I have held off on sharing my true feelings about Bitcoin until now, as it soars past its all-time high, so that it will be maximally humiliating when the bubble bursts and all the funny Internet money becomes worthless again.
See, I have something to get off my chest: I don’t think Bitcoin is stupid.
No, not even at these apparently ridiculous prices. Not even when financial illiterates are making grandiose claims about where it’ll end up.
Lots of people have made the case for or against Bitcoin using careful technical or fundamental arguments. I’m not going to attempt that in this post, or regurgitate the basics of cryptocurrency (I’ll suggest some resources later on).
Instead, I want to make two points I haven’t seen addressed elsewhere:
- Bitcoin as a hedge against FOMO
- Speculation as a useful and productive economic activity
Before we get into it: why am I writing about Bitcoin specifically, and not one of the other bazillion cryptocurrencies conjured out of thin air? Or, as Mr Money Mustache asks in his article Why Bitcoin is Stupid, why not invest in his fingernail clippings instead?
They may have no intrinsic value, but at least they are in limited supply so let’s use them as the new world currency! Why not somebody else’s fingernail clippings? Why not one of the other 1500 cryptocurrencies?
Shut up, just send me $100 via PayPal and I’ll send you a bag of my fingernail clippings.
Bitcoin as Crystallised Trust
It’s true that bitcoins have no intrinsic value, but this is not quite the slamdunk that MMM thinks it is. Our entire civilisation is built on abstractions that only exist in the hallucination of our shared social reality. ‘Money’ and ‘human rights’ and ‘justice’ are not natural forms woven into the fabric of the universe. They exist only because there’s a critical mass of people who believe they exist.
MMM is also right that there’s nothing special about Bitcoin in particular. The protocols it uses are not a secret, and can be copied and adapted by anyone. Bitcoin could be dethroned by any of thousands of rivals.
But the reason we might expect Bitcoin specifically to be a store of value is very simple, and requires no analysis whatsoever of its competitors: momentum.
So long as nothing disastrous happens to the protocol itself—and as far as I understand, that’s essentially impossible (EDIT: see the top comment by Norswap for plausible disaster scenarios) Bitcoin doesn’t have to do anything to outcompete. It’s already accumulated 12 years of crystallised trust and belief, which is an eternity in digital time, and makes it extremely difficult for new challengers to get a foothold.
Bitcoin’s first-mover advantage and network effects are not a ‘nice-to-have’. That’s the entire value proposition. The desirability of Bitcoin comes from the fact that so many people are invested in it, doing the mathematical work to keep it secure, and so on.
So: you don’t have to believe in Bitcoin to understand its value proposition. You just have to believe in belief.
Bitcoin as Digital Gold
What’s Bitcoin good for? I like the comparison to ‘digital gold’. It’s not super convenient for daily transactions, just like it wouldn’t be ideal if you had to carve off a bit of your gold ingot to tip the Uber Eats guy. Instead, it’s a durable asset with built-in scarcity, which acts as a reserve or back-end for many smaller transactions batched together. This is how central banks and nations have used precious metals since forever.
Gold is pretty and has some industrial uses, but its value proposition is almost entirely based on this use case, i.e, thousands of years of social proof. It’s a gigantic pain in the ass to transport, divide, store, and secure—dimensions on which Bitcoin is massively superior—but it’s still worth about $10 trillion. So it’s not crazy to expect that Bitcoin might takes some market share from gold as a longterm store of value.
Except…I don’t like gold, either! As I’ve pointed out before, gold is not really a hedge against inflation, or a good longterm investment, or great as a countercyclical asset class.
I am very much in the Warren Buffett camp of not wanting to invest in non-productive assets that just sit around gathering dust. The only way you can make money from gold is by finding a greater fool who is willing to pay even more for a pretty but fundamentally useless lump of metal.
Sounds an awful lot like speculation to me. But is that really such a bad thing?
Speculation is Not a Dirty Word
Here’s MMM again:
When you make this kind of purchase, which you should never do, you are speculating, which is not a useful activity.
