Bitcoin: A Generational Investment?
Bitcoin… I’ve been following this cryptocurrency and dollar-cost averaging small amounts into it for nearly a year now. However, that is not to say that it’s always been a ‘no-brainer’. Quite the contrary, actually. I’ve had plenty of doubts. The majority of the last year has been anything but smooth sailing.
When I first started going down the rabbit hole, my headspace was generally in one of two camps: (1) “I’m a crazy person who is gambling on a ‘get-rich-quick’ scheme” or (2) “Bitcoin is an absolute unicorn of an investment and it might be able to solve most of the world’s problems.” There was no in-between.
As time went on, my headspace spent less time in the crazy person camp and more time in the one with unicorns. Now, this could be due to the sunk cost fallacy. Or, it could be that bitcoin is the investment of our lifetime… and for more than one reason.
I plead my case:
The Early Days
I graduated from college in May of 2019 with a degree in business finance. I chose that route because I understood that financial literacy is essential if you ever want to achieve true “freedom” in this world. As I got further and further into my studies, however, it began to dawn on me that you need one of four things to achieve this freedom:
- Time. You need to be willing to spend 20, 30, or even 40 years of your time working from 9 to 5 so that you can save enough money to retire off of passive income at a modest 10% rate of return. And you must also be prudent in your spending.
- Endowment. You need to have been born into a wealthy family that blessed you with a large inheritance.
- Risk tolerance. Since there is a constant trade-off between the riskiness of an investment and its return potential, you need to be able to stomach the possibility that you could lose most of your money.
- Expert knowledge. You need to know something that 99% of people don’t. It will take years to obtain this kind of knowledge. Even so, the chances are slim that you capitalize on an investment opportunity with such an asymmetric risk-reward ratio.
As it turned out, I wasn’t very keen on the idea of spending the best years of my life climbing the corporate latter. It also doesn’t help that a mere 15 years separate the average age of retirement and life expectancy of a U.S. citizen.
Nor was I born into a filthy-rich family that bestowed a large endowment fund upon me.
And in my studies about finance and economics, I came across the Efficient Market Hypothesis (EMH). EMH states that it is impossible to outperform or time the market. Now, that isn’t completely true, but it does hold some truth. Furthermore, it became apparent that the only way to truly game the stock market is by already having a few hundred thousand dollars (and the know-how) required to construct a properly diversified portfolio or execute arbitrage opportunities via financial derivatives.
Bleh.
In my portfolio management class, we used a virtual stock exchange to “pretend invest” a million dollars. Not a single group in our section had a higher return than 1%…
So I eventually came to the conclusion that the average person — like myself — should just stick to passive investments, like a Vanguard mutual fund or an index like the S&P 500.
Disheartening to say the least.
And then I came across bitcoin — for the second time — in April of 2019. At the time, it was worth roughly $3,000 per coin. As a broke college student, I had previously watched its massive bull run in 2017 from the sidelines (while average people became millionaires over the span of a few weeks). Despite not having any money at the time, I decided that my first investment upon graduating and getting a “big boy” job would be to buy an entire bitcoin…
… but it was too late by then.
By the time my first paycheck was direct-deposited into my bank account, bitcoin had already undergone another bull run to upwards of $10K.
So, I slowly started dollar-cost averaging into the speculative cryptocurrency….
First, I started with $50 per week. Then, I started doing some research. And before I knew it, bitcoin appeared to be the investment opportunity of a lifetime. I couldn’t get enough of it.
Here’s why:
The Investment Opportunity
The money is what pulled me in. I can’t even lie. As we discussed in my latest publication “Bitcoin Halving Basics,” something magical happens every four years or so to bitcoin:
Parabolic price appreciation.
Bitcoin has only been around for 10 or 11 years. In that short amount of time, however, there’s been a pattern of its price doing a 10X (or more) around the same time that its supply issuance is cut in half. And we were already t-minus one year away from the next halving.
So I wanted a piece of it.
Also, I took into consideration a general truth about investing: “Concentration builds wealth, diversification preserves it.” At the time, I had very little wealth. In fact, I had northwards of $30K in student loan debt. It made perfect sense to concentrate some wealth in a highly speculative asset .
The History of Global Reserve Currencies
The below chart really says it all. Over the last 600 years, every reserve currency has eventually failed. Thus, it wouldn’t be ridiculous to believe that the U.S. dollar will also fail in due time. If that were to be the case, and if bitcoin were to replace it as the global reserve currency, then each bitcoin would be worth about $10 MILLION per coin.
