Philosophical discussions don’t typically bear on investing decisions. But when they do, they matter.
The question in this case is: what is Bitcoin’s source of value?
I differ from many in the crypto space about this one and I am a Bitcoin bull. My view is NOT that BTC derives its value from belief or math. To my mind, those are methods of verifying ownership, not sources of value.
Instead, I think that BTC derives its value, just like fiat currencies, from the coercive power of a state apparatus that can force people to acknowledge contracts and exchanges made in terms of BTC.
In this piece, I’m going to spell out my reasons and why this matters for investing in or trading BTC. Even if you don’t agree with me—and many don’t—my position shows that you can still be bullish about BTC without believing in conspiracy theories about governmental collapse.
Let’s start with the best argument in favor of “the standard view”.
1. The Standard View
The idea behind Bitcoin (BTC) was to build a system of value that would be independent from national finances.
Politicians have an incentive to print money — Republican, Democrat, Green Party … all of them. “Running up the credit card bill” is fun. Paying it off is not. As long as people associate politicians with their financial fate, they will vote in those who spend and vote out those who don’t.
In the long run that makes for predictable consequences: every single sovereign currency has collapsed in value over a 100 year + period. Have a look.
When inflation is built into the operation of your currency, people lose purchasing power. Your food doesn’t go up in price, it’s that your currency goes down in value.
The idea behind Bitcoin was to fix this.
What if there was a place where you could put some of your money that you knew—because of mathematics—that the currency wouldn’t lose catastrophically over time? What if it went “up” rather than “down” in value because demand would outstrip the issuance of new supply?
What you’re looking at in the chart below isn't “BTC” gaining on the value of the US dollar. It’s the US dollar losing in value to BTC.
2. Limits of The Standard View
Unlike other crypto believers, I DO NOT think that Bitcoin will have value apart from the large international structure of power that we call our modern world order.
You need some institutional body that can enforce laws about theft, fraud, and the like. Without that, someone could hold a gun to your head and ask for all your BTC. That act of theft would be legal.
The value of BTC is rafted on top of the value of our other legal systems. It isn’t anti-establishment. It’s anti-individual establishments. It doesn’t need a specific one to function but it does need the coercive strength of some states to do its job.
The current cycle, which is characterized by a more thorough integration with “TradFi” is a needed step to ensure that BTC and other cryptos do function as long-term stores of value.
What BTC has potentially accomplished is thus threefold.
- It operates as a store of value backed up by any number of possible agents of our global order so that it enjoys relative independence from the financial woes of a single nation.
- It offers the citizens of any country the opportunity to avoid inflationary ruin.
- It offers most citizens a path out of the “middle class” if you have a long enough time horizon.
It is part of an emerging market that does appear to be supported by the largest members of traditional finance. This means that in its incorporation into the new system, you can be part of the “ground floor” of a new asset class.
Remember, however, that not all emerging markets work and there is hardly any guarantee with Bitcoin or cryptos. But those are the top 3 possibilities I can see at this moment. Perhaps there will be more later.
3. How Does This Affect Investors?
It means that BTC isn’t likely to serve as a hedge against sovereign currency devaluation if those markets aren't reasonably stable.
- Should the US dollar suffer a devaluation akin to Argentine’s over the past 2 years, then I would not expect BTC to perform well
That means that BTC is likely to do well in the long run provided that the general global order that we have (with the US dollar as the global reserve currency and the IMF + World Bank supporting that system) holds up.
European declining demographics will affect that thesis, but not for a few years out (10 - 15 probably).
If you do not have a 3-year time horizon for your investment, I would guess that you are cutting it too close. Also, and this goes without saying, cryptos should not be your only investment.
If you have a longer horizon, and you do not need this money to live on, then you are much better positioned to take advantage of what BTC has to offer.
Happy Trading and Investing!
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This post is provided for educational and entertainment purposes only and should not be relied upon for business, investment, taxation, or legal advice. You should consult your own advisors for those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by 1.2 Capital Management. (An offering to invest in a 1.2 Capital Management fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation--all of which should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by 1.2 Capital Management, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
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