To understand Bitcoin we first must understand the role of currency and its use throughout history as a means of exchange and store of value.
By definition money is something of value and currency is a system of money in general use by a particular country. In the beginning, ancient civilizations started with bartering system or a simple exchange of resources or services for mutual advantage. Slowly morphing into a type of currency-like trade through common used items such as animal pelts, salt, and agriculture. These traded goods served as the medium of exchange. Different cultures throughout history have derived their own different mediums of exchange such as cowry shells, minted coins, and beads. At its core currency is simply a common held belief system.
The first known paper money was in China 806 A.D. its use spanned from the ninth through fifteenth century. Throughout this period, paper notes grew in production to the point that their value rapidly depreciated and inflation soared. (Sound familiar?) Then beginning in 1455, the use of paper money in China disappeared for several hundred years. Later in 1949 the Yuan is created and established as sole unified legal currency, as communists seek to end the hyperinflation that had plagued China.
The US dollar however is fairly new in comparison, created in 1792. Throughout its short 240 years of existence has gone through some major changes. When banks ran into trouble and the panic of 1907 set in, at the urging of J.P. Morgan and other prominent financiers, Congress formed the Federal Reserve in 1913, establishing the Fed as America’s central bank. As a means to give control over economic stability in the United States and to oversee monetary policy. giving the 12 Federal Reserve banks the ability to print money to ensure economic stability. Or that’s at least what they claim to do. The problem with this system is it enables human errors and greed to take over.
The dollar was later tied to the gold standard in 1931 linking its value to gold, similarly to that of which European countries have been doing since 1870. But even this was paused for a brief stint when World War I broke out, the United States and European countries suspended the gold standard so they could print enough money to pay for their military involvement. As the gold standard progressed it started to cause deflation and unemployment began to run rampant in the world economy, and so countries began leaving the gold standard.
President Nixon in 1971 stopped the conversion of dollar to gold marking the 50th Anniversary of the fiat currency we know today. By effectively delinking the dollar’s value to the price of a tangible good, this allowed the dollar to float freely. Since then, the US dollar’s value has been determined through trade in foreign exchange markets. Factoring in such variables as economic strength, interest rates, and other macroeconomic factors. Central banks have the power to intervene in currency markets to “counteract” volatility, by printing more money or adjusting interest rates. In other words, the dollar’s value is derived from social agreement and faith in the issuer — ie the US Government.
Although the US dollar paints the picture of its value being derived from supply and demand, which is partly true. But because supply is controlled on a whim at times with no cap and interest rates can be changed. A more accurate depiction would be: an artificial economic system. Perhaps that's why the government created an agency specifically to maintain stability and public confidence in the nation’s financial system called the FDIC. Fundamentally there seems to be a lot of grey area and trust required with this system. As a result the dollar has experienced perpetual devaluation throughout its history.
35% of all US dollars in existence have been printed in the last 10 months. Inflation is real and in my opinion greatly under calculated through CPI data that puts it at around 2% annually (I’d estimate closer to 5–8%). Let’s put it into perspective; What cost $100 dollars when I was born in 1994 would now cost me $175.59 today, 26 years later amounting to a 75.6% cumulative rate of inflation over that time. $100 in 1913 would only be worth about $3.87 today. This is why in order to beat inflation and dollar devaluation you must invest your money in an appreciating assets. That money under your mattress is losing value as you read this.
On the tail winds of the 2008 market crash when the public’s trust in the system was arguable at its lowest, Bitcoin is created by a pseudonymous person(s) Satoshi Nakamoto (check out my other article on the creator of Bitcoin — Satoshi Nakamoto). Bitcoin is a Digital currency built through open source software on top of blockchain technology. Blockchain creates, stores, and manages digital transactions that are public, secure, and distributed. Commerce on internet has come to rely almost exclusively on financial institutions serving as third parties to process and verify transactions (trust based model).
Cryptographic proof of work removes the need for trusted third party involvement and solves for double spending problem. Coins are mined with individual digital signatures transacted and verified on a peer to peer network, using proof of work to verify transactions and record on a blockchain or public ledger that stores the data history of all transactions. Nodes are incentivized to support the network and provides a way to initially distribute coins into circulation, since there is no central authority. Once all coins enter circulation, incentive will rely on transaction fees and be completely inflation free. With a fixed supply, the number of coins mined has a 21M hardcap and halving of mining blocks occurs every four years, it is fundamentally deflationary and decentralized. By being open and un-censorable, Bitcoin has the ability to emerge as a global non-political standard of value and settlement. The numbers and amount of investment and activity in the space sure point to its success.
