My Take on Bitcoin 5 Years Later

I thought it would be appropriate to sit down and write this article given all the frenzy and talk behind Bitcoin, and the growing interest and seemingly mania like environment around it.

Being a polymath will help

It is important to preface this viewpoint by mentioning to those that do not know me, that I am not an economist, philosopher, computer scientist, anthropologist, sociologist, or historian.  Which, as you will eventually find out, are all the possible fields that tend to crop up when researching or discussing the viability and future of Bitcoin and/or other alternative coins. 

Moreover, although in the latter half of this year I’ve spent quite a bit of time reading up on it but by no means, I’m an expert or this article is meant to cover all of the important areas or topics related to this subject.  The general audience for this article are mainly those who are either not familiar or fairly new to the Bitcoin and crypto world, but if you are an expert and while reading this you notice any mistakes, by all means do let me know.  Also let me add the usual disclaimer that the following viewpoint is NOT a recommendation to buy, or for that matter, not to buy Bitcoin or other crypto securities.

Since most people tend to always talk their books, let me say that most of my money is still allocated in your traditional financial assets, real estate, and, of course, the US dollar.  That said, I do have a very, very small percentage of my money in Bitcoin, which I finally purchased this year after spending a good amount of time learning about it. 

Back in 2013, I wrote a much shorter note about Bitcoin here, that was very dismissive of it.  Fact of the matter was that, much to my own chagrin like many others that have, or still are doubting it, I did not devote enough time to studying Bitcoin, and I was trying to value or understand it using traditional investment valuation techniques and more importantly without an open mind.

This time around I was more open minded. My rational for buying Bitcoin was that I finally understood the basics of the blockchain technology, and agreed with the general premise and rational for its creation. Then I figured if enough people also see this logic and get caught up in the network effect of this seemingly utopian world, the outsize reward potentials can be large enough to warrant a very small speculative ‘initial’ purchase (I hesitate to use the word investment) which I would be comfortably ok with it even if it goes down by 50% or even to zero.  While giving myself time to buy more in the future as the market provided more information.

Although some may think that I’ve finally seen the light but I’m still skeptical of its future success, and why the tone and purpose of this article in general will be to mainly highlight some of the challenges and dilemmas that are out there.  After all, given all the crazy price targets that are being put out by Bitcoin proponents and not to mention the FOMO created because of all these overnight millionaires trading cryptos; there really isn’t much of a need to persuade people into buying them.

Currency and an Ideology

The small amount that I purchased was indicative of my ‘current’ faith in Bitcoin’s future.  I purposely use the word faith because to be a long-term holder of Bitcoin you have to believe in the general ideology that has evolved since Bitcoin’s white paper was first published by Satoshi Nakamoto in 2008 creating the first decentralized censorship resistant form of transferring payments, and more importantly faith in the goodness that lies in its unknowable future. 

An ideology or border line religion, rooted in some or many of the principles found in libertarianism, Austrian economics, gold standard, anarcho-capitalism, even ‘carnivorism’ along with a strong disregard for appealing to authority, Keynesian economics, globalist and central banking.

In fact, the more money you have allocated into Bitcoin, that is not being traded on a daily basis and is just being held somewhere safe, ideally in a hardware wallet; by default the more you need to believe that in long run most or all of the fundamental concepts that are behind these ideologies will prevail over the current status quo beliefs, systems and institutions. 

One of the main rationales behind Bitcoin’s creation is the need for having ‘sound money’ given how governments can and have easily issued government money aka fiat money like the U.S. dollar.  A problem that has gotten worse ever since all major currencies are no longer backed by gold and as a result have lost their purchasing power. 

Bitcoin addresses this issue by using math to impose a finite supply of Bitcoins that will ever come into the market to just 21,000,000 coins, and so those coins are highly salable each Bitcoin is divisible into 100,000,000 units.  Units which later on, in honor of the protocol’s founder began being referred to as “satoshis”.  This ‘absolute scarcity’ is what makes the original Bitcoin very unique.  But it also makes it extremely problematic because this limited supply means that any increase in demand can send its prices soaring into the stratosphere and thus create the current bubble that we are in right now.

Bitcoin ≠Tulips or Currency

Although history may show the current Bitcoin and alt coins environment that we are in, are exactly what constitutes a bubble, but the constant and semi-glib comparison of Bitcoin with the infamous tulip bubble which lasted for less than a year is ridiculous. Not only because there is no serious commonality between tulips and the math program behind Bitcoin, but also because the Bitcoin phenomena does involve some major paradigm shifts that goes far beyond behavioral finance and economics as evident by the fact that we are now 9 years past when it was first introduced and it is still around.

