Why I Own Bitcoin
The simple answer is that I own Bitcoin because I think it is valuable. I think it is currently undervalued by the market and, therefore, a wealth creation opportunity for me and those who are currently accumulating Bitcoin. Ask anyone why they own Bitcoin, and you'll likely get some form of the answer I just gave. For many people, this is enough. Their mimetic instincts kick in, and they experience a deluge of FOMO from not owning Bitcoin and start buying. In this sense, acquiring Bitcoin appears to be the same to these buyers as Tesla stock in recent years or Amazon stock in the prior decade - on a clear march up, with the potential for 10x or more gains.
Although similar regarding the potential for outsized economic gains, Bitcoin is different. For one, it's a completely new asset. Few understand it at first. I didn't. People talk about it like it's a currency, so most people balk at Bitcoin's utility. Especially for those in the Western world, they already have relatively stable currencies that allow them to buy all the goods and services they need, and they can use those currencies to pay their taxes and debts. These individuals may have a lot of things they need, but a new currency just isn't one they have considered.
Then, for those curious few that look into Bitcoin a little further, they learn that it takes the Bitcoin blockchain about ten minutes on average to create a new block, which means that it takes the Bitcoin blockchain about ten minutes to confirm a transaction. At this point in my Bitcoin journey, I was thinking there's no fucking way this is a currency. Ten minutes? Can you imagine waiting in line at the grocery store, with a screaming child behind you, an ever-growing line of shoppers behind her, and the cashier with her hands on her hips, rolling her eyes, and smacking her gum as she refreshes the webpage every five seconds to confirm your Bitcoin transaction, and this going on for ten minutes? Moments like these are a great reminder of why we have Visa cards. And I think it is at this point that a lot of people count Bitcoin out as a currency replacement.
At least I did, at first. Scarred by the imagery of a ten-minute grocery store transaction, I was forced to rethink what Bitcoin is. Several people I respected, including Niall Fergusson and Jonathan Bales, seemed to endorse Bitcoin as something valuable. But if I couldn't wrap my head around it as a currency, then what was it? Viewing Bitcoin strictly through an investment lens, I began to compare it to gold. And it turns out that Bitcoin compares favorably to gold.
As we know there is a limited supply of gold, we know there is a limited supply of Bitcoin. According to the protocol, only 21 million Bitcoin will ever exist. Since two people can't own the same Bitcoin at the same time, just as two people can't own the same gold coin at the same time, we know that, like gold, Bitcoin is a scarce asset. Does that mean Bitcoin is as valuable as gold? Maybe.
Gold has some advantages over Bitcoin. The most obvious is history. People have been using gold as a store of value for thousands of years. Humans may have even evolved to view gold as valuable. Different cultures and different nations and tribes, speaking different languages, all have histories of valuing gold. Bitcoin doesn't have that history and can't have that history until a long, long time from now. People have historically put their faith in gold to store their wealth, and gold has performed well. It's held its value over millennia.
The other major advantage for gold is that it has utility outside of being a store of value. I'll bet you know someone who wears a gold watch or a gold bracelet or gold earrings, or any other jewelry form that is typically made out of gold. There's white gold and yellow gold. There's ten-karat gold, twenty-karat gold, and twenty-four-karat gold. Gold is a huge part of the jewelry industry and has been for thousands of years. Again, people speaking all kinds of languages in countries all over the globe want to own gold jewelry and that gives it utility value. Further, in recent years gold has gotten additional utility from its use in electronics. It turns out that in addition to its impressive store of value history and desirability as jewelry, gold is also an efficient electrical conductor.
For these reasons, gold currently has a $13 trillion market capitalization (Spring 2023), which is significantly larger than Bitcoin's $540 billion market capitalization. Is Bitcoin as a whole worth one-twenty-fourth as much as gold? I don't think so. Bitcoin doesn't have gold's store of value track record, it can't be worn as jewelry, and it has no use in electronics or other industrial utility. But it has advantages over gold that, for many, are unrealized and under-appreciated.
