Bitcoin (OTCQX:GBTC) (Pending:COIN) has not performed well year-to-date. In fact it crashed and then stayed down. Yet, the case for Bitcoin is growing stronger. I’ll go over what I view to be the most important reasons to buy Bitcoin in no particular order.
Bitcoin is a scarce asset. You’ve probably heard this so many times it doesn’t really register any more. But it’s a fundamental reason why it is so interesting. Satoshi Nakamoto solved the problem of digital currency by creating one that’s extremely hard to be spent twice (a problem that plagued previous iterations). The algorithm limits the issuance of Bitcoins to ~21 million total. However, these are divisible in up to a hundred million Satoshis. Bill Gross’ worry that you can’t use Bitcoin to pay for groceries is therefore unfounded.
To quote Murray Stahl’s memo Bitcoin and Risk:
…Bitcoin possesses about the most identifiable and valuable fundamental property of any financial asset, which is a known scarcity value, such that it cannot be diluted or debased. There has never been a form of money with this property that can be employed by the general public. Every known currency in history has ultimately collapsed…
Gold can be mined. If the price goes up, reserves appear out of nowhere (companies are only allowed to book reserves if it’s economically feasible to mine them).
Fiat currencies get printed around the clock. Everyone who’s been alive for 30 years or so will have noticed the effect of inflation. Stuff you want to buy generally requires you to put up a lot more fiat than it did when you were a kid. For this reason stashing money under a mattress is really unpopular.
Bitcoin has neither problem. It can be saved and it should hold its value better than fiat as long as the status of either remains unchanged. Something that seems unlikely given the superior properties of cryptocurrency.
One counter argument often heard is there can be an unlimited number of cryptocurrencies. That’s true. There can be an unlimited number of Facebooks as well. There are even Facebook variants out there that have much fewer adds. Yet they are dead. G+ didn’t work. Microsoft Windows was hardly the best or only operating system out there. Yet it completely dominated for decades. That we ascribe value to a certain number of cryptocurrencies does not mean that every crypto that’s functionally the same or better is also valuable. Almost randomly most of the value is in this particular unique chain of transactions called Bitcoin. Could have been another one? Sure. But it isn’t. This is our Facebook of the Money Networks.
As alluded to already, there’s a network effect at work with Bitcoin. It becomes more useful/valuable as more people and businesses accept it or acknowledge it as a store of value. Because of how the technology works that makes it such an extremely secure asset it becomes safer as its market cap increases. Bitcoin is now much safer compared to Bitcoin three years ago. Bitcoin is still adding new wallets (users) on its blockchain
The pace has slowed since the price decline end of 2017 but it is still growing. Important to the Bitcoin specific bull case vs. the cryptocurrency bull case – the growth has slowed but so has the growth for most alternative cryptocurrencies. The frenzy of people creating accounts has died down for now.
Two major complaints about Bitcoin have been the speed by which transactions are processed and the cost of transactions getting processed. These are real issues but sometimes I hear people entirely dismiss Bitcoin based on just those issues. That’s somewhat premature.
Although the solution to these problems could be best addressed through switching to an alternative, there could be a solution in the lightning network (explained here). This technology is available but will take time to spread and build on its own.
The advantage of Bitcoin with lightning network over altcoins lies in its flexibility. With an altcoin you are trading general security in exchange for features you think are more desirable. With Bitcoin plus lightning network you can toggle between what I deem the safest ledger in existence and speed/low transaction speed as needed. I’m optimistic this is an interesting solution and it could give new life to Bitcoin as a payment system. The bull case for payment systems has better upside prospects compared to the more accepted premise of Bitcoin as a “store of value.” As the use of the lightning network spreads it could quickly ignite another Bitcoin run.
The serious money continues to move in. It’s not the pension funds. In finance Bitcoin is the opposite of IBM (IBM). No one ever got fired for buying IBM. Buying Bitcoin puts your career at immediate risk. Not just at JPMorgan (NYSE:JPM).
It’s really the vanguard of money management that’s starting to see the benefits of adding a slice of Bitcoin to holdings….