Well, as with almost everything in life: it depends. Yes I know, what a lame answer. In my case it does make sense to buy some bitcoins, and I will explain in this post why.
The digital currency of the new world disorder?
I am not going to explain what is Bitcoin, there are plenty of sites that do better than me, what I do consider important in the Bitcoin definition is that it is fundamentally decentralized, and does not depend on any political party, country or currency. This is an attractive selling point in case the world goes to a standstill between US and China, and the US dollar cannot work as the word currency anymore for some reason. Something needs to replace it in case it does, maybe Bitcoin could. It is a long shot but at least it is robust and digitally transacted, unlike gold.
Scarcity made through mathematics
What makes gold so valuable is its scarcity. Bitcoin emulates the same kind of scarcity through a process called "halving". Here is the deal, the very existence of Bitcoin depends on a network of computers that process all the transactions, also known as "mining", in real time. Bitcoin is not a physical commodity but a collection of nodes, also known as "blocks", that store a collection of transactions (this is what a block looks like). To make it self-sustainable, the Bitcoin inventors embebed an incentive within the system: the computer that processes a new block gets rewarded with new bitcoin. This is how new bitcoins are created: as rewards for the "miners" (the computers that process new blocks). To emulate scarcity, these incentives are cut in half every 4 years, making it less rewarding to process a transaction hence to create new bitcoins. Today each miner is rewarded about 6,25 bitcoin for each new block, but in 2140, the reward will come to zero and no more bitcoins will be created/rewarded. All in all, the currency is self-sustainable, scarce and decentralized (each computer also validates the transactions of the rest).
How scarce exactly?
Here comes the good part, I will just quote the excellent explanation made by Twitter user PlanB about the "Stock-to-flow" metric used to measure the value of scarce resources such as Gold.
The stock-to-flow is the number that we get when we divide the total stock by yearly production (flow). It tells us how many years are required, at the current production rate, in order to produce what's in the current stock. For example, gold has a production rate of around 3,000 metric tonnes and the current stock in the whole world is estimated to be 185,000 metric tonnes.
At the current production rate, we'd need 62 years to dig out all the gold that's currently in circulation. The higher the number, the greater the scarcity. There are 18.569 million bitcoins currently in circulation (Dic 2020) and 328.500 BTC are generated every day (6,25 new bitcoin rewarded/created for each new block, and new blocks are created every 10 min). That means that we need 56 years of current Bitcoin production to produce the current stock. This number is just a bit smaller than gold but the halving makes it grow over time, unlike Gold. Last year, before the halving, each block was rewarded 12.5 Bitcoins and there were about 18 million in circulation, so the stock-to-flow was 27. The following halving, in 2024, will raise that number to 113 while the stock-to-flow of gold will roughly be the same, unless we stop finding gold to mine.
To infinity and beyond
So the Bitcoin Stock-to-flow is known at any point in the future, and some mathematical models use it to predict the Bitcoin price based on this and the historic price of BTC. You can see the details of the formula here. The model does a pretty good job at predicting the price up to now (see graph), so if in the next 10 years, things run smoothly for BTC, the model predicts its price to be above 1.000.000 USD by 2026...🤯🤯
What about the misuses of Bitcoin?
There is a fundamental paradox that I am still trying to grasp here: Bitcoin has been known for its use in internet black markets, such as for buying drugs for example, and there are many critics about the anonymity it supposedly gives. But there are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to. Here is an example of bitcoin transaction, the public information includes the amount transacted, the time of the transaction, and the "address" of who sends and who receives it. This address is like an email, and you can see all the transactions related to that address. So in theory, BTC is much more transparent and traceable than any other currency, much more than cash for example. So why would you buy drugs with it? Maybe its because you can generate a different address as many times as you want through "Bitcoin Wallets", which makes it more difficult to trace, but not impossible. What if governments change regulations to require companies behind such wallet to provide them with who is behind each address? Or if these companies get hacked?
You are on your own
As far as Bitcoin is concerned, the blockchain tech may make it very secure as a system, but if the user´s wallet gets hacked, nobody will answer for it. There is no regulation whatsoever nor insurance that covers such risk, and there are new cases of fraud every day. This is something to consider when buying bitcoins. Here is a good piece of content on what kind of wallet offers more security than others and why.
The Gold standard
As you may know, Bitcoin is not the only cryptocurrency out there, but it was the first. The thing is there is no other crypto that has the scale nor robustness of Bitcoins. New Cryptocurrencies are created every month, even the Venezuelan government has one. What is fundamentally wrong about these lesser know cryptos is that they are easily manipulated as there are less volume transacted and fewer computers validating transactions. It´s kind of investing in penny stocks. Also, there is a great systemic risk in the very design of crypto. Bitcoin itself had to go through a major redesign in its source code to face the higher volume of transactions and, from time to time, there are still bugs appearing in the network. But the scalability of its computer network and strong community of developers always fix it in a matter of hours. This is why I would not bet on any other crypto than Bitcoin, which has shown more resilience than any other. The fact that Paypal started accepting only 4 cryptocurrencies as a payment method proves the point that not all crypto were created equal.
What if governments start banning it, such as China in 2017? Well, it will not be good for its value, depending on which government we are talking about. When China banned it, its price dropped 25%. Imagine what would happen if the US Government did the same...💣
Here is my plan
- Worst case scenario: the Bitcoin value drop to... zero😱.
- Best case scenario: its value pops to 1 Million USD by 2026.
That´s it, I am in with such a risk-reward ratio. I have invested 2% of my portfolio into it. I am ok with losing all of it as long as I also believe it can pop to $1.000.000, or an average 150% annual yield. The day Bitcoin makes it all the way up to representing 15% of my portfolio, I may take action to lower my exposure, until then, bring it on and see you in 2026!
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The author of this post owns shares of MercadoLibre, Sea Limited, Paypal, Tencent, Walmart. The Rookie Investor recommends these stocks. The Rookie Investor has a disclosure policy. Any information found on this page is not to be considered as financial advice. You should do your own research before making any decisions.