What comes to your mind when you hear the word Bitcoin?
Here are some of the responses I got when I posted about Bitcoin on Facebook.
- Lack of Federal Regulation
- Pure Speculation
- No Intrinsic Value
- Buy Gold Instead
All valid points. Some I agree with and some I disagree.
What is Bitcoin?
I define Bitcoin as digital money. Bitcoin was created in 2009 by Satoshi Nakamoto. The identity of the person or the group is still a mystery. The salient point about Bitcoin is the limited supply of Bitcoin. Bitcoin only has 21 million Bitcoin that will ever be available. There are approximately 18.4 million currently in circulation.
Tragically, it may seem unwise to invest in Bitcoin at first. Why would you? Bitcoin has no intrinsic value. Bitcoin isn’t backed by any commodity or government. Some have rightly compared it to the tulip mania or the dot-com bubble. Bitcoin will go through hiccups for sure. Worse still, it could fail. I agree with those who say Bitcoin maybe too volatile to be a currency for now.
This is quite a depressing conclusion.
It makes the title of this blog post appear foggy.
There are risks when you invest in Bitcoin. However, I also believe there are risks with our current currencies as well. The value of fiat currency is being destroyed right in front of us. We are all seeing trillions of fiat money being printed out of thin air. Especially after COVID happened, the printing skyrocketed. There is a limited supply of Bitcoin. By comparison, I am not sure same can be said of the USD or CAD or any other currencies in the world.
Bitcoin is new technology. I believe in science and technology. Naval Ravikant rightly said, society follows technology. Society does not control technology. Bitcoin is extremely volatile and the uncertainty is there. But, here’s the crucial detail you need to remember. Volatility and uncertainty works both ways and introduces opportunity too. You take risks to get reward.
Recently, major corporations are using Bitcoin as a reserve asset for part or majority of their treasury. We saw Microstrategy Inc, a Nasdaq-listed company revealed that its board of directors has approved to put 85% of their $500M balance sheet into Bitcoin. More recently, Square made an announcement saying it had bought about $50M of Bitcoin for their balance sheet. $50M is approximately 1% of Square’s assets.
Jack Dorsey has one thing listed in his bio on twitter i.e. #bitcoin. Dorsey sees value in Bitcoin like many other billionaires. Additionally, PayPal entered the cryptocurrency market announcing less than a week ago that its customers will be able to buy and sell Bitcoin and other virtual currencies using their PayPal accounts. After PayPal’s news, Chamath Palihapitiya tweeted – “Every major bank is having a meeting about how to support bitcoin. It’s no longer optional”
Central banks have not put Bitcoin as their reserve asset yet but my belief is it will happen sooner than later. More importantly, let’s not forget about Fidelity Investments. Fidelity’s CEO Abigail Johnson has rightly been dubbed as Bitcoin’s Unlikely Evangelist. Further, fidelity recently published a paper showing positive impact for 1% – 5% Bitcoin allocation in client’s portfolios.
But even more crucially, most Bitcoin owners are not selling their Bitcoins. Instead, they are holding their Bitcoins. Anthony Pompliano correctly announced on his recent letter, “More than 60% of all Bitcoin in circulation today have not changed hands in the last 12 months. This means that majority of Bitcoin investors stomached multiple double-digit price movements, both up and down, and continued to hold the asset. They even weathered a 50% drop in price during a single day of the liquidity crisis in March 2020 without selling. So the likelihood that the 11M+ Bitcoin that is currently being held by strong hands will trade in the short term is very low.”
These findings are shocking to some but it is the truth.
This is not science fiction.
What does this mean? The first thing you learn in economics is supply and demand. People are holding their Bitcoins and this will create scarcity value to it. Demand for Bitcoin will skyrocket and we know the supply is very limited.
What corrects it?
The price. In the blink of an eye, the price of Bitcoin will balloon.
You could be skeptic about what I am saying here in this blog post. Further, Peter Doyle revealed on the pomp podcast some may question Square only putting one percent in Bitcoin and argue Microstrategy’s founder made the wrong move. It is hard to ignore Fidelity Investments, one of the largest asset managers in the world.
All of us living in The Western world have yet to see the tragedy caused by the devaluation of our current currencies. Things are far less rosy in countries like Venezuela, Zimbabwe, Iran, Lebanon, Argentina and many others. I have never had a conversation with Justin Trudeau but I would ask him to call his finance minister immediately and own some bitcoin so Canada is not left behind.
Bitcoin owners will wake up one day in 2025 and say this – “I jumped at the opportunity to own Bitcoin five years ago and the rest is history”.
I vividly remember euphoria swept the Bitcoin world in December 2017 as the price of Bitcoin hit close to 26K. I thought to myself: What on earth? Many were thunderstruck. Then, a few months later, the panic began. The price of Bitcoin dropped down to around 4K in less than a year. They said Bitcoin won’t survive. They said Bitcoin will disappear like most of the technology companies during the dot-com bubble.
More than a decade later since it’s inception, Bitcoin is still here. Bitcoin has survived. Mt.Gox, the world’s largest bitcoin trading exchange collapsed in early 2014. Canada’s own crypto-exchange Quadriga, shut down as recent as January 2019. I remember taking a selfie with my driver’s license to verify to open an account with Quadriga like it was yesterday.
With each attack, the Bitcoin system gets stronger. In turn, the number of people owning bitcoin swells. Multiple governments have attacked Bitcoin. Same goes for politicians, economists and journalists. The headlines were horrifying, sickening and outrageous but none succeeded. They came up empty. The effect of the Bitcoin System is electric and Olympian.
Mind you, the stakes here are surprisingly high. Don’t be left behind. Once again, what comes to your mind when you hear the word Bitcoin?
Thanks to Vijay Boyapati for the idea, all errors are mine.
Disclaimer: None of this is financial advice. Please be careful and do your own research.