I’m A Bitcoin Skeptic— Here’s Why I Invested AnywayFeb 21, 2021
I’m A Bitcoin Skeptic— Here’s Why I Invested Anyway
A guide for non-conspiracy theorists
“Erm, no you’re not. Don’t be stupid.”
That was the identical reaction I got from two people I trust when I told them about my plan to buy bitcoin. One is an accountant and the other works for a hedge fund. Honestly, I’d have reacted the same way a few months earlier but I managed to convince both of them I wasn’t crazy.
Bitcoin has a massive communication problem. People who got in on this fringe product early tended to be counter-culture and stubborn. It worked out great for them but it’s rare to read anything online about Bitcoin that doesn’t feel like propaganda.
No, the government isn’t going to steal all your money if you don’t buy.
No, hyperinflation is highly unlikely to come to any major currency.
No, not everything is a lie unless it comes from a Bitcoin addict.
The truth is you can choose to completely ignore bitcoin if you want to and you’ll be perfectly fine. Some people have already made massive returns and others might in the future. Yet don’t forget, most people didn’t invest in either Apple or Pets.com in 1999 and they turned out alright.
Just because something is hyped doesn’t mean it will work out or that you need to pay attention.
I’m not a financial advisor and you should take this for educational purposes, not as investment advice. However, I’m a curious amateur who has a degree in Economics and worked as a research assistant for members of the monetary policy committee for the Bank of England.
I hope I can convince you I’m not crazy too.
Firstly, what is it?
In the simplest terms, Bitcoin is meant to be a currency like dollars or euros. Supposedly, you could use it to buy and sell goods and services. Yet while normal currencies are managed by governments, Bitcoin is a cryptocurrency so ruled by fancy maths instead.
The security is built into the coins themselves through blockchain technology so they are difficult to forge or steal. Let’s be real, most people who buy bitcoin have no clue how the technology works but luckily you don’t need to. Just like you don’t need to understand the entire monetary system to trust dollars.
My confidence in Bitcoin stems from people like Elon Musk and Peter Thiel. Both know way more about technology than I do and are vocal supporters of cryptocurrencies and the power of the blockchain. If you trust them too, you can safely use Bitcoin for transactions and assume they won’t disappear.
But it fails at being a currency
I’ll jump straight into the negative side.
Bitcoin can’t simultaneously be a great investment opportunity and a way to trade. If you think your bitcoin is going to be worth more tomorrow than today, you’d never buy anything with it because you’re sacrificing gains.
1 bitcoin = $30,000
1 car = $60,000 or 2 bitcoin
1 bitcoin = $40,000
1 car = $60,000 or 1.5 bitcoin
If I bought bitcoin to invest, I’d be a fool to actually buy a car with it. In the above example, I’d have saved half a bitcoin ($20k) by waiting a day.
With dollars, there is stability where you know the price you pay today will be pretty much the same tomorrow. You can buy in confidence knowing and make reliable budgets because of this. Yes, prices for daily goods do change but they do so slowly and rather predictably over time. It can’t be underappreciated how stressful volatility and uncertainty can be.
A lot is made of a couple of large companies like Tesla and Twitter indicating they will look at accepting it as a form of payment. Not a lot is made of the other 99% of companies that haven’t shown any interest at all. We’re unlikely to see a sudden revolution where everyone starts paying for everything with cryptocurrency anytime soon.
So if it’s not a currency, what is it? Many investors treat Bitcoin as an asset in reality. They buy it like they would shares in the hope the price will increase and they can sell for a profit at a later date. These people never intend to buy anything with their bitcoin.
I’m one of those people.
This is the basic paradox of bitcoin. It needs to be useless as an actual currency to be interesting as an investment. A stable asset is boring for those who want to make money.
I view Bitcoin more like digital gold because they are both scarce as viewed as an inflation hedge. There’s a limited supply so as long as demand goes up, then the price per coin should go up. This is why many Bitcoin investors are so aggressive; they want you to buy because it increases the value of their holdings! There’s an obvious underlying bias that you shouldn’t fall prey to.
There’s a crucial difference between gold and Bitcoin though. One has desirability formed by millennia of human behavior and the other is Bitcoin. Like any currency, it only has value as long as people collectively believe it has value. Right now, a tiny proportion of earth sees this in Bitcoin whereas almost all associate gold with wealth. 84% of Americans don’t care about Bitcoin.
It could be worthless overnight
I have less than 5% of my portfolio invested in Bitcoin. I’ve worked and invested most of my income in a variety of asset classes for several years. Frankly, I can afford to lose everything I’ve invested in Bitcoin if I was particularly unlucky. I only considered Bitcoin because I have this stable (privileged) base.
Don’t buy with the money you need to put food on the table or to pay off debts. No one online is going to pay for your kid’s education if you gamble their college fund on Bitcoin and lose.
For most, it’s better to invest in a stock index because it would take an apocalypse level event to lose it all. You’d have bigger problems to deal with like fighting zombies if that happened.
Yet the possibility of bitcoin losing all its value is more realistic. The people who make these kinds of decisions have already indicated unfriendly opinions.
They wouldn’t even need to ban it for everyone, all they would need to do is say pension funds or banks were not allowed to hold it. Despite all the “fight-the-man” attitude, to reach the lofty valuations, institutional money is a necessity for prices to soar.
There are infinite other ways regulators could neuter the currency if they wanted to. The larger the market gets, the more attention it draws.
The elephant in the room
The supply of bitcoin is managed through a process called mining. This process uses excessive amounts of power to solve pointless equations. Bitcoin mining uses 0.55% of global energy consumption according to the Cambridge Bitcoin Electricity Consumption Index.
For context, both the Netherlands and the Philippines use less energy than is spent mining bitcoin every year. That’s a problem. A big one. Especially as the purpose of all this energy consumption is to make a few people wealthier. You might as well burn trees for cash.
Climate change is one of the major issues facing the earth’s population. Increasingly, people are going to be asked to make lifestyle sacrifices and find their taxes raised — all while bitcoin holders boast about the money they are making on every corner of social media.
To me, it looks like this makes them an easy target that most of the population don’t care about. So even if financial regulators don’t come after Bitcoin, politicians could on pro-green stance.
There is an alternative to the energy-intensive methods Bitcoin uses but it needs to make the switch sooner rather than later to avoid unwanted regulatory and activist attention.
So why am I investing?
I’m playing roulette and I’m well aware of that. I’m not deluding myself with the belief returns are certain nor planning retirement next year.
Analysts at big banks such as JP Morgan are making noise now with price estimates in the hundreds of thousands of dollars per bitcoin. BNY Mellon is looking at opening a bitcoin fund. If what some of these institutions are talking about actually happens then this kind of return is almost impossible to get elsewhere.
I’m betting enough institutional money will flow in to keep raising the price and regulators will be slow to crush it. I use the word “bet” on purpose because I don’t have any insider information, all I’m doing is guessing based on publically available information.
To pretend I’m doing anything else would be dishonest and no one in the comments has a functional crystal ball either.
The rewards for being right are huge and for me, it’s worth the risk of potentially losing my entire investment. There are troubling aspects of bitcoin but I believe there are enough smart rich fans to work out the solutions.
I’m buying into the herd mentality in the hope I don’t get too greedy and get out before an eventual crash. Nothing could go wrong with that plan, could it?
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