My thoughts on bitcoins
I recently tried to think about bitcoins a little more, a little deeper than the surface level. On any day there is typically a wide range of opinions about bitcoins. It could go to $1m USD per bitcoin, it could go to $0. It's useful, it's useless. Because I'm trying to invest in bitcoins a little more seriously now, I want to think about it deeper.
It's a store of value
I have both personally spoken to a lot of bitcoin critics/doubters, and read a lot of opinions online about why they don't believe in bitcoins. Right off the bat, let's get through some critics' arguments and look at what bitcoin is not:
- Bitcoin is not a commodity with intrinsic value (like gold is, for example). When anyone suggests to keep some percentage of one's assets in bitcoins, critics like to immediately bring up that it isn't like gold because gold has practical applications. I fully acknowledge that.
- Bitcoin is not a currency for transaction (at least, there are better cryptocurrencies for that like bitcoin cash or others). Although one of bitcoin's original feature was transfer of value, the speed and fees make it unfeasible for either daily consumer uses (fees) or backbone infrastructure money transfers (speed/scale). Critics love to point this out, and how bitcoin is not truly a currency because of this. I also fully acknowledge that.
- Bitcoin is not a stock (even though it is often traded like one). The stock price of a company is tied to how well the company makes money. Critics of investing in bitcoins would point out that the price of bitcoin is not tied to anything like that. Again, I fully acknowledge this.
In my opinion, this is actually what makes bitcoin interesting — it's categorically a different thing than everything we've known about before (which might be why it's so hard for people to wrap their head around, or to accept what it is). It's a pure store of value.
There are lots of arguments related to this, from proponents and critics. Because it's a store of value, various arguments about inflations, USD risks, etc. typically come up. I just want to talk about it at the most fundamental level (without speaking about what factors may contribute to or act against its use as a store of value) — the fact that it is a store of value now, in 2021, simply because enough people around the world recognize it as something with value (i.e. a store of value).
Bitcoin achieved the unlikely
For everyone in the world to accept an arbitrary thing as a store of value, you first need a critical mass of people who value it. For there to be enough people who value it, you need a critical mass of people who own it and consider it a store of value. As you can see, this is a chicken and egg problem. Or rather, it was. Bitcoin has solved it; it has gotten over that hurdle.
You can read all about bitcoin's history and why Satoshi Nakamoto created bitcoins (after the 2008 financial crisis). Perhaps it was the catalyst that made enough people get interested in the project. And then there was thousands and thousands of other factors in the subsequent years that eventually lead to bitcoins becoming a mainstream store of value that it is now. What's important is not how we got here; it's the fact that we are here now. Critics like to point out how bitcoins at its core and origin are fundamentally useless. This is where I think it's more important to consider the situation of the present, rather than looking at the history (of how something that was fundamentally useless became a globally accepted store of value).
What's the value then?
This is where I had a key revelation after taking some time to think about it more. First, I'll acknowledge that bitcoins, like stocks now, will always have a large amount of day traders, high frequency trading algorithms, stop losses, and so on; and things that essentially make the market of bitcoins a living organism with behaviors that technical analysis / charters can study infinitely. I'll fully acknowledge that these have a huge effect on the price of bitcoin.
But I'd like to take a step back here. The traders and daily actions are going to happen; for a second let's remove them as a factor. Fundamentally, the value of bitcoin then comes down to how many more people in the future want to own some portion of bitcoins, compared to now. If the answer is more, the value will go up. If the answer is less, the value will go down.
This is also probably where (as I've learned) I have to put a line of "this is not financial advice". It's simply my thoughts. In fact, this was actually so simple once I've had this revelation, that it seems silly I didn't think about it this way before.
I'll make a few concrete examples. As of right now, Tesla and Square are the two relatively bigger companies who have some portion of their balance sheet in bitcoin. (~10% or $1.5 billion in the case of Tesla which is worth more than $2.5b now, and 5% in the case of Square) In a hypothetical situation, say in 10 years, we have 200 companies holding some portion of their cash in bitcoin instead of 2 companies. That's a lot more billions of dollars that will buy into bitcoin in 10 years.
