio’s book, the Big Debt crisis.
Why are Rookie cards valuable? Scarcity: As mentioned above, Bitcoin is scarce! There aren’t a lot of them for the amount of people out there in the world. Why is a Michael Jordan rookie card worth more than a Jordan card from his 10th season? Scarcity! They only print so many rookie cards. The value of the baseball card isn’t in the colouring or the cardboard it is made on. The value is in its scarcity. When a painter dies to their paintings go up or down in value? Typically, up. Again because of scarcity. Bitcoin is the scarcest asset in the world. Gold used to be, but when the price of gold goes up, additional mining explorations take place and more gold can be found, which in turn increases the supply of gold out there. Increase supply in turn, decreases price and the cycle repeats itself. This can’t happen with Bitcoin; it doesn’t matter the price. The supply is constant. When the supply is constant, the only real variable can be the price.
Stock to flow model & halvening: Because we know the number of coins in circulation today (stock) and we know how many coins are produced each year (the flow) we can calculate the stock to flow ratio for bitcoin. However, the flow of Bitcoin is reduced every 4 years by half in a process called the halvening. As we see in the chart above every four (4) years the flow of Bitcoin is cut in half. In 2025, instead of roughly 328,125 Bitcoin being produced yearly, there will only be approximately 164,062 Bitcoins produced yearly. In 2029 around 82,031 coins and so on. Because the stock to flow remains constant, we can apply this against the historical price of Bitcoin since its inception.
Enter Plan B (PlanB@100trillionUSD or PlanBTC.com). Plan B has modeled Bitcoin price relative to the stock to flow model. What’s interesting is the cycles Bitcoin forms every 4 years as a result of the halvening. Typically, based on the charts below since 2013 the price of Bitcoin reaches its maximum for the cycle roughly 20 months after the halvening. This happened at the end of 2013 and the end of 2017 and the price increase relative to the below chart in 2020 is strikingly similar. As an FYI, the last halvening occurred on May 11 of 2020. If the chart below holds true, a Bitcoin price of $100,000.00 is projected by the end of 2021. If the price growth occurs in the future, as it has in the past, you can project the price of Bitcoin in 10 years (add a 0 to the end of the price every 4 years)!
Bitcoin is already the 7th largest currency in the world. In only 12 years Bitcoin has gone from concept and obscurity to being discussed mainstream. Bitcoin’s price has historically grown logarithmically (exponentially). Traditional assets and our understanding of their growth is typically linear. This makes Bitcoin’s past performance and future price forecasts difficult to fathom due to how high the price could go if it continues to follow the stock to flow model of Plan B. If you are curious on how to buy Bitcoin, that is a whole separate discussion and can be found here.
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