Here it is important to define what I think Bitcoin is or I should say what I think Bitcoin is not.  In my opinion Bitcoin and all the approximate 1350 alternative coins/tokens that are out there are not currencies.  Hence why so far, I’ve avoided using the term cryptocurrency.  I think they are either digital securities or digital commodities where market participants derive a monetary value for each of them based on how much benefit or what kind of utility functions that particular coin/system is offering to its users.  But as of now they are not a currency.

A currency, money, or cash all synonymous names for what we use on a daily basis as a medium of exchange (MoE) for the goods and services we need, fall into two general categories.  Fiat money and commodity money.  Fiat money is money issued by the government and it is what we are all accustomed to using on a daily basis such as the USD, while commodity money can be oil or precious metals like gold and silver.  

One important function of what makes money is that it is used as a medium of exchange as well as both how widely it is used by buyers and accepted by sellers.  One way to evaluate Bitcoin as a medium of exchange is to compare it with how many places accept Bitcoin with number of places that accept cash, and credit cards or even PayPal.

The daily transaction volume in major currencies in the world run close to $3 trillion whereas as of this writing the daily transaction volume in Bitcoin globally was less than $50 billion when converted to USD (assuming those numbers are legit and don’t include double counting of transactions).  Setting aside the dollar value transacted the actual number of transactions which are on average only about 300,000 daily are also minuscule given the current technological limitations within Bitcoin’s network.  To put it in context other payment processors like Visa can process about 4000 transactions per second and have the capacity of raising it to up to 65,000 transactions per second.  Whereas Bitcoin can only process just 7 transactions per second.

There are upgrade plans like the Lightning Network in the works that is supposed to improve Bitcoin’s network to handle more transactions and there are also other alt coins like Bitcoin cash that can handle transactions faster but all of them are still nowhere close to being as efficient as the current systems in place and thus dethroning the status quo mediums of exchange that are utilizing fiat currencies or payment systems like Visa, MasterCard and AMEX. 

Aside from being used for daily retail like transactions perhaps the most important metric to judge whether Bitcoin or any other crypto is a medium of exchange is if it ever is used as unit of account in businesses and for settlement of payments between banks and large financial institutions.  For now, given the slowness of the system the likelihood of any of these cryptos supplanting the USD as a global reserve currency is extremely low.

This nuance of whether Bitcoin or whatever alt coin is truly a medium of exchange might seem as being an appropriate academic debate between a monetary economist and a philosopher but fact of the matter is, to value something you have to know what you are valuing, what utility or benefits it offers and both how big the market for it could be and how in demand will be the utility or the benefits that it offers.

Is it a currency thus a medium of exchange?  Is it a security like a stock of a company in this case stock of an entity that provides a payment system?  Is it a commodity?  Do we have to have a paradigm shift in how for centuries we defined what is a currency? 

According to the IRS Bitcoin and other cryptos are a form of digital ‘property’ very similar to other tangible properties like real-estate but clearly not a legal tender or a currency. In fact, because they view cryptos as property and not legal tender, any transactions you make using a crypto as a medium of exchange for any other good will basically constitute a taxable transaction and so requires reporting any gains or losses to the IRS.  So, in some ways they’ve made it abundantly clear how the U.S. government views Bitcoin and cryptos as a medium of exchange. 


In the 9-year history of Bitcoin you will see that the valuation metrics or comparisons (comps) that have been used to value Bitcoin have continuously been changing and evolving.  Depending on which evangelizer you are speaking with and the mood in the crypto markets; the comp-du-jour used for showing the potential for Bitcoin can range from either one or combined market values of centralized private companies like Western Union, PayPal, Visa and MasterCard, to practically all the money supply in USD measured (M1) equivalent to $3.6 trillion, or to all or portion of the $7 trillion worth of global gold supply, and for some the most optimistic comparison would be the $29 trillion in total global money supply of all major currencies. 

Important to note that when the white paper that started Bitcoin was written it was specifically intended to create a peer to peer electronic cash system.  The inventor by design chose 100,000,000 smaller units per Bitcoin (satoshis) because the total global money supply at the time was estimated to be around $21 trillion.  In his mind, he set up the system so it can handle the world economy being switched to Bitcoin.  Another word in his mind the best comparable for Bitcoin was the global money supply.  This is also why some people keep mentioning the $1 million-dollar price target for each Bitcoin. 

For this reason, if one thinks or believes that it can reach $1 million s/he must also think and believe that the global money supply dominated by reserve currencies like dollar, pound, yen etc … will all be supplanted by Bitcoin.  And for that to happen you have to also believe that Bitcoin has to be used as a medium of exchange.

Early after its inception Bitcoin was used as a medium of exchange albeit the number and value of transactions were small, and those that weren't small, were mainly used for illicit purposes.  But as time has passed and more people have gotten to own more Bitcoin, ironically it has been used less as a medium of exchange.  One reason has been because of its ‘current’ technological impediments that the original systems was built on transaction times have lengthened and so have transaction costs thus not making it very practical or economical for small or micro size exchanges of goods and services like buying a cup of coffee to occur on the network. 