I am always going to tell you that price speculation is a bad way to spend your life. This part of it is ideological to me: You Must Earn Your Money By Creating Value for Everyone.
I am very sympathetic to this argument, and feel pretty much the same way. I’ve been highly critical of forex, penny stocks, and trading in and out of equities, because these are zero-sum games: you can only win at someone else’s expense, and once you factor in transaction costs, the game becomes negative-sum.
But an ideological belief is a dangerous thing. I’ve reluctantly come around to the idea that speculation is not zero-sum, albeit in a clumsy and horrifyingly wasteful kind of a way.
Here’s the relevant passage from a 2017 article I wrote about the crypto boom:
While this is going to cause a lot of hurt for a lot of people, the boom and (impending) bust of the ICO bubble is sort of a good thing. The speculative period during the early adoption period of new technologies helps attract a flood of capital, with at least some of the profits reinvested in the platform. Greed is the perfect vector for raising awareness, with a wave of FOMO rippling through society until even your grandma is sending you texts about the price of Ether.
The dot-com boom was one of the biggest bubbles in history, but that didn’t mean the web was not, in fact, a huge deal. […] The hype was real, but there had to be a big painful consolidation before we could unlock the real potential.
The same is true of crypto. The financial system is long overdue for an overhaul, and people are right to be excited about that. It wouldn’t be surprising if some application of blockchain technology became as ubiquitous as the personal computer and the Internet, both of which were originally pooh-poohed by sneering critics who failed to see the writing on the wall.
The Dotcom comparison still looks good to me. Most of the shitcoins have been sent to the crypto graveyard, while the quality ideas—the Amazon.com equivalents—are doing better than ever.1
As I suggested in the book, through gritted teeth, one potential black swan hunting ground is speculating on emerging asset classes where you have some unique insight. Of course, it’s too late for that now. Bitcoin early adopters are mega-rich; we don’t have the same kind of upside available to us.
(I started buying crypto in 2017, around the same period as I wrote the Spinoff article quoted above, although you probably wouldn’t guess from reading it.)
But even us Johnny-come-latelies are, in a loose sense, playing our part in ushering in a new age. And if you consider that only something like 1% of the world’s population owns Bitcoin, maybe we’re not all that late.
So let’s do the whole upside/downside thing.
The Asymmetric Opportunity for Bitcoin
Here are what I see as the three main scenarios for upside:
1. Boring bluechip
For me, a modest upside would be anything up to a 10x return, i.e. the price hits ~$200,000. This is what happens if Bitcoin becomes the dominant digital store of value, takes some market share off gold, and becomes a ‘bluechip’ with lower levels of volatility in each subsequent cycle.
2. Hyperinflation
Personally I think this gets way too much attention (Venezuelans or Zimbabweans might feel otherwise). Modest inflation or stagflation is a much bigger consideration, albeit not as spectacular in terms of upside.
3. Global reserve currency
This is the moonshot one for me. The Fed’s printing money like the greenback’s going out of fashion, which… it just might be?
We know it’s possible for the global reserve currency to change, because it’s happened before: first with the pound sterling, and arguably with gold. There are various candidates for a replacement, but Bitcoin is certainly in the mix. It’s interesting to note that China is already breaking its reliance on USD by building its own digital currency to transact on, and central bankers in dozens of countries are planning similar moves. If a central bank starts actually buying bitcoin, hold onto your butts.
Now for the potential downside scenarios:
- Every universe in which none of the above three events happen, in which case, your bitcoin will be worth approximately zero dollars.
What probabilities should we assign to each of these scenarios? I was tempted to do this, but I’d probably just end up working backwards to justify my beginning intuitions.
Instead, I’ll make a couple of general statements:
- I believe Bitcoin is much more likely to fail than to succeed
- I believe the expected value (EV) of the bet is still positive
Some bullshit numbers for the sake of illustration: if Bitcoin fails in four out of five possible worlds, it has to make at least a 5x return in the final world for the EV to come out positive overall.
I think that’s more-or-less the position we’re in: bitcoin will probably fail, but in the event that it wins, it wins big, and even the current prices will look astonishingly cheap.
