In the second half of 2017 Bitcoin gained the world’s attention. Seemingly out of nowhere, the cryptocurrency was gaining unstoppable momentum. By now, everyone had heard the term cryptocurrency, and other cryptos were hitting the scene as well such as Litecoin and Ripple.
A Novel Idea
Bitcoin is based on blockchain. To put it simply, this technology allows for decentralization and increased privacy. Since I’m no expert, I’m not even going to try and explain the details, you can read more on blockchain here. Bitcoin and other cryptos are based on the idea that the currency is decentralized. Unsurprisingly it started gaining traction after the financial crisis of 2008. Moving the control of currency from the big banks that created the crisis in the first place.
The Value of Currency
We exchange money for goods and services. The value of a currency is based on trust. A society needs to believe that their money is worth something in the market. This worth depends on the value of products and services created by a nation (GDP) and the control of its supply through monetary policy. We know that printing more of it will not increase its value and leads to disastrous inflation (think Zimbabwe). If the value of money is unknowable the day after an exchange, no trade would happen. The reason we can trade is that we have some form of knowledge of what we are getting in a transaction.
Bitcoin is Not an Investment
The simple definition of an investment is putting money aside now, in order to gain later. I’ve also written a more detailed definition of the word here. Bitcoin, no matter its pros and/or cons, is NOT an investment.
If the value of currency (crypto) is erratic and based solely on supply and demand, how do you build trust in using it as a means of exchange? If it’s tied to nothing tangible, how do you know its worth? You can value a business, but you cannot value a crypto. Interestingly, most crypto enthusiasts are talking about how much their unregulated currency will be worth in the future due to its superior merits. If the product is so valuable and will be the standard of the future, why are these people looking to what they can gain from it in real dollars in the future? If they truly believe in it, they would never look into selling it in the first place… But it’s going to be the next big thing, right?
Is our population suddenly over-supplied with blockchain and crypto experts? Or has the church of crypto filled its congregation with yes-men who parrot what they read on the internet?
The purpose of this post is not to bash blockchain technology. Its certainly interesting to see how it can be implemented in business operations. But remember, in order for something to be mass-implemented, it usually needs to be simple enough to explain to a child or a senior. Can this be done with cryptos and the technology behind it?
Two Main Counter Arguments
There are two main counter arguments to my points that Bitcoin-believers use.
Limited Supply
There is a “limited supply” of Bitcoin. This is how it’s creator, Satoshi Nakamoto designed it.
Lets go back to the trust factor I wrote about earlier. We don’t even know if Satoshi Nakamoto is the real name of the designer. Maybe the supply is limited. If it is, how can you explain it simply to the masses. It’s a hard sell if all you can say is “there’s a limited supply”. How are all these things so knowable and set in stone? Remember that Bitcoin is a human invention. If it’s designed by a human to have a limited supply, it can be designed to not have it. Technology has a strange tendency to change and I don’t doubt the flexibility of crypto technology. It is not gold, which actually is demonstrably a finite resource.
I do believe Nakamoto is some sort of tech whiz kid. Whoever he is, I hope he is using his tech talents in other productive ways.
“The Financial Industry is Using it!”
Aah, the financial institutions have started to use Bitcoin in their operations. Are these the same “evil big banks” that created the financial crisis in the first place? Do you see the irony of the thesis of a “deregulated currency”?
Let’s remember that the finance industry is “highly innovative” when it comes to their products. Sub-prime mortgages anyone? Collateralized Debt Obligations? If the industry believes it can make real world money with cryptos, I guarantee they will try it. Beware of the Appeal To Authority fallacy. Just because some areas of the financial industry is using Bitcoin today, does not make it an investment.
Conclusion
I believe the most enthusiastic of Bitcoin believers are suffering from confirmation bias. If they honestly assessed their standing, they would admit it. But it’s hard for human nature to admit our faults and weaknesses. Perhaps Bitcoin will be widely used in the future. Maybe I’m just a tech dinosaur who doesn’t understand its wonders.
What I do know, is that the most dangerous words in investing are “This time its different”. When these words are said (as is the case with cryptos), be rationally skeptical. Those who do not learn from history are bound to repeat it.
You can buy cryptos if you feel like it. No one is stopping you. Just remember, its a speculation, NOT an investment.
-IGTSKasimir
Further Reading
Warren Buffett – The Partnership Days (1956 – 1969)
Philip A. Fisher – Lessons From The 15% Man
The Best of Ben Graham – Security Analysis
Phil Town – The Compounding River Guide
Margin of Safety – The Most Important Thing
Intelligent Investing = Thinking In Probabilities
The Emotional Stages of a Value Investor
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