The first and biggest advantage of Bitcoin is its transferability. Sure, it's easy to use a gold coin to buy something from your neighbor, but what if you want to trade your gold coin for a product from someone who lives a thousand miles away? The trade becomes quite complex. The counterparty and you would have to arrange a place to meet, and given the travel hassle and cost, the counterparty will likely want to verify that you actually own the gold you say you do before investing time and money into completing the transaction. You could send a picture of your coin, but it could be a doctored or borrowed picture. You could search for an intermediary that could vouch for your creditworthiness, but finding someone whom the counterparty knows and trusts would take time and effort for most. I don't know the best way to accomplish this, but I think it's near-certain that for the vast majority of people, accomplishing this transaction with gold would involve a high degree of difficulty.
Bitcoin solves this. Any computer anywhere that is connected to the internet can send and receive Bitcoin. And while it takes on average ten minutes for the blockchain to confirm a transaction, the receiver's wallet almost instantly recognizes the payment to be received and verifies whether the sender has the amount of Bitcoin he or she purported to have. Seeing this for the first time by moving my own Bitcoin was the vision that convinced me Bitcoin is value. Compared to gold, Bitcoin is a far superior medium of transacting.
You may argue that this is a moot point because Bitcoin doesn't make for a very good currency, but I think that oversimplifies things. Even if you were only evaluating gold and Bitcoin as stores of value, its transferability is still a huge advantage for Bitcoin because people rarely want a store of value asset that they will do nothing more than sit on indefinitely. Things change. People want to buy businesses, houses, college for their kids, among other large ticket purchases. In these cases, people don't want their store of value to be their store of value forever. They just want it to be their store of value until they want to spend or invest the value in something else. And even for people who think they want to have a store of value to sit on forever, the ability to quickly transfer that value into something else, should they ever change their mind, is valuable. Therefore, Bitcoin's ability to transfer value with so much less friction than gold is a distinct advantage.
Another advantage of Bitcoin is numerical certainty. We know, without a doubt, that there can only ever be twenty-one million Bitcoin. Gold is thought of as a scarce asset, and it is because there is a finite amount of it, but no one actually knows how much gold exists. Geologists could find a new gold deposit tomorrow that is large enough to devalue people's gold holdings. This is simple economics, assuming the demand for gold is constant. If the supply of gold increases, then the price of gold decreases. Gold inflation has a historical precedent. When the Spanish conquered parts of the New World, they returned with ships full of gold. Once this gold was distributed into the European market, inflation ran hot, and the Spanish economy almost crashed because the value of the currency the Spanish people transacted in (gold) suddenly became volatile. Today, this may not be a huge risk, but few saw the U.S. fracking boom of recent years coming either when new technology drastically increased the U.S.'s proven oil reserves, and it is known that some asteroids have quantities of gold that would be valued in the quintillions (eighteen zeros!) in today's prices. Such a recovery would severely disrupt the gold market.
Yet another advantage of Bitcoin over gold is how the asset is stored. If gold is your store of value choice, then you will typically choose between storing your gold in your house and storing gold in the vault at your local bank. Neither of these is ideal. If you choose to store your gold at your house, you'll probably put the gold in a safe, which comes with limitations. No safe is impenetrable, and because of their size, a thief would have no trouble finding your safe and deducing that if you keep valuables in your house, such as gold, they are most likely stored in the safe. If you have a lot of gold, finding a safe large enough to hold it all may be hard. Also, gold is heavy, so moving the gold into and out of the safe will likely require hard labor and a trustworthy friend or two. And then there is the issue of gold being a bearer asset or an asset that is considered owned by whoever has the asset in his possession. Of course, you always have access to the gold stored in your house, but you’ll have to live with the risk of your gold being stolen because your safe is too big to hide, and the burglar knows what he is doing. Because the burglar has your gold in his possession, you really don't have any way to recover the gold short of pursuing him yourself, hoping that law enforcement comes through for you, or relying on insurance. Further, if you store your gold in a bank, you'll only be able to access it by appointment between the hours of nine and five, Monday through Friday. You also have to hope that the bank doesn't lock you out.