So we can still get exposure to potentially asymmetric returns. To be clear, they’re not all that attractive: early adopters were the ones who got the really life-changing upside. But I still think it’s an OK speculative bet to add to a portfolio with an allocation for these kind of positions, e.g. the bastard’s barbell (see the post, improved upon in the book).
What does that mean, practically speaking?
How Much to Invest in Bitcoin
Is Bitcoin stupid? Absolutely, if you do any of the following:
- Having an exposure that is more than single digits of your portfolio
- Trading in and out constantly
- Taking on personal debt to load up
- Other variations of outright gambling, e.g. punts on shitcoins
We have to remember the difference between expected value and expected utility—we can’t bet the farm on a single idea, even if we think it has a very large EV, because in all the worlds where it doesn’t pay off, we’re screwed.2
The general consensus is that someone who is in a comfortable financial position might take a position of about 1-2% of their net worth—an amount of money you can afford to lose without changing your quality of life—and then hold it indefinitely. (This is what I’ve done.)
But when we look at what the sensible advice actually means in practice, there’s something interesting that no-one’s really talking about.
If you do the only responsible thing, which is to limit exposure to a small portion of your portfolio, even a 10x return is not going to have a transformative impact on your fortunes: ($100k net worth * 1% stake * 10x return = $10,000, whoop whoop). We’re going to need another order of magnitude to start getting the kind of asymmetry that doubles our net worth, and that’s way out in the wildly-unlikely branches of the multiverse.
In other words: there’s no way to get stinking rich here, without taking on an inappropriate level of risk through the aforementioned leverage, trading, large exposure and shitcoin gambling. The ship has already sailed; our upside is just not all that attractive.
Which is why I say that the strongest case for bitcoin right now is not actually a transformative financial return—it’s a hedge against FOMO.
Bitcoin for Hedging Regrets
Fear of missing out (FOMO) is what drives ‘dumb’ money to pile into asset bubbles. This is largely what fuelled the last hype cycle; no doubt the same thing will happen again in this one.
My slightly edgy take is that people with FOMO are not necessarily behaving irrationally from a psychological perspective, given the constraint of limiting exposure to a small % of net worth.
What do we know about regrets? You regret the things you don’t do more than the things you do. If you invest in Bitcoin and it goes bust, you probably won’t regret it so long as you’ve framed it as play money that won’t change your life outcomes. If you invest in Bitcoin and get a 10x or a 100x over years/decades, you will feel smug and ‘in the loop’ and get to brag about how early to the party you were, even if you were kinda late and it was only ever a small percentage of your net worth in the first place.
This is similar to the phenomenon in which status-hungry rich people try to get a tiny slice of a unicorn company at series C/D/E long after it requires any kind of brilliant insight, so that they can put ‘early investor in Uber’ in their twitter bio. Is this lame? Yeah, but they still get to brag about it.
So here’s my actual framing on Bitcoin: it’s primarily a hedge against FOMO/having to eat crow, with some minor benefits in terms of diversification, inflation scenarios, corrupt governments, and so on.
I’ve owned crypto for more than three years, and have started buying more seriously in recent months. So why did it take me so long to come out and actually say so?
Respectability and Bitter Nocoiners
If you read my article for the Spinoff you’ll notice I was fairly acerbic—mostly about ICOs, on which history has proven me right, but about the broader phenomenon too, where my public position didn’t entirely match up with my private actions.
Why? Partly it’s a matter of responsibility: as a journalist, you have a duty to be skeptical and make sure your readers don’t get rekt.
But there’s also a social consensus thing going on. The respectable mainstream position is (or was) that this is dodgy online money used by criminals and hucksters. Except…that’s wrong.
Anyone who has been paying the slightest bit of attention knows this is not true. Hedge funds are in. Major banks are in. Billionaires are in. Paypal is in. Serious investors are in. If and when a boring-ass central bank starts holding some of its reserves in crypto, the salty nocoiners who still think it’s all a big scam are going to look pretty silly.