More importantly because of both the unusual daily volatility since its inception and now the recent meteoric upward price movement it also makes it difficult to be used as viable and stable medium of exchange.  Both from the standpoint that sellers will have to daily or hourly adjust their price of goods and service as well as that buyers will be less inclined to let go of their prized Bitcoins just to spend it on discretionary items because they don’t want to miss out on all the huge future price appreciation that they keep hearing about.

Precautionary Principle

Now for many Bitcoin hoarders that disagree with Keynes aggregate demand theory which tends to promote consumerism especially by using debt; foregoing such purchases isn’t such a bad thing.  Some of them believe that the lower your time preference is in relation to your present consumption vs. future consumption the more productive you and thus the society will be.  However, such a belief is more than likely predicated on having a more stable medium of exchange rather than one that goes up or down by 5-10% each day.  Moreover, in a country that derive large part of its GDP from consumer spending the short-term consequences of this shock of people hoarding money and not spending will have a severe impact on not only that particular country’s domestic economy but if it is large enough like U.S. it will have an impact globally. 

It is one thing to fully adopt using Bitcoin in a small emerging economy going through hyperinflation and/or having severe restrictions in movement of capital, the likes of Zimbabwe, Venezuela, Cypress, or Greece; and another matter if the experiment is being done on an economy like U.S.

As brilliant as Satoshi was for creating Bitcoin’s game theory, the likelihood that he could or did go through the precautionary approach of looking at all the different iterations of outcomes and risks (black swans) associated with his vision was very low; and thus, intentionally or unintendedly may have ended up exposing societies to more harm.  Be it harm done by severe economic shocks to how and what kind of mischievous methods will be used by those with power who have benefited from the profligacy of governments to maintain their power.

Which comes first? Chicken or Egg?

So, if Bitcoin is not a good medium of exchange can it be a store of value (SoV) like gold?  As I mentioned earlier since its inception the goal post for Bitcoin has been changing, and because of all the issues that has now caused it to not be a viable medium of exchange, many Bitcoin holders are now suggesting that it should be viewed as store of value.

The one problem is that in economics in order for money to become a store of value it has to first be accepted as a medium of exchange.  In fact, some of the economic heroes of many Bitcoin evangelists the likes of Carl Menger and Ludwig von Mises both said so. 

Menger had defined money as the “universal medium of exchange,” meaning it must be accepted by everyone while Mises more reasonably maintained it must be “generally-accepted and commonly-used,” leaving some room for different possibilities. A concept often referred to as the ‘regression theorem’, and one that ironically Bitcoin and for that matter almost all other alt coins are in clear violation of how money was defined by both economic idols of Austro-libertarian supporters.

I’m sure there are some people within the Bitcoin community that subscribe to Austrian economics beliefs and still have some kind of 21st century rational or justification for why Bitcoin violating the Mises regression theorem does not disqualify it as being either a medium of exchange or a store of value or both.  Whether they are right or wrong is a matter that needs to be determined by monetary economists.

Valuation Metrics

So, what is Bitcoin and how do we value it?  We know IRS considers it as a digital property, but how would you value a digital property that doesn't produce any type of cash flow that only has a financial use as oppose to an industrial use like typical commodities.  It is almost like valuing a piece of art, that also has some kind of a utility function.  To some this piece of property may be worth $X while to others it will be worth $Y.  The digital property is a 9-year-old payment processing system trying to be a quasi-PayPal/SWIFT system for the masses that as of now is clearly miles behind the efficiency provided by those systems.  

Does buying a Bitcoin is equivalent to owning a share of a startup, which indirectly suggests that Bitcoin is a security? I don't think so because clearly it isn’t a security (yet) because if it was it had to be regulated (assuming it can be).  More importantly buying Bitcoin is not equivalent to buying a share of Bitcoin stock because a stock represent ownership in a private centralized entity that generates cash flow which can be forecasted and then used to come up with a present value for that company and its stock. Obviously, Bitcoin doesn't produce any type of cash flow or dividend just potential price appreciation based on how market participants perceive its value.   

Although Bitcoin isn’t a company, yet many people and websites are using typical finance jargons used in the stock market like for example, the term “market cap”.  Which is the last price multiplied by the number of tokens in existence.  A problematic number for novice individuals as some will think the market cap number is equivalent to how much actual $USD has been invested in that particular crypto coin.

The most creative jargon is how some have come up with a metric very similar to price to earnings ratio (P/E) often used for valuing stocks.  The NVT ratio is calculated by network value (market cap) divided by the USD volume transmitted through the blockchain.  The only problem is that the denominator consists of a number that can include some transactions that are difficult to quantify as whether they have been double counted by the entity that pulls those data from one website and so it is very difficult to accurately quantify it.