Bitcoin also gives holders a storage choice. Bitcoin holders can store their Bitcoin on exchanges (essentially like a bank account, but without FDIC insurance), in a software wallet (essentially an app on their phone), or a hardware wallet (an external hardware device without internet connectivity that is usually smaller than a cell phone). Holding Bitcoin on an exchange is the easiest because it requires no extra effort on the holder's part, but most advise against this because if the exchange loses the Bitcoin for any reason (hackers, bankruptcy, government mandate, etc.), the Bitcoin is forever lost.
Software wallets face some of the same risks, such as being hacked, but they also offer tremendous advantages that gold could never dream of. With a software wallet, you could go anywhere in the world with thousands, millions, or even billions of dollars worth of Bitcoin. Putting even one gold brick in your pocket feels awkward and wouldn't be discreet, which would make traveling around much of the world impossible given the size of the target that many would see on your back with gold bricks in your pocket. And that doesn't even consider government checkpoints. We all carry a cell phone, and that cell phone looks, feels, and acts the same way whether it has millions in Bitcoin or none at all.
The other storage option for Bitcoin is a hardware wallet. A hardware wallet functions similarly to the software wallet, but it doesn't have connectivity except by a cable to your computer. This feature protects your Bitcoin from hackers, spyware, and the like.
The ultimate advantage of Bitcoin storage is that if you misplace or someone steals your software wallet (i.e., your phone) or your hardware wallet, your Bitcoin is not lost. Yes, your read that correctly. Your Bitcoin is not lost even if you lose or someone steals your Bitcoin storage device.
The process for recovering your Bitcoin is beyond the scope of this argument, but at a high level, when you set up a Bitcoin wallet, you generate a cryptographic key. The cryptographic key is twelve to twenty-four words and can be used to recover Bitcoin from a lost device, provided you can remember the key or have it written down in a safe place. Therefore, the only way for you to truly lose your Bitcoin is to have your cryptographic key either compromised or coerced out of you, which is how many suspect governments have "recovered" Bitcoin.
All in all, Bitcoin should be a competitive asset with gold. And yet, its market is currently valued at just a fraction of the price, which makes me think that Bitcoin has high appreciation potential. If Bitcoin were able to capture half of gold's market capitalization, a single Bitcoin would be worth a little more than $320,000. Given where Bitcoin is today, this would be an approximate 10x return on a Spring 2023 investment.
Gold's market capitalization seems like a large number, and it is, but it also isn't, at least compared to other assets that are also viewed as being a store of value. The primary category of these assets is bonds. As of 2022 (according to the World Economic Forum) the world bond market was valued at approximately $122 trillion, or more than nine times the gold market, and it is this store of value asset that I think Bitcoin may largely replace.
A bond isn't much more than a tradable loan. Investors like bonds because they are typically thought of as being less risky than equities since they are often issued by governments and large institutions that are, on the whole, deemed creditworthy. Instead of betting on the entire value of an enterprise, bondholders are betting only that the enterprise will be able to repay its debt.
In return for the loan, bondholders get paid interest in addition to the principal, which is repaid at the end of the bond's term. For Western government bonds, the rate is low because these are perceived as stable governments, and, at least theoretically, they could at any time raise taxes to raise more revenue, so an investment in one of these government bonds is often thought of as being risk-free. The interest rate on a bond issued by a non-governmental entity varies with investors' perceived risk in the investment, with less financially sound entities offering higher interest rates to attract investors to their bonds.
Why do we care? Because the bond market is enormous and the majority of the money invested in it isn't looking for outsize returns. Instead, it seeks downside protection. The majority of the bond market would be thrilled to have an absolutely risk-free investment whose value keeps pace with inflation. Enter Bitcoin.