Why are former skeptics not updating on this? Maybe they’re still right and the new evidence doesn’t change anything, or maybe it’s confirmation bias. Personally, I’m relieved I didn’t write crypto off entirely, a la MMM ( “We’ll start with the answer: No, you should not invest in Bitcoin.“) or the drive for internal consistency might have prevented me from being able to reevaluate that position.3
It’s easy enough to overcome the social respectability thing privately, as I’ve been doing for the last few years, but very hard to do publicly. If Bitcoin ultimately fails, then everyone will tell you how dumb you are, MMM will write another triumphant article about his toenails, etc. And remember that this is the most likely outcome! So you have to be OK with that, although so long as you keep your business to yourself, you’re good.
In any case, I’m secure enough in my position not to mind what strangers think of me.
The aim of this article is to add my own tiny bit of social proof to the whole enterprise, and offer a counterpoint to some of the other voices in the personal finance blogging community who have led their readers to miss out on the best performing asset class of the decade, and are currently in the process of doubling down on their position.
Bitcoin is kind of stupid, but it’s also kind of awesome. Ignore the relentless shills and the hardcore haters. The truth lies somewhere in between.
I’m curious where Deep Dish readers stand on this. Do you own crypto? Do you think I’m full of shit? If you’re bearish, what’s the best counterargument to my framing here? What are your favourite resources?
Notes:
- Bitcoin has baked this hype cycle into its very structure, with its regular halving of supply all but ensuring it would get headlines with each boom and bust. Crucially, volatility contracts with each subsequent cycle, and credibility/trust builds. I don’t know if this was deliberate, but if so, it’s genius.
- If all this EV stuff is going over your head, see Chapter 22 of Optionality for the full explanation.
- I love MMM’s stuff but his ‘fingernail clippings’ take was honestly not great, and he’s still doubling down on it—this being the kind of narrow prescribed ideology that makes me somewhat less enthused about the FIRE movement.
Not Sure What the Future Holds? Get Your Copy of Optionality Now.
Nice article on a contrarian opinion. Particularly liked the “hedge against FOMO” argument, which strikes me as particularly lucid.
But if I had to argue a single thing, it would be this:
I, on the other hand, think disaster is likely. In fact, things were dire not so long ago. The following piece by a former Bitcoin Core developer should be required reading for anyone considering Bitcoin:
https://blog.plan99.net/the-resolution-of-the-bitcoin-experiment-dabb30201f7
I can tl;dr at least two major risk for Bitcoins. The first is that the blockchain is completely manipulable if you own more than 50% of the mining power. Historically, this would only have required a few companies to collaborate. I haven’t followed the situation recently, but I believe this risk can’t be ruled out even if there are now more players.
The second risk is similar, but related to ways in which the companies controlling bitcoin mining can influence bitcoin negatively. While the 50%-rule entails hard technical control, this is more of a “soft power” situation.
Let’s trace this issue from the start. There has to be miners. For this, mining has to be profitable. Bitcoin famously has “halvenings” every so often, where the cryptographic difficulty increases, increasing the mining computing power required, and effectively halving the number of bitcoin emitted by unit of time. For mining to stay profitable, the reward has to keep up – either by an increasing bitcoin price, or by an increasing reward.
Now, I’m not actually worried about running out of miners. Because the companies could step up and change the protocol to increase profitability, one way or another.
But in the mean time, this makes more difficult to turn a profit mining bitcoin, pushing more of the market into the hands of a handful of specialized corporations.
Like I said, these companies actually have a lot of power in deciding the future of the protocol. If a majority of companies decide to switch a detail of the protocol, everybody has to follow suit, lest a blockchain fork occur (as was the case with Bitcoin Cash).
These changes can be both dangerous and self-serving. And they have been. If you refer to Hearn’s blog post above, he explains how a change in Bitcoin 0.12 allows transaction to be reversed before they’ve been processed by the blockchain. Key excerpt:
This may have been fixed (again, I’m not keeping up). But this happened, and could happen again.
The key thing is that the bitcoin ecosystem was controlled by shady characters (see the article to get a good sense) and that mining companies have to power to change the rules on you. Additionally, their incentives do only weakly align with that of Bitcoin’s users: everyone wants the price high, but miners don’t necessarily prioritize usability, security, etc.
