“4 Strategies for Investing in Bitcoin”
With the recent rise in Bitcoin prices, everyone has taken notice. Even this guy:
Because of this, I’m getting a lot of questions about Bitcoin, but almost none about cryptocurrency. People are having a hard enough time wrapping their heads around the technology of Bitcoin that they’re not even bothering to ask about the larger cryptocurrency ecosystem. They’re also equating Bitcoin to cryptocurrency. Bitcoin is a cryptocurrency, yes, but Bitcoin is not the cryptocurrency. This may seem obvious, and indeed it is. However, people are conflating the price and notoriety of Bitcoin with the tech of Bitcoin, thinking, “since Bitcoin has the highest market cap, surely it must have the best technology, and the most utility, therefore, whatever Jackson says about Bitcoin must hold at least somewhat for the entirety of the cryptocurrency market”, which is patently false.
An example. Someone recently told me they asked their financial advisor about buying Bitcoin, and he told them it was a ponzi scheme and to steer clear. I think this financial advisor came to the right conclusion, but probably for the wrong reasons. If you’d have asked him what he thinks about cryptocurrency in general he probably would’ve said the same thing, but that’s because his only frame of reference for cryptocurrency is Bitcoin. Bitcoin may very will be a “ponzi scheme” (I don’t know if it is or isn’t, so don’t ask me) but that doesn’t say anything about cryptocurrency generally.
But, I’ve also had numerous discussions with engineers who view it the same way. Many call Bitcoin digital gold, which is one step removed from real gold, of which the famous Warren Buffet has this to say:
The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis.
As “bandwagon” investors join any party, they create their own truth – for a while. Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.
I can’t blame Mr. Buffet for not investing in Bitcoin. However, he’s recently said he was wrong about Google and Amazon. Buffet isn’t a technologist, he’s a financier. He also claims he only invests in things he understands. I don’t blame him, or many other people for not understanding this tech and it’s nuance.
However, I tend to agree with Mr. Buffet, and the financial advisor with regard to Bitcoin. Bitcoin may very well be a ponzi scheme in as much as gold is. Bitcoin core is positioning itself as a digital gold, as such, if you don’t think gold is a solid investment, you probably shouldn’t invest in Bitcoin, using the logic given above by Buffet. But this does not mean that all cryptocurrencies are positioning themselves as digital gold and that you shouldn’t invest in any cryptocurrencies.*
Also, while I’m at it, too many people who haven’t investigated the cryptocurrency ecosystem are substituting arguments against Bitcoin with arguments against cryptocurrency in general. What may hold true for Bitcoin in an argument does not necessarily hold true for all cryptocurrencies.
Speaking as a software engineer, we’re trained to crystallize logical concepts, and then use these crystallized logical structures to build more logical structures on top of the existing ones, and with the block chain, we’re doing just that. Block chain engineers are extrapolating from Bitcoin’s block chain structure, building new things with it everyday. One of the breakthroughs for me when learning about cryptocurrency was when I investigated Ethereum and saw the inferences made from Bitcoin’s original block chain. Once this connection was made I started to realize the possibilities were vast, not just internal to the Ethereum block chain as many before me have already stated, but with the block chain concept as a whole. We’re still trying to figure out which building blocks fit where, which are useless, and which will form the backbone of this new landscape. But that’s technology. There will be many more innovations to come, as this technology is very much still in it’s infancy.
Yes, we’re in a bubble
Yes, we’re in a cryptocurrency bubble, and everyone is trying to cash in on the craze. But this doesn’t mean there isn’t still true innovation and disruption happening in computation in this space. But also, what’s wrong with a bubble? Look at the beautiful infrastructure and technology the last tech bubble gave us. The cryptocurrency bubble is turning heads, just as the dot-com bubble did before it, and luring brilliant engineers into it’s fold due to these absurd valuations. Yes, a lot of people are going to lose a lot of money, but a lot of people have, and will continue to, make a lot of money, just as they did during the dot-com bubble, and I don’t think there is anything wrong with that.
*note: this also doesn’t mean that Bitcoin’s only use is as a digital store of value, but for the sake of keeping this digestible for beginners, I won’t go there. In fact, the only reason I bring this up is because I know advanced readers from the Bitcoin community are going to pitch a fit about this. Yes, most of us understand you’re purchasing access to the btc network, but with all the price speculation it remains to be seen if access to this network is priced according to it’s value.