Is Bitcoin a fad or the future? Is it worth long-term investment? Should you still buy it now at this price? These are the common questions that my clients and subscribers ask lately, and you probably want the answers too.
I have wanted to write an article about Bitcoin on several occasions but I have always procrastinated. It is hard to have a credible discussion about Bitcoin, both the technology and investment value, without going in-depth into many technical aspects of blockchain and cryptocurrency.
But now I think it is time for me to share some of my thoughts so that you can make a better judgement concerning the misinformation about Bitcoins posted all over the web. I have omitted most technical aspects and hope it is an easy read for you.
The public’s perception of Bitcoin often stops at something that they can “trade” to get rich quickly or at least get rich in the long term. Through this article, I want to focus on the discussion about the long-term perspectives of bitcoin to help you understand this big trend. If you are interested, read on…
Can Bitcoin help you get rich?
It is hard to take your eyes off the media when it reports that some people have become millionaires by owning Bitcoins. The news typically goes like this, “If you had invested $100 in 2010, you could have bought 1,000 bitcoins. With the market value of US$52,000 per coin today, your investment is now worth US$52,000,000!”
If you read any investment forums, you quickly find many bitcoin success stories. But the truth is, very few people have made serious money through bitcoin investing. Why?
If you check Toto (Singapore lottery) results, there are winners EVERY Monday and Tuesday. Sometimes people win hundreds of thousands of dollars, sometimes even millions.
Imagine the Straits Times’s headline news today is that Mr Tan, a pizza delivery person, just became a millionaire because he bought a Toto ticket with a $1 investment, would you get excited?
What if the same kind of news appears twice a week, every week? You probably feel the itchiness in your hands now.
My point is that there were many ways to get rich over the past decade, and Bitcoin was just one of them. But it was an extremely low probability event. Just because the price has gone up so much, it doesn’t mean people who invested in bitcoins get the same kind of returns.
Even if you were so lucky that you did own some Bitcoins in 2010, be honest with yourself. Would you have held it until today? I know many people who had owned bitcoins but sold at a very early stage.
If you had invested $100, would you have sold it at $1,000 (100% return), $10,000 (1,000%) return or $100,000 (10,000% return)? I bet that you would have sold it at $100,000 at most.
How much courage, determination and faith must you possess to own bitcoins while the value of your wealth moves in a range of millions on a daily basis?
People who were able to hold bitcoin from the early days until now are either someone who was the pioneer of digital currency and deeply understands and believes in it, or someone who has forgotten that they own a bitcoin or lost their password. Don’t you think so?
So there is no need to beat yourself up if you haven’t been owning bitcoins.
Can bitcoin be a long-term investment?
Despite its speculative nature, not everybody has the intention to “trade” in and out of Bitcoin. Rather, many people bought the idea that Bitcoin was a good investment for the long term.
A typical pitch about Bitcoin investing starts with a graph showing how much money the central banks around the globe have printed and how inflation is going to erode all of your money. Bitcoin is “toyed with” as an alternative to gold which can store value and combat inflation.
By design (I will explain in the future), Bitcoin is deflationary in nature because of the limited supply. But a lot of things are too, like a limited-edition Rolex watch, LV bag or an 1811 Chateau wine. While there are people who are willing to pay a hefty price for them, not everybody cares, right?
If you ask me, I think blockchain technology has great potential, cryptocurrency is here to stay. The value of Bitcoin? I am not so sure. I started writing computer programs when I was 10 years old and I have seen many technologies and products come and go. For example:
- Social media services such as Friendster and MySpace started in the same era as Facebook, but they aren’t here anymore.
- Microsoft started its launch of the revolutionary smartphone O2 earlier than the iPhone but it never took off.
- I used to write computer code using many programming languages because the technology has evolved so far: BASIC, PASCAL, C, C++, Java, Python etc.
- I have changed my web browser from Internet Explorer to Netscape, to Opera, to Mozilla and finally to Chrome today.
Every time, there is this “next big thing” (sometimes they are), but they are just a blip when you look back. Think about the sharing economy (the OFO bikes) and 5G which people talked so much about just two years ago.
Can Bitcoin be a future currency?