But there is more. These companie could be ill-intentionned. They could also be incompetent. That’s actually the main point of Hearn’s article – the failure to change the block size when it was the obvious right technical decision. (The block size has ultimately been increased, but much longer after it should have, causing issues that were completely avoidable.)
I’m not against cryptocurrency (heck I mined two bitcoin of my own back in 2011) – there might come one that is actually useful (no such crypto I’m aware of currently fits the bill, except maybe as a way to fly under the legal radar for both good or bad reasons). But bitcoin seems to me “risky in the short term, risky in the long term”. In fact, short term bitcoin swinging might be the “””sanest””” way to play bitcoin. Personally, I’ll just keep playing with options instead (which I started recently, and I’m shocked – there are literally bills on the sidewalk).
I personally regret not investing in bitcoin back in 2011. I was 20 and just not thinking about money much. But there was a good thesis to be made that there was a small chance that it would 1000x over a few years. Basically, you can throw a couple hundreds of dollars at it. If you lose them, you don’t hurt much – but if you hit the jackpot you get a transformative amount of money. Today I feel like this thesis no longer holds: the upside is much lesser. There are a lot of potential issues.
Great comment, thanks—this is exactly the kind of thing I was fishing for (a potential pitfall I hadn’t considered). My understanding is that most of the concerns raised in Hearn’s article have been addressed since 2016 (e.g. scalability), but I’ll definitely go through it more closely and try to figure out where things are at now.
In the meantime, a question if you’re game: how powerful is the mining bloc? I understand that they’re essentially in control of the hashrate, but what are the implications of that besides the 51% attack thing? Mad respect for China’s ability to get shit done but I doubt the government can somehow coordinate thousands of miners in secret.
Editing to be more specific: are we talking some kind of coordinated action amongst miners to act in a self-serving way, which isn’t out-and-out 51% double spending, and independent of e.g. the Chinese government?
Thanks for you kind words 🙂
I don’t think we’re dealing with “1000s of miners”.
Here’s an article on the big players in 2015:
https://www.businessinsider.com/bitcoin-pools-miners-ranked-2015-7?r=US&IR=T
The top 4 have > 62%, with 16.4% outside China.
Couldn’t find a 2020 equivalent easily, but this lists mining pools (cooperative mining):
https://www.buybitcoinworldwide.com/mining/pools/
Already, the 5 biggest pools account for ~ 57% of blocks, if this is to be believed. 11% is in Russia, the rest in China.
In both cases, 5 actors are enough to be a majority, and 5-6 Chinese actors are enough.
About the implications, if these actors collude, they can influence the bitcoin protocol. Their intentions shouldn’t be too nefarious – they profit from Bitcoin so it’s not in their interest to kill it. Also for mining pools, it depends on the size distribution of individual miners, as they could easily defect to another pool, diminish the risk of controversial shifts in Bitcoin direction.
But they can make bad (and not necessarily unpopular) decisions regardless – as they did in the past when the block size was not increased and the transaction processing rate was strangled.
This risk is not very definite. But I don’t think it’s a good idea to model Bitcoin as a “resilient decentralized” system. In practice, it carries risk that is more similar to a national economy (where bad central bank policies can have disastrous and/or unpredictable consequences).
Just one doomsday scenario for flavor: if the transactions rate is strangled, the lack of liquidity could trigger some kind of “bank run” (wallet run?) if coupled with a crash (get your money out now – while you still can). Unlikely, but so is every black swan scenario – yet one of those happens every so often.
To be clear, it’s not impossible (and not even implausible at all) that Bitcoin just cruises higher and higher (in that sense, I think a small FOMO bet might make sense, even if it’s not the best expected return you can get on the market). I’m just saying it’s a risky investment and should be planned/hedged accordingly.
I haven’t considered Bitcoin investing recently, but I used the same kind of reasoning to decide against another crypto investment: I was considering investing a sizeable sum to put some stable coins on BlockFi, which gives a lofty 8% return rate. But I ended up choosing against it because there is a small but non-trivial risk that BlockFi goes bust (google “blockfi rehypothecation” to know more – they also have significant Bitcoin exposure – what happens if it crashes?). If I’m going to take this kind of risk, I want more returns, and probably invest a smaller sum too.