As favorable as Bitcoin compares to gold, it compares even more favorably to bonds because bonds have more risk. The two most significant bond risks in this context are counterparty risk and interest rate risk. Counterparty risk is the risk that the other party to a contract fails to honor his/her obligation. Bonds are a type of contract, and here, the risk is that the party issuing the bond fails to repay investors at the expiration of the bond's term. Although this risk isn’t often realized, it has been realized by investors in government bonds throughout history, often coinciding with a change in government where the new government repudiates the debts (because to the government issuing the bonds, the bonds are a debt) of the prior government. A recent example of counterparty risk in government bonds is Greece's default on its bonds in 2015. In the private entity context, defaults happen with regularity, as many companies file for bankruptcy every year.
Interest rate risk in this context is the risk that the bondholder's return on his/her investment doesn't keep pace with inflation and therefore loses real value over the bond term. For example, an investor may buy a bond that pays three percent annual interest over its five-year term when in reality, the inflation rate over that five-year term is six percent. In this case, the investor has lost purchasing power by investing in the bond, even if not nominal value.
Bitcoin offers a better way. With Bitcoin, you don't have to conduct due diligence on which government's or entity's bonds to invest in, and you don't have to assess the probability that the government or entity will exist at the expiration of the bond. Instead, you are investing in a network powered by thousands of miners (the individuals and companies that operate the computers powering the network) who are more economically aligned with you than any government or entity. The miners make money by keeping the Bitcoin network up and running and safe from attack, unlike governments and entities issuing bonds, which will use your investment to fund something else. The same individuals that were running the government or entity when you invested in a bond are often not the same individuals running the government or entity at the expiration of the bond's term and, therefore, these individuals often don't want to repay the debts of their predecessors and don't profit from repaying you as the Bitcoin miners do.
Further, interest rate risk should not apply to Bitcoin. The Bitcoin protocol has hard coded the number of Bitcoin that will be issued each year, which decreases by half every four years. Owning Bitcoin doesn't require monitoring the market, the Federal Reserve, or any of the fallible individuals and institutions that set the market interest rates. You can instead simply buy Bitcoin and not worry about whether or not the value you invested in the asset will keep pace with inflation.
Whether compared against gold, bonds, or some other asset or combination of assets, I think Bitcoin makes a forceful case that it is and will continue to be a valuable and enduring asset. I'm not one who thinks Bitcoin will replace all money. I think it could, as the technology seems to be developing to do just that (see the Lightening Network), but I think governments' inability to control it will ultimately hinder Bitcoin as a currency. That said, I think Bitcoin is too powerful to kill. Even if governments want to eliminate Bitcoin, I don't think they could completely do it. The internet is too ubiquitous, and the freedom of capital to move across jurisdictions is too accessible for Bitcoin to be eliminated.
If I had to predict where Bitcoin will be in ten years, I'd guess that it is a firmly established asset class, separate from all other crypto projects. I think most governments will ban their citizens from transacting in anything other than the national currency (likely a central bank digital currency by this point), but citizens will be permitted to own Bitcoin in the same way citizens are permitted to hold gold, bonds, and stocks. I think most individuals and companies in Western nations will hold Bitcoin and that this Bitcoin will be purchased with funds that otherwise would have been allocated to bonds or gold. I'd guess that Bitcoin captures about twenty percent of both the bond and gold markets, which would make the price, in today's dollars, of a single Bitcoin approximately $1.3 million.
Is Bitcoin guaranteed to appreciate to over $1 million? Of course not. I've laid out my case here for why I think it will. Question it, poke holes in it, and do your own research, but don't undervalue an asset just because it is newer and harder to understand than a tech stock.
Of course, this is not financial advice. The purpose of Common Adversary is to prompt you to exercise independent judgment to evaluate your circumstances and investments and invest accordingly.