Besides inflationary protection, Bitcoin is also widely viewed as a place to store value now. Many people believe that Bitcoin is a currency because it is a “coin” or a “cryptocurrency”. This perspective is strengthened when Elon Musk announced that his company bought US$1.5 billion bitcoins and will allow people to buy a Tesla car using Bitcoin in the future.
There is no clear definition of whether bitcoin is a currency or not, but let me just give you an example.
Suppose you have one bitcoin, you walk into a Tesla shown room and book the latest Tesla Model Y which is selling at US$30K. One week later, you get a call from the salesman. You are told that because Bitcoin just dropped to US$20K per coin, you need to top up US$10K before you can take the delivery. How would you feel?
Of course, you would be pissed, but given that you are a big fan of Elon Musk, you will do whatever it takes to own a Tesla. After you happily pay another US$10k and take the car, you read that Elon Musk has tweeted “bitcoin!”. And Vola, bitcoin’s value has rocketed to US$60K. Your one coin could have got you two Model Y cars if only you have bought the car two weeks later! Does this make sense?
I am not sure if you get it, it is the volatility that makes bitcoin a poor candidate as a currency. Of course, you can argue that the volatility will normalize sometime in the future. However, that is a belief, not a fact. And if bitcoin does have a stable price in the future, people still stop speculating on bitcoins and the price may not appreciate anyway.
If you understand economics, a widely accepted currency cannot be subjected to too much manipulation. But Bitcoin is actually in the hands of very few people. You can think about Bitcoin address as the bank account number. As you can see from the chart below, less than 100 “accounts” own 10,000 to 1,000,000 bitcoins. So we can say most people are at the mercy of what the top 0.01% of Bitcoin owners want.
The other important point is that currency needs to be inflationary in nature so as to support economic growth. When the economy grows faster than the currency, that currency has to be abandoned. That is why the US abandoned the Gold Standard in 1971.
Of course, it is again the ideology of Bitcoin enthusiasts that Bitcoin will put a stop to the “irresponsible” money printing by global central banks. That brings us to the next topic.
Can Bitcoin decentralize wealth?
People who have faith in Bitcoin are told that bitcoin has no borders. It is the ultimate solution to save the broken financial system and that the world will eventually have one currency to transact.
Let’s assume that not everybody is a criminal who wants to use Bitcoin as a way to transfer money for illicit activities. But Bitcoin does have borders.
China, the country with the most advanced digital payment infrastructure and adoption rate, banned Initial Coin Offering (ICO, the process to issue new coins for fundraising) and cryptocurrency trading activities. But that doesn’t mean that China doesn’t want to embrace digital currency. In fact, they have already launched their own sovereign backing national digital currency project DCEP (Digital Currency, Electronic Payment).
I don’t want to get too deep into this topic, but a digital currency doesn’t necessarily mean cryptocurrency and a digital currency doesn’t have to use blockchain technology.
Rothschild, one of the richest men in the past, said:
Permit me to issue and control the money of a nation, and I care not who makes its laws.
If you understand what he is saying, you will know the reason behind the reluctance of any government to allow bitcoin to take over their financial system. That is why even the US Treasury Secretary Janet Yellen suggested that lawmakers “curtail” the use of cryptocurrencies.
At the end of the day, no matter how powerful you are, nobody is bigger than the government and the country where they stay. Therefore, it is not hard to see why Facebook’s Libra project is on the verge of failure “following months of severe regulatory pressure and political pushback”.
Let me summarize here…
As I said in the beginning, Bitcoin is a big topic, you may need some time to digest this article. I will expand the discussion to more articles in the future. You can comment below to express your own opinions too.
I think one of the reasons instruments like Bitcoins are gaining popularity is because they give people the illusion that they have the tools to make extraordinary wealth without much effort.
It sounds great that the common men on the street are finally standing up against the big corporations and corrupted Wall Street. It is probably the Robinhood sprits that drove the GameStop saga. Elon Musk and Keith Gill, are playing a “leader” role to help you “occupy Wall Street”. But I always tell my clients,
You can’t fight Wall Street on Wall Street.
This may sound defeating, but a billionaire leading you to fight villains? That doesn’t sound right to me.
In my next article, I will share more of my thoughts about Bitcoin. I will talk about
- What is the difference between trading bitcoins and owning bitcoins?
- Why can’t Bitcoin be used for future digital payment?
- What is the eventuality of Bitcoin?
Comment below if there are other aspects of bitcoins that you are interested in.
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