As another example, Morgan Stanley has recently announced offering bitcoins as an asset for their wealthy clients. Goldman Sachs is said to be doing the same soon. (And JP Morgan announced the same as recently as today!) Hypothetically, if we assume 10% of millionaires currently hold 10% of their assets in bitcoins, then say in 10 years, 50% of millionaires will hold 10% of their assets in bitcoins. You have a lot more millionaires putting a lot more money into bitcoin over the next 10 years.
The Satoshi risk
The next question then, if we believe more and more people will buy and own bitcoins, is what would possibly drive its value down (aside from HFT algorithms).
It is said that a majority of bitcoin supply have already been lost. Many early bitcoiners (miners or traders) have lost their private keys of wallets containing enormous amounts of bitcoins. Lost wallets are unlikely to be recovered (save from a scenario of some quantum computing advances that would crack private keys; but I have no idea what I'm talking about in that aspect). What is a non-zero risk still though is Satoshi Nakamoto.
It has been heavily speculated who Satoshi is. It's most likely a fake name, or could even be a group of people. It's possible the person (or people) is already dead, or arrested. No one really knows. Satoshi also still owns an extremely large amount of bitcoins. If Satoshi actually shows up again and starts liquidating bitcoins, that could pose a real drop in value by way of flooding the supply of bitcoins.
I'm inclined to believe that Satoshi no longer has access to these bitcoins (either because they're dead, in jail, or incapacitated by other means). I think whoever they are, they would have truly hearts made of steel to not have ever liquidated any bitcoins throughout all of history's insane spike of value (at every step along the way).
The scenario of it going to zero is unlikely
I wanted to give a thought exercise to what could possibly drive down bitcoin's value to zero at this point. I believe it would take international geopolitical pressure of unfathomable scale for this to happen.
The US and China are among the biggest drivers of bitcoins now. (Not necessarily the governments, but the people) For most of the world to give up on bitcoins, it would most likely take both of US and China to completely ban and outlaw bitcoins (as in, anyone who owns, transfers, even touches bitcoin goes to jail). This is extremely unlikely to happen because: 1) If the US bans bitcoins first, China will pick up the slack and will actually become the primary owner and driver of bitcoins; which will then severely weaken the USD in the process as China's power grows. I believe too much is at stake for the US to ever really ban bitcoins like that. 2) Similarly, China would also have too much at stake to ban bitcoins. 3) For the aforementioned scenario to happen, it would probably require the US and China to cooperate to ban bitcoin together at the same time. This will happen when hell freezes over. The US and China are unlikely to cooperate on anything at all, much less this.
The elephant in the room is energy
If you frequent Hacker News, you would know that any time bitcoin trends are brought up as topics there, the loudest voices are always about the energy usage of bitcoin mining and how because of it, bitcoins will never last.
The smart crowd of Hacker News is rightfully concerned about bitcoin's energy usage and climate change risks; this is also something I fully acknowledge.
However, I would also say that over the past two decades, countless times I've observed this pattern:
- Amazing tech happens, with one or more significant flaws
- The flaws are not enough to stop its traction
- Critics point to the flaws as why the tech will eventually fail
- Quietly and gradually, the significant flaws are resolved in ways critics and mainstream hadn't thought of, and before you know it, the flaws no longer exist
The very short summary of this behavior is, "life finds a way" (cue Jurassic Park).
I feel that if something is important enough, there will be no shortage of extremely smart people on the planet who will spend their entire focus on solving it. Who knows what the solution might be? Maybe it's data centers set up in the North and South Poles with solar power to have 24/7 mining operations setup completely driven by solar. Maybe it's harvesting more geothermal energy from Iceland and other places with it. Maybe it's nuclear energy in the deep sea. Maybe you launch mining centers to space to get energy from the sun 24/7.
At the end of the day
Again, there is no financial advice here, it's everyone's own decision to buy and invest in bitcoins. Bitcoin critics may be right. I'm personally basing my investment decision on the fundamental factors I laid out above. Hope this helps someone out there frame their mind around bitcoins and cryptocurrencies!