As bitcoin soared through US$4,000 over the weekend, you’d be forgiven – if you haven’t bought any bitcoin for thinking you’ve missed the boat, that it’s too late… that the opportunity has slipped through your grasp.
Relax, the opportunity is still there. But it’s meaningless if you don’t take any action to seize it.
- Baupost Letter Points To Concern Over Risk Parity, Systematic Strategies During Crisis
- AI Hedge Fund Robots Beating Their Human Masters
The media still misses the point
“Bitcoin’s core use remains what’s it’s always been: paying for drugs or extortion fees on the Internet.”
Fortune magazine, August 10, 2017
David Einhorn Buys Three New Stocks: These Are The Names And Theses (Q3 Letter)
David Einhorn's Greenlight Capital funds returned 5.9% in the third quarter of 2020, compared to a gain of 8.9% for the S&P 500 in the same period. This year has been particularly challenging for value investors. Growth stocks have surged as value has struggled. For Greenlight, one of Wall Street's most established value-focused investment funds, Read More
A friend of mine forwarded me an article from Fortune magazine last week that included “3 Reasons Not to Buy Bitcoin”.
I was interested in this because, as someone who is bullish on the future of bitcoin, I’m always looking for contrary opinion. I don’t need more reasons to buy bitcoin, I want reasons not to.
The suggestion that bitcoin’s core use is for buying drugs and extortion, however, is nothing new – and it’s part of the media’s ongoing narrative . It’s understandable in many respects.
The infamous “Silk Road” website of the dark web (the internet hidden beyond regular websites) was the equivalent of Amazon.com for narcotics, where it was only possible to pay using bitcoin or cryptocurrencies. And a recent ransomware hack/virus called WannaCry demanded that users who wished to unlock their computers pay a small ransom in bitcoin.
However, to infer that – since bitcoin was the method of payment required by criminals – that therefore bitcoin’s core use is criminal is like saying you shouldn’t buy U.S. dollars because it’s the currency of choice for global drug cartels.
And on the flip side, it’s also worth noting that neither Standard Chartered Bank’s laundering of an estimated GBP192 bn (US$250 bn) over 10 years for the Iranian government, or HSBC’s complicity in laundering Mexican drug cartel, money had anything to do with bitcoin or cryptocurrencies.
(The other two reasons not to buy bitcoin cited in the Fortune article were 1. that it’s volatile, and 2. that it only exists on computers. The price of bitcoin has risen four-fold this year, so yes, it’s volatile. And Facebook, Google, and pretty much every internet business exists only on computers – is that reason enough not to own them?)
Why bitcoin is still a buy
Bitcoin is fast becoming both mainstream and institutionalised.
[Fidelity Investments, the financial services and investment management company with over US$2 trillion of assets under management, this month is rolling out a service that lets investors track their bitcoin and cryptocurrency holdings alongside their traditional assets.]
But more importantly, there’s a good chance that bitcoin becomes a global digital reserve currency, and a medium for storing and exchanging value.
You see, bitcoin is money. It’s liquid, it has value (albeit volatile value), I can exchange it for goods and services, and I can do so in many circumstances with far less friction than traditional fiat (that is, paper) currency.
When I executed a bank transfer from my HSBC account to fund my bitcoin exchange account, in order to buy bitcoin, it required a 20-minute trip to the bank, paperwork, a few days to clear through the various banking intermediaries – and cost me nearly US$40 in banking fees.
The irony was not lost on me… using an expensive and unwieldly incumbent global payment system in order to buy a digital currency that can potentially remove my need to use the very same banks for this kind of global transfer in the future.
At the current market capitalisation of US$65 bn, bitcoin is tiny for what it could potentially come to be. Were it to one day be equivalent in value to the total monetary base* (a very small component of total money supply) of a developed country like the U.K. for example, that alone would require a 10-fold increase from today’s price. To match the U.S. monetary base, we’re talking a 50-fold increase from here. And that’s before we even talk about any potential allocation into bitcoin from the trillions of global bank deposits and pension fund assets under management.
If global bitcoin adoption continues on a similar trajectory, this is perfectly feasible.
*Note: The monetary base, or “narrow money” is a component of a country’s total money supply. It refers to the amount of currency in public circulation and in commercial bank deposits held in reserve at the central bank.
Remember, bitcoin is global and freely usable by anyone with an internet connection.
And the longer bitcoin hangs around, the more that institutional money will have to sit up and take notice. When the Japanese government for example said earlier this year that bitcoin was a legal method of payment, people took notice. And recently nearly half of all bitcoin trading has been denominated in Japanese yen.
Buying bitcoin is still relatively cumbersome. Exchanges need to do know-your-customer (KYC) checks. Depending on where you live, funding a bitcoin account can require a trip to the bank like it did for me, and an expensive bank transfer. And you still need to familiarise yourself with a new asset class, which takes some effort.
But all that means is the opportunity is still there. There is no assurance by any means. It is volatile, and there’s a lot of uncertainty as to how the ecosystem will continue to evolve and whether or not global governments will at some stage aggressively crack down on bitcoin (because they can’t control it!).
The most appropriate course of action for the majority of investors is simply to buy a little bitcoin – and forget about it. Buy, hold and ignore the volatility. It’s not a one-way ride, it’s a bumpy one. Be prepared to stomach big declines and sit tight.
The biggest mistake people have made with bitcoin so far is selling it.
Bitcoin is an asymmetric bet… if it falls or even goes to zero, your loss is small (assuming you’ve put in only what you can afford to lose)… but if over the next few years it continues to make strides towards becoming the global digital reserve currency, then gains of 10 to 100-times are not impossible.
It’s worthwhile holding some. You can download a bitcoin beginner guide we put together by going here.