Traditional investors will point out that Bitcoin does not produce earnings or dividends and does not generate interest. This is correct, most forms of sound money have no intrinsic value. For over a millennia gold has played a significant role in human society. Yet, despite its shiny exterior, it is intrinsically worthless. The price of gold and bitcoin are based around one thing and one thing alone — belief. The belief that these assets will have value in the future. And right now the collective belief in Bitcoin is increasing exponentially. Just talk to anyone who really believes in this technology, and their conviction will run deep. Current estimates show only 1.3% of the world’s population owns Bitcoin, with 10% of American’s owning some. By all estimates Bitcoin is still in an early adoption phase.
Currently Bitcoin is a speculative asset unlike any other known to the investment community. As it matures it will continue to have huge run ups in price followed by violent crashes, each time making higher lows. As the market capitalization grows with more and more transactions on the network, the harder it will be to manipulate and the more stable it will become. As with each transaction the difficulty of cryptographic proof of work needed to solve and approve transactions increases, thus becoming more resilient to corruptibility each day. Each Bitcoin is divisible into $1M bits or satoshis. Letting anyone purchase no matter fund size. With a fixed cap on supply paired with increasing demand and utility, Bitcoin has plenty of room to grow and is still early in its global adoption.
Biggest risk in owning Bitcoin is not a price crash, but rather the possibility of government ban on ownership. This might seem outlandish, but the US government banned ownership of gold bullion/coinage in April 1933 through executive order (which was later revoked). Gold today has a market cap of $10T or about 10x the size of Bitcoin’s market cap. I predict capital will shift from gold into Bitcoin over the coming years. As long as time flies and water falls, capital will flow from weak assets to strong. There is extreme volatility in the short term, but over a long period of time, Bitcoin shines. It does a great job of preserving purchasing power and avoiding the perils of fiat currency devaluation. The problem with the US dollar is that when money is printed out of thin air or created out of nothing. The resulting effect is the confiscation of wealth through inflation.
What captures my attention as an investor/speculator is Bitcoin’s story. Created anonymously to solve a systematic problem, providing an avenue to a better future with more freedom accessible to anyone on a global playing field through the internet. What other revolutionary technology has gone from zero to $1T market cap in 10 years, without a leader or CEO? To compare and give some perspective of how remarkable of a feat this is here’s a list of the largest technology companies we know and how long it took them:
Microsoft — 44 years to become a trillion dollar network.
Apple — 42 years to become a trillion dollar network.
Amazon — 24 years to become a trillion dollar network.
Google — 22 years to become a trillion dollar network.
There is no other trillion dollar networks.
Time and time again Bitcoin has proven its relative strength and continues to carve a path to legitimacy. Main stream adoption has come a long way, now some of the biggest companies have started to accept it. (Microsoft, Paypal, BMW, AT&T, Etsy, Shopify, Overstock, Home Depot, Starbucks, Wikipedia, Square, Tesla, Whole Foods, etc) Bitcoin has established itself as an disruptive platform with remarkable network effects. Proving to be an instrument of economic empowerment. Seems negligent not to have some exposure. The asymmetric risk/reward is too favorable to sit on the sidelines. As you gain more exposure to how bitcoin operates you will begin to understand just how important and needed this technology is. When you feel the urge to learn more about bitcoin, you are simultaneously acknowledging that you that you are being oppresses by the fiat monetary system. That’s powerful. You may not understand that fully at the time, but that’s exactly why you are interested. You feel a need. The goal is not to adopt bitcoin to become rich. The idea is to adopt bitcoin to become free. Adopt it slowly. Try it. Interact and understand how it works. Continue to learn about our current monetary system and why this network is so revolutionary. We are still early in adoption. Most people are skeptics at first and that is fine. But as you dive deeper into the protocol of bitcoin and the fundamentals it is built on, you may change your mind..
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
– Satoshi Nakamoto
As writing this, the Fed continues Quantitative Easing (QE) while interest rates break record lows. At some point debt will build too high and the money printer will slow. The fed will stop purchasing corporate bonds as borrowing rates start ticking up. The excessive liquidity being pumped into the market will dry up and so too will some equity valuations. But cycles occur and change is inevitable. There is undoubtedly growing underlying systematic risk that is being artificially propped up by the Fed. Bitcoin can be seen as a hedge or the new future to a non-political global value settlement system free of sovereign control.