Almost 12 years ago, at the depths of the great recession in 2008, the Bitcoin white paper was released by an anonymous Satoshi Nakomoto.
The best performing asset class in the last decade at an ROI of 295,999,900% was bitcoin while the best performing S&P 500 stock, Netflix (NASDAQ) gained an incredible 3680%.
From 10,000 BTC Pizzas to the silk road, the journey of bitcoin through the last decade was nothing short of extraordinary.
The exciting story on the origins of bitcoin, its success stories and the controversies that it entailed and the journey ahead is presented in Digital gold by Nathaniel Popper.
From an economic standpoint, it’s hard not to see the value and importance of bitcoin.
The much-awaited halving
The total supply of Bitcoin is fixed forever at 21M. Every 10 minutes, a set number of bitcoin is mined by bitcoin miners all over the world every 4 years, the block reward is cut by half which essentially means that the average number of bitcoins mined gets cut by half. It is also important to note that the average cost to mine a bitcoin is $5600 USD.
2008: 50 BTC per 10 minutes
2012: 25 BTC per 10 minutes
2016: 12.5 BTC per 10 minutes
2020: 6.25 BTC per 10 minutes (May 12th, 2020)
2024: 3.125 BTC per 10 minutes
Over 18 million bitcoins have already been mined. Halving will continue till the last bitcoin is mined in 2140.
What creates value? Scarcity or abundance?
Scarcity is a key driver of value. People generally desire and want things that are more difficult to obtain. Limited edition watches, rare art, FOMO and playing hard to get are all examples of scarcity generating potential economic value.
Stock to flow(S2F) is used to measure the abundance(or scarcity) of a certain resource. It is simply derived by amount of reserves of that particular resource divided by the amount it’s produced annually.
Quantitative easing Vs. Quantitative hardening
A giant wave of quantitative easing has swept through the world to counteract the economic shocks due to the global pandemic.
Quantitative easing(QE): Increase in money supply which penalizes people who own the majority of their wealth in cash relative to those who own hard assets and shares. When interest rates are approaching zero, central banks use this as last resort to induce liquidity in the financial markets and encourage lending through the purchase of long term securities and government bonds. Universal Basic Income( UBI) which places money directly at the hands of people is known as “QE for the people”.
QE in 2008 was a few billion. QE in 2020 is a few trillion. The next rounds of QE will be in a few quadrillions.
Quantitative hardening: Opposite of QE. Used to reduce inflation by restricting the money supply.
Bitcoin halving couldn’t have come at a better time.
Role of Mainstream media
We are at record levels of consuming content which results in the content we consume dictating some of our decisions. The dramatic market crash in early March was clearly a huge success for media.
Throughout financial history; there have been dramatic changes in systems, policies, currencies, and global powers change but investing psychology remains fairly consistent.
With abundant and real-time information, panics and bubbles get accelerated further(i.e the Great toilet paper shortage of 2020).In the process lures in more speculators rather than investors who do not have enough time to build any conviction.
Due to the pandemic, people have digitized entire lifestyles. When the media starts talking about digital currencies(already have), what’s the first thing that comes to mind?
The latest of which billionaire hedge fund manager Paul Tudor Jones has claimed that he was loading up bitcoin to help protect against a rise in inflation.
Low barriers to entry
Back in 2017, when I FOMO’d and tried to get bitcoin because “everyone was talking about it”, I had to wait for days to get my account certified through a cryptocurrency broker. It was a frustrating process to get verified, transfer money and start trading.
Times have changed.
In 2020, you can get verified and start trading in a matter of minutes. Platforms in 2020, provide much more security, liquidity, ease of verification, assistance and advanced portfolio management systems compared to the last halving.
FOMO + ease of access + information can perhaps create another bull run.
So, what’s the catch?
Needless to say, Bitcoin comes with its unique set of problems that get improved regularly. It is worth understanding all its drawbacks just as much as its benefits before making any financial decision.
- For starters, the bitcoin price is extremely volatile. In March 2020, it crashed 51% in a few days before recovering all the losses in May. This is due to its relatively low market cap. Volatility has reduced over time as market capitalization and adoption has increased.
- Bitcoin payments are irreversible, it can only be refunded by the person receiving the funds.
- Government taxes and regulations. Anything that disrupts existing legacy systems and forces them to be more efficient will be under scrutiny.
- Bitcoin security: Cold wallets refer to a wallet that is not connected to the internet. Generally, it is more secure, but don’t accept many cryptocurrencies. A cold wallet could cost anywhere between $80-$200 depending on the functionality. If the file containing the keys are lost or stolen, the user’s bitcoin is gone forever. Hot wallets refer to wallets that are connected to the internet, generally easier to set up but susceptible to hackers and regulation.
- Bitcoin exchanges: Although more secure now, bitcoin exchanges early on failed quite frequently due to external hacks and fraud.
- Scammers: If you’ve seen random people commenting on social media to try a new bitcoin platform or a service that guarantees to double your money in a week, block them. Chasing ‘get rich schemes’ is fool’s gold and applies to any form of investing.
- Bitcoin is still very new and experimental. It’s still extremely complex and hard to understand. It is continually improved over time.
- Quantum computing: The cryptographic protocols used to secure bitcoins are hard for an ordinary computer to crack. Quantum computers can solve complex problems ordinary computers cannot. Race for quantum supremacy by the tech giants might generalise quantum computers faster than we can imagine which could pose a threat to the security of blockchain networks.
- Bitcoin whales: Few large players holding the majority of any cryptocurrency can collectively cause large price fluctuations.
- Low transaction speed: Bitcoin can only perform 5 transactions per second while e-payment giant Visa can perform up to 24,000 transactions per second.
For these reasons, bitcoin is not for everyone… yet.
Building enough conviction to hold(HODL) through its emotional rollercoaster is crucial.
Back in 2017, I wasn’t convinced. At least not until I learnt the history of money.
Bitcoin has all the elements of sound money that fiat fails to manifest time and time again. It’s convenient to dismiss it as a scam but when I started to learn and question about what money really is, bitcoin is the first thing that came to mind. The value of any currency at the end of the day is built on the collective faith in its utility.
Global trade has evolved from barter, commodities, precious metals into banknotes and cards. Similarly, banknotes and cards will soon be part of history.
Either way, it doesn’t hurt to park 1% of your net wealth(Money you can afford to lose) in a truly free market currency based purely on math. Bitcoin dollar-cost averaging could be a worthwhile strategy to ignore news and emotions.
Works 24/7, does not get bailed out and does not get printed at will.
For me, this makes sense. More so in 2020.