Thanks a lot for the further explanation. On reflection, these kind of scenarios are plausible enough that I’ve changed my risk model slightly (and edited the post accordingly). It doesn’t make all that much difference in practice, but I will probably rebalance a little earlier than I had planned (i.e. reduce exposure back down to ~2% of portfolio once I hit my target price) then continue to ride or die on the rest.
As I understand it, the physical tech to mine has now been mass produced (China, I think) to lower process costs, also design improved, become more efficient, and therefore more profitable.
Excess/unused = cheap power is found in Russia and Iran, and using off peak (iirc) in Texas (at least).
The “mass production tech” (mining AASICs) is not new, but you may be right that costs will keep low. Revenue being split in half 4 years is no joke though.
Really interesting article. Given that this was written in December, it seems you must be quite happy with your BTC purchases.
I’m really new to this whole crypto discussion, and I feel I’ve been waiting too long to educate myself on the topic. The online community surrounding cryptocurrencies tends to make a bad impression on people, myself included.
When you talk about central banks and other financial institutions adopting blockchain technology and/or buying up tokens as some sort of reserve/hedge, where is the real utility in this when there is no stability in crypto aside from stablecoins? Also, wouldn’t major federal crypto regulation need to come before these practices become acceptable in major institutions (talking about the US here). Tax evasion and money laundering come to mind. Wouldn’t the whole “decentralization” ethos be defeated in the process of necessary regulation being put in place?
I wouldn’t surprised if BTC lost the thrown to one of the many far superior blockchains, but as you said, the long-term public exposure bitcoin has goes a long way in this timeline.
This was an interesting read, and I’ll definitely be checking out some of your other posts.
Yeah, CBDC would be both centralised and stable in value, e.g. pegged to the USD. Obviously fiat currencies are not appealing to the typical crypto investor, but it has major utility for governments in being able to quickly, cheaply, securely and immutably send and receive payments, especially with people outside of the traditional banking system.
Glad you enjoyed the article.
Something you didn’t mention was the climate impact of Bitcoin. All of that processing power constantly running to mine bitcoins and process transactions is using up an awful lot of electricity (in fact it uses more electricity than the entire country of Ireland). And what’s worse, this mining is mainly taking place in countries with the cheapest power and dirtiest generation (i.e. coal).
I’m a big fan of your blog Rich but I think it’s irresponsible not to mention this angle, given the situation our planet is in. Bitcoin is not only an awful currency, but also tremendously destructive to our environment. I would really encourage anyone thinking of ‘investing’ in crypto, to think about the environmental impact of doing so.
Hey Freddy, it’s impossible to cover every facet of this thing in one little blog post so you’ll have to forgive me! One of the resources I linked to has a response to the environmental concerns which might be of interest (point number 4 in her list). It also becomes much less of an issue in a future in which energy is both cheap and clean, which I personally think is not at all implausible (e.g. see Noah Smith). But we’ll just have to wait and see.
This is exactly how I speculate on BTC and ETH. I limit it to no more than 5% of my portfolio, max. Most of the time I’m in the 3-4% range. If I lose it all, it’s only 5% of my net worth (exclusive of residence).
Awesome article, Rich. What is your reasoning when you say about hyperinflation that “Modest inflation or stagflation is a much bigger consideration, albeit not as spectacular in terms of upside.”? Would love to hear more on this, as it seems counterintuitive at first glance.
Hi Ryan. There’s a lot of fear around extreme, Zimbabwe-like hyperinflation scenarios, which is fair enough to consider as a tail risk, but the return of regular inflation is vastly more likely and perhaps doesn’t get enough consideration. Here’s a primer by Lyn Alden which I found extremely useful for getting my head around the implications of record-breaking QE.
I wish Bitcoin was also seen as a medium of exchange as much as a store of value. It’s completely possible.
What’s the case for medium of exchange? Lightning network works out?
