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
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
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.
This time around I was more
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
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
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
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
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
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
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
There are upgrade plans like the Lightning Network in the works that
Aside from being used for daily
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
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
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
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
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
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
Now for many Bitcoin hoarders that disagree with
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
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
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
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.
So, what is Bitcoin and how do we value it? We know IRS considers it as
Although Bitcoin isn’t a company, yet many people and websites are using typical finance
The most creative jargon is how some have come up with a metric very similar to
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
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
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,
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
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:
- basics of blockchain technology,
- concepts of forking (replicating or upgrading) Bitcoin,
- 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,
- what is money and what is sound money,
- pros and cons of: deflation or potential hyperdeflation vs. inflation or potential hyperinflation
- 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,
- difference between USD (U.S. dollar) and USDT (Tether) and potential issues surrounding pegged tokens like Tether,
- IRS laws as pertaining to Bitcoin and other cryptos and your responsibilities and tax liabilities regarding all the tax consequences in transacting in them,
- differences between an ICO and IPO and the risks involved given that as of now there are no regulations involving ICOs
- 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,
- 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,
At this stage, everything is really just a guess. Some may be more educated and