Let’s say the price per bitcoin is $10,000. Would you be willing to lose $10K for the chance to win $10M?
This is the very definition of asymmetry…
I don’t know about you, but I would rather not bet against it.
The Evilness of Fiat Currency
Here’s how Wikipedia defines fiat money: “A currency established as money, often by government regulation, but that has no intrinsic value.”
(The U.S. Dollar, the Euro, the Chinese Yuan, the Japanese Yen, and the Mexican Peso are all examples of fiat currency.)
The thing about fiat currency that really gets under my skin is that governments can *literally* create it out of thin air. In fact, we’ve seen the U.S. government inject fiat currency into the economy in recent months to the tune of $2.3 trillion. This stimulus is called “quantitative easing” — we’ll talk about it another time. For now, just know that they’re just getting started.
Also, just like a crack-addict always needs more drugs to get the same high, know that quantitative easing has significant implications in the long-term.
This type of money — the kind that has “no intrinsic value” — is the one that we are all paid in for our hard work. Do we also think that the time we spend working has “no intrinsic value?” Think about it: many of us store our wealth in a currency that has an unknown value.
Look, we don’t know how many dollars are going to exist in the future. Thus, we don’t know how much our money is going to be worth. And if we don’t know how much our money is worth, then we can’t confidently assume that we are being paid properly for the time we spend working for other people. Since we are all going to die one day, this begs the question: are we wasting our time?
On the other hand, we know exactly how many bitcoin exist right now. Furthermore, we know exactly how many bitcoin there will ever be. There will never be more than 21 million. And there’s nothing that anybody can do to change that.
Our government is cunning, bitcoin is transparent.
We Don’t Understand Capitalism
Here’s how Investopedia defines capitalism: “An economic system in which private individuals or businesses own capital goods.” They also mention the following: “the production of goods and services is based on supply and demand in the general market — known as the market economy — rather than through central planning — known as the planned economy or command economy.”
To say that the U.S.A. is a capitalistic economy is misleading to say the least. Given that we owe $25 TRILLION to other people, I would go as far as to say that we are actually a debt-based economy.
Moreover, our goods and services are not completely based on supply and demand. Our government is notorious for bailing out Wall Street, airlines, and large corporations that are failing. Given that a few large sectors in our economy are dependent on central planning, I would go as far as to say that we are a socialist economy in a sense.
Inflation and The Cantillon Effect
When our beloved, bureaucratic central planners print money out of thin air in the name of bailing out the top 1 percent, inflation inevitably happens. In layman’s terms, this is when the price level of goods and services increases due to the money supply growing at a faster rate than consumption.
Like most things in life, a little bit of inflation isn’t necessarily bad. Too much of it, however, can lead to total ruin.
Inflation is the reason why a $100 bill can’t buy you as much today as it could 30 years ago.
Inflation punishes you for each dollar that you put in a savings account for a rainy day.
If your salary was $100,000 in the year 2000 and you’re not making $150,000 right now, inflation is ripping you off.
Thanks to the Cantillon Effect, inflation makes poor people even poorer… while making rich people even richer. Every time the Fed bails out Wall Street, airlines, and large corporations, the wealth gap widens.
Hyperinflation explains why Germans lit their money on fire for warmth after WWI. And it explains why people today in countries like Venezuela, Lebanon, and Zimbabwe wake up every morning and worry about how much value their money lost over night.
Bitcoin, on the other hand, cannot be inflated by a third party. Its inflation schedule is not only known years in advance, but it decreases every year. In fact, it is almost as low as gold’s — and gold has already been around for a few thousand years.
In a sense, bitcoin is almost deflationary. This means that the longer you hold it, the more cheaply you will be able to buy goods and services. The longer you hold a deflationary currency, the more purchasing power you will have. Think of it like this: as the number of people hoarding a deflationary currency increases, the total supply of the currency in circulation decreases, which makes each unit more scarce. All else equal, a currency will become more valuable the scarcer it is.
We need a currency that can hold its value over time. We need to be compensated for our scarce time with a scarce currency. And we need this scarce currency for a rainy day because we can’t predict the future and don’t know when the next rainy day will come. Just ask COVID-19…
Listen, I like bitcoin for what it is. That much is probably clear by now.
But the truth is, I love bitcoin even more for what it is not: a gamble.