Agree the bitcoin initiative created trust; also agree it is perhaps the ‘private coin’ may be a transient phenomenon. Why? A government must control the issue of accepted currency. It can’t allow global-systems scale transfer of value to removed from it’s hands due to digitization.
I am sure this has been exercising the most brilliant banking and economist minds for decades now. THEY aren’t stupid…
The realpolitik of the world at the moment is the move by the west to create a ‘bloc’ controlling as many elements of trade and rules around trade as possible – and the block chain technology is (fortuitously?) perfectly timed to enable this.
The EU filed the trademark ‘digital euro’ on September 22 2020. When you look at what processes the trademerk covers, you virtually have a blueprint for the future of Central Bank transition to blockchain tech driven virtual currency.
I suspect all the bitcoin-type instances will eventually be buried by Central Bank instances, which have the additional features (claimed) of reduced volatility, great depth, and the ‘force’ of law.
Here are the functions, from the trademark application:
applications for both goods and services:
Notice it doesn’t exclude bitcoins. It does integrate them. Notice also that it acts as the gateway for issuing and redeeming of digital tokens.
It will be interesting to see how this evolves, especially with China doing a similar thing. (Russia appears to be sitting on the sideline, and how India will cope is a mystery. ‘Trust’ in India is the gold bangles on women’s arms.)
I’m interested in seeing what happens with CBDCs but don’t really see them as a threat. Partly because the use case is different, and partly because the ship has already sailed on the whole “a government must control the issue of accepted currency” thing. Any given govt could certainly make life more difficult for its citizens but there’s nothing they can do to stamp it out globally—that’s the whole point of decentralisation.
John Rubino makes this point: “The supply of viable gold miners is constrained by geology. There’s just so much gold out there, and most of it has already been found. But the number of cryptos with algorithmically-constrained supplies is potentially infinite.
And as money flows into that space, the incentive to create more bitcoin clones – and to sell bitcoin itself to buy those potential hundred-baggers – rises. Put yet another way, bitcoin’s first-mover advantage is real, but the constraints on its dominance imposed by the other viable cryptos seem real too. Very few sectors are swallowed up by a single entity, and it’s not yet clear that cryptos are an exception to that rule.”
My understanding is limited, but the essence is that any number of blockchains could be set up – whether public or private.
Private blockchains are controversial because the software (presumably) is proprietary, and control therefore in private hands. I guess the ‘digital euro’ will be private (Central bank/bank consortium owned).
Public blockchains are controlled by the ‘co-op’ of users, so to speak. All transactions are visible publicly, but possibly can’t be controlled by a cabal.
But the politicians have an immensely powerful leverage point in a countries system – and that is what may be used as ‘legal tender’ for goods and services. And what may be considered as ‘legal currency’ for payments of taxes and receipt of government-originated payments.
Governments may differ in implementation. EU seems to be going full ‘in-house’. China seems to be going ‘let a thousand flowers bloom’ in terms of application software on a blockchain. As long as China controls it’s core, then interoperability is an asset. And Ethereum seems to have strengths in this part of the system (and a lower price point).
Where will bitcoin-like block chain instances be when linked financial institutions agree to a private protocol, with patented software, with very high public utility?
Perhaps some will end up as a facilitator of a goods for goods and services for services bartering system. As an example, at one point New Zealand Dairy Board (as it once was) traded butter to Russia in exchange for Lada cars to be sold new on the domestic market. Why? Because Russia was an important market, but was in a financial crisis, with little foreign exchange capacity. (As a result of this scheme, we bought a Lada Samara, only ever new car, a great little car – once the “chernobyl” in the ignition switch was repaired.)
Perhaps others wills be ‘apps’ integrated into some, but not all, State/Bank public/private blockchain system/s.
I bought a small amount a few years back for much the same reasons as yours. Probably slightly more bullish as I’d be surprised if it disappeared completely now more mainstream institutions are starting to take notice. But the final value could be 50% or 10x of where it is at the moment.
I also think there is something to brand recognition. The value of Coca Cola is not in the fizzy flavoured water, but in the brand surrounding it and the investment made in it over many decades. There’s an element of the same with bitcoin. The underlying technology might even change, but I suspect it has enough of a wind behind it now that an almost seamless way of bringing along existing owners would also be found.