A major issue with Bitcoin now is in how it can be forked aka duplicated into another quasi version of it by any group of developers.  In August of this year a group chose to do this and created what they saw as a better version of Bitcoin which they named Bitcoin cash.  While another group created Bitcoin gold and there are other versions of Bitcoin that are being worked on.  The problem with all of these forks or duplicates or as some suggest cheap knockoffs of the original blockchain is that it literally dilutes the “idea or perception” (not actually if you don’t buy them) of having a finite money supply which was Bitcoin’s competitive advantage over fiat currency. 

Although hardcore supporters of Bitcoin have a valid point by suggesting that those other copied versions are not ‘decentralized’, however the end result of all confusion, fear and dramarama on the web by each faction or seemingly sects can reduce the growth of the network effect as people who are non-techies and don’t have the time to follow what is going on will choose to just simply walk away.

Add to this all the other approximate 1300 alternative coins that have popped up by every person that can code and able to create their own currency or token.  The irony here is that aside from those that are just day trading and trying to ride the wave on the pump and dump actions in the alt coin market; many of those who got into Bitcoin by complaining about profligacy of central bankers issuing fiat money, are perfectly ok when someone who is far less accountable and/or known has come up with a coin/token that is neither finite nor decentralized.

On the point of Bitcoin being the only decentralized system, a point that although I am not too sure but wonder about is that although Bitcoin isn’t owned by anyone, or any company, and it is truly decentralized however like everything in life nothing is permanent.  The game theory that the protocol was built on was based on miners, developers and users keeping each other in check, a system that has worked so far.  But what if x years from now as some miners grow exceptionally bigger, or a large entity hires most if not all of the core developers, or a large holder owns most of the Bitcoins there can be chance to see the system becoming less decentralized.

Another point of importance when considering speculating in Bitcoin or other crypto securities is market manipulation.  Market manipulation has been going on and still is going on in all the other markets so it isn’t just a crypto issue.  However, what makes it different is that because there are regulations in traditional markets the chances of you getting caught and being punished is much higher.  Whereas given there are either no regulations or very little regulation or consumer protection in the crypto markets, the risks for the bad actors who want to game the system are lower and so there is a larger chance for market participants to be taken advantage of for example these common shenanigans:

  • wash trades, market manipulators basically buying and selling simultaneously just to show high volume of transactions in the position they own,
  • painting the tape, is just like wash trading but now there are more than one market manipulator involved
  • spoofing, is when you put a large size limit order above or below the current market price with no intention of having it filled all to create the illusion of optimism or pessimism
  • front running, is when people associated with the exchange take advantage of the customer orders by placing orders that benefit the exchange
  • insider trading, when people associated with an exchange or developers working on a project buy or sell before making that new public to others. 

To wrap this up my only suggestion for anyone that is contemplating speculating in Bitcoin would be to spend some time learning and reading more about the following points:

  1. basics of blockchain technology,
  2. concepts of forking (replicating or upgrading) Bitcoin,
  3. difference between being a centralized and decentralized system, pseudonymous and anonymous system and in what instances which system is a better choice than the other,
  4. what is money and what is sound money,
  5. pros and cons of: deflation or potential hyperdeflation vs. inflation or potential hyperinflation
  6. risk and benefits of leaving Bitcoin or other cryptos with an exchange, web wallets, or any other 3rd party as oppose to keeping it in a hardware wallet,
  7. difference between USD (U.S. dollar) and USDT (Tether) and potential issues surrounding pegged tokens like Tether,
  8. IRS laws as pertaining to Bitcoin and other cryptos and your responsibilities and tax liabilities regarding all the tax consequences in transacting in them,
  9. differences between an ICO and IPO and the risks involved given that as of now there are no regulations involving ICOs
  10. consider how would other powerful people, companies, and government that stand to lose with the adoption of Bitcoin can and will react to this power grab,
  11. lastly, realize that with owning Bitcoin you need to accept and handle many of the responsibilities that you used to delegate to others, meaning no reliance on 3rd parties be it a person or government entities that can help or bail you out from making a mistake or protecting you from fraudsters.

Again, although this article was not meant to be a recommendation to buy any cryptos, but if you are going to do so my suggestion is to start out with very-very small amount that will not affect your health and lifestyle should you lose all or most of it.  After all no one truly knows how this experiment will turn out or how different people and institutions with vested interests and motives would react in this multiple dimension game of chess, where most are playing it as they are playing checkers. 

At this stage, everything is really just a guess.  Some may be more educated and fact based than others but at the end of the day given the infancy of this project they are all guesses.  Which is why for those who have worked hard to accumulate their wealth up to now, discretion is the better part of valor.  


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The views expressed in this blog reflect those of Grayeli Investment Management as of the date of the write up. Any views are subject to change at any time based on market or other conditions, and Grayeli Investment Management disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results.

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