What Everyone Keeps Getting Wrong About Bitcoin
Another day, another big name comes out against Bitcoin.
“In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.” –Warren Buffett
A bad ending. Interesting word choice there, because it highlights exactly what people keep misunderstanding about Bitcoin. They talk about the inevitable coming crashes in Bitcoin as if that’s it, that’s the end. After the crash, we will all finally realize how silly we all were about cryptocurrency and walk away. The end of Bitcoin.
Really? The end?
Are we in a crypto bubble right now. Of course we are. Everyone knows we are. But how often do bubbles pop and destroy the underlying asset class? How many times has the S&P 500 crashed? How many housing crashes have we had? Is housing a fraud because bubbles pop? Does housing as an asset class go away after people lose money?
“History doesn’t repeat itself but it often rhymes,” –Mark Twain
Many people thought that e-commerce was “just a fad” in the 90’s, that nobody would actually buy things online. Despite these warnings, shares of Amazon stock sold for $1.50 in May 1997 and rose to over $85 in a couple short years.
Amazing growth, completely unsustainable. It must be a fraud. It must be a bubble. E-commerce certainly had to come to a bad ending. Then the dotcom bubble crashed. Amazon shares fell to less than $6 per share.
Clearly the naysayers were right. E-commerce was a fraud. Amazon lost 93% of its market cap in a couple years. Obviously the whole thing was a sham, the technology would crumple up and die in shame, right?
Now Amazon stock is over $1,200 per share.
Why? Because e-commerce as an asset class didn’t die.
We are in the 1999 dotcom bubble of Bitcoin today. Will it crash? Yes. Might it lose 93% of its value? Yes.
Will it die and go away? Absolutely not.
For all the skeptics of Bitcoin out there, almost nobody is skeptical of blockchain. Blockchain is a brand new asset class, like e-commerce was in the 90’s. Nobody is saying that blockchain is going to “end.”
But the problem is, you can’t buy “Blockchain.” Just like you can’t buy “E-commerce.” You can buy shares of Amazon. You can buy a diversified group of e-commerce assets. But you can’t just buy shares of “E-commerce.”
And if you look at the history of market crashes, the largest market cap investments in an asset class are the safest during a crash. The small guys die. The Pets.com die. Many of the ICOs are going to die during the upcoming cryptocrash. The big guys only get hurt. The Amazons get hurt. A 93% crash hurts. But did it kill Amazon? Did it kill the asset class? No.
The S&P 500 is made up of the 500 largest market cap stocks. Does that mean that if a company is in the S&P 500 that it can’t go bankrupt? Of course not. Blockbuster? Polaroid? Circuit City? Even big guys die. But others take their place. That’s why it’s a diversified portfolio.
If you believe that blockchain isn’t going away, then the question becomes how do you best and most effectively invest in blockchain as an asset class?
Today the largest and most established market cap options for blockchain are Bitcoin, Etherium, Litecoin, Ripple, Bitcoin Cash. That’s the CryptoFortune 5 of blockchain. Will all 5 survive the cryptocrash? I have no idea. Nobody does. But if history rhymes, they probably will. They will take a big beating, but probably most of them will survive.
Will another blockchain implementation come around in the next few years and trump Bitcoin’s market cap? Maybe. Maybe it won’t be a coin, maybe it will be for identity management. And then it will take its place in the CryptoFortune 5. Will Bitcoin drop out of the CryptoFortune 5 or CryptoFortune 10? If so, then maybe its time to rebalance the blockchain investment assets out of Bitcoin. But today, Bitcoin has the biggest market cap.
If you truly believe in blockchain and want to invest in it, you need to realize that the next 10 years will be a really rocky ride. It might be 20–30 years before blockchain is as established as e-commerce is today. This might be the first wave of blockchain, like the 90s was the first wave of web companies.
But who wouldn’t want to go back in time and buy as much Amazon stock at $86, the top of the market, as possible? Knowing today, after holding it for 20 years, it to be worth $1,200. Just make sure to invest only money that you are willing to not touch for 30 years, otherwise you are in a sucker’s game.