Kicking off with some resources. Lyn Alden has some handy breakdowns on bitcoin, QE, portfolio design etc. These two pieces in particular played a part in my decision to start buying again in the last few months:
3 Reasons I’m Investing in Bitcoin covers the halvening cycle, macro factors (inflation and QE), and the network effects I touched on briefly.
Misconceptions About Bitcoin covers electricity wastage, scalability, bubble formation, volatility, and regulation.
Great article Richard and I think the last paragraph hits the nail on the head! I used to be in the “fingernail clippings” camp but after learning more about Bitcoin and crypto believe that it will have increasing utility over time. Tim Ferriss’s podcasts with Naval Ravikant have been quite informative. I purchased a small amount of Bitcoin prior to this year’s halving mainly as a hedge against FOMO as you described. I’m not expecting this amount to make me rich but am willing to make this small “bet” for the potential upside, especially given the current low interest rate environment.
Hey Matt, nice. Those Naval podcasts are great—I really enjoyed the most recent one. Another excellent recent listen was on Erik Torenberg’s show: The State and Future of Crypto in 2020 with Avichal Garg. Has some interesting stuff on China and regulation.
Knowing next to nothing that isn’t widely known about crypto, I’ve been increasingly curious about it as a 1%-2% speculative bet on the edge of my portfolio. This post was largely in line with my own thinking – anyone buying today is probably too late to get the astronomical returns that were possible for the true early adopters, but there’s likely substantial speculative upside if things continue going the way they have. A couple risks to the thesis I’ve had popping around my head, but haven’t tested in public:
1) If crypto’s best realistic case in the boring bluechip scenario is “gold, but digital,” wouldn’t gold have a significant longevity/exposure advantage? Shaving some share off gold and gold products would be good, but could take decades as older investors who don’t trust it die out and subsequent generations become increasingly comfortable with a digital asset. Timeframe for the 2x-10x returns you suggest becomes very important. Doubling your money over ten years would get you…about even expected stock market returns, at higher risk (no intrinsic value to fall back on). If this is a multi-decade process to reach the upper ends of that bound, the case against this being called “asymmetric” gets stronger.
2) Complexity is a barrier to adoption here. Nobody has yet found a way to explain bitcoin to me (a person who’s worked in finance his whole career) in a way that doesn’t make my eyes glaze over. I understand the basics, but I don’t understand the mechanics, creation/halving system, mining, etc. etc. If I don’t fully get it, I can’t imagine what I’ll call Regular Folks picking it up and saying “sure, I get this enough to trust it.” Especially for a generation that came of age during the GFC, I think not understanding how it works = distrust.
That said, I’m past the point where I can avoid doing further homework on this. Unclear if I’ll end up giving it a shot, but this article has added fuel to an ongoing fire. Thanks for the thought-provoking post, and please point out any glaring holes in my logic!
Hey David, solid points. One complication with gold is that if bitcoin takes some market share, that’s going to put pressure on the price of precious metals. I’ve never owned gold for the reasons I’ve given in the past, although it would probably wouldn’t hurt to have a small % for the sake of diversification.
The reason bitcoin has more appeal to me is that it has that inherent uncertainty with potential for a very large upside—to be clear, I wouldn’t be interested if I thought it had less than a 10x, which is the lowest possible floor for any kind of high-risk position for me (3+ orders or magnitude is preferred). This is also determined by my buy prices, which are obviously quite a bit lower than the current market price.
On your point #2: In the fullness of time, I don’t see this as being a huge problem. Extending the dotcom metaphor—I don’t have the slightest clue how HTTP protocol works, or any of the inner workings of the Internet, and neither do 99% of people. I expect there to be retail solutions that make all of this invisible to the consumer, and to basically accept the security stuff as a given (again, in the same way we do with the web). There will need to be lots of education around scams and phishing and so on, but that’s really no different to the current system.
Sounds good. I don’t really want to encourage people to buy; only to do enough research to make an informed decision on whether or not to take part.