Remember the internet in 1996, everyone kinda knew what it was about. It was something big, new, and vast—but what exactly it did for you was unclear. Bitcoin is in a similar state: It’s fairly new, unclear, and holds enormous promise just like the early Internet. The only difference is you can actually buy a piece of the Bitcoin network.
This article is for the professional that has a reasonable savings (whatever that means to you) and at least a basic understanding of investing. You may likely invest in stocks, bonds, real estate, your own business, and many other things. You should also invest 5% of your portfolio in Bitcoin.
What is Bitcoin?
Bitcoin is unlike anything the world has ever seen. It allows you to send money, essentially like sending an email to anyone in the world for nearly free. It’s a game changing concept. There are no governments involved, no fees for holding, and no banks to act as gateways.
Is It for Real?
Bitcoin was developed by an anonymous developer with the pseudonym Satoshi Nakamoto in 2009. There will only ever be 21 million Bitcoins released between 2009 and 2140. This creates a fairly rare and scarce currency. To put it in perspective, there are 7 billion people in the world. Each person could only hold .003 Bitcoins. You want to get yours before everyone else realizes this is something valuable.
Dollars, Euros, and Pounds
Most of your wealth is probably held in terms of dollars, euros, pounds and the like. We have begun to take it for granted that these represent wealth and will continue to do so.
History is not on your side, however. Government created currencies have only become worth less over time. The purchasing power of the dollar has decreased 95% from 1913 to 2009 . Think of the Roman currency, the Greeks, ancient Egyptians, Aztecs, and Mayans—all great and powerful societies of their day—all of their currencies are now worthless.
You’ve heard of the Federal Reserve, Ben Bernanke, Alan Greenspan and so on. What do they actually do? They control the money supply, which effectively means they print money. Literally. As of late, the Federal Reserve is creating 65 billion new dollars a month. Since all existing Bitcoins are currently worth about $8 billion, that means the Federal Reserve is creating the equivalent of 8x Bitcoin value—every month. That shouldn’t make you comfortable; it doesn’t make me comfortable.
Everyone should have 5% of their money in Bitcoin. Your emotional reaction is likely a combination of fear, distrust, and curiosity. It feels like jumping off a cliff without knowing if the bottom is 2 feet or 200 feet below. I agree— but it’s a sensible risk.
There are speculations that Bitcoin could someday rival a currency like the dollar or euro. If the value of all dollars is more than 1,000 times the value of each Bitcoin, there is plenty of room for Bitcoin to increase in value—and thus provide a significant return on investment.
Upside — Bitcoin rivals a major world currency and is worth 1,000x the current value.
Downside — Bitcoin goes to zero.
Reasonable scenario — With a current price of around $650 per coin, and a total currency value of $8b, the value of Bitcoin could easily increase by 10x and still be extremely small compared to the value of the dollar or euro. You want to be an owner if this happens.
What Happens Next
Similar to the Internet in 1996, Bitcoin is just getting started. In the past few months alone, Overstock, Tiger Direct, Zynga, and Virgin Galactic have begun to accept Bitcoin as payment. It allows merchants to avoid paying banks 2.9% for credit cards, costing them less than 1% to accept Bitcoin.
While the initial hobbyist exchanges like Mt. Gox have failed, its an evolutionary process. New York is accepting applications for digital currency exchanges. Later this year regulated VC-backed organizations will begin to setup exchanges for Bitcoin. Just wait and see what happens to the price once Amazon or Google begin accepting them.
How to Buy Bitcoins
If you’re in the US, the easiest method—and one with the highest levels of security—is through Coinbase. They are one of the biggest in the US and is backed by Marc Andreessen, who started Netscape. Overstock uses them to process their Bitcoin transactions, and Jimmy Wales, the founder of Wikipedia, recently signed up for an account.
Bitcoin has gone on a historic move to the upside, but it’s still only the beginning of the Bitcoin game. There is an entire ecosystem of Venture Capitalists, software developers, bankers, and merchants creating value for your potential Bitcoin wallet.
There will only ever be 21 million created—right now its essentially still a land grab. Make sure you get a piece of this incredibly valuable real estate. Like the Internet in 1996—Bitcoin is just getting started.
Adam Kornfield is Co-Founder and Soothsayer at Baron Fig: Notebooks for Thinkers.