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Why You Should Care About Bitcoin

Bitcoin — The Digital Gold is the future of money and here to stay

The Practical World
Coinmonks
Published in
12 min readDec 15, 2020

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Disclaimer: This is not financial advice. I am not a financial advisor, just a practical guy, writing about a practical world.

CREDIT: Pixabay/MichaelWuensch

If you have not heard about Bitcoin by this point, you may be living under a rock. However, a brief summary will help to get started. Bitcoin is what is known as a cryptocurrency, or a digital currency, that can be used as a store of value and a means of exchange. There are currently several thousand cryptocurrencies in existence, but Bitcoin was the first and the largest, by market cap. There are only 21M Bitcoins in existence and only about 3M are left to be mined. Mining is the process of computer hardware obtaining more Bitcoin through verifying transactions. Bitcoin was created by an unknown person(s) known as Satoshi Nakamoto. Interesting aside about Satoshi; if you combine some of the big electronics manufacturers you can make up the pseudonym. Specifically, Samsung, Toshiba, Nakamichi and Motorola. Bitcoin was created in 2009 and was released as open-source software. What makes Bitcoin unique is that it is decentralized, meaning there is no central bank tied to it. Transactions can be sent between parties and the records are stored on what is called the Blockchain, which is essentially a digital ledger, that holds encrypted data. Bitcoin price is volatile and it has experienced crazy swings since its inception. Most people will probably remember hearing about Bitcoin back in 2017 during what was known as the period of FOMO (Fear of Missing Out). Bitcoin was the topic of many Thanksgiving and holiday gatherings. The price of Bitcoin jumped from out $1,000 to $20,000 that year only to come crashing back over the next couple years. But…that is only the beginning of Bitcoin’s story.

Bitcoin can be exchanged between people over the Blockchain. The transactions themselves happen very fast and at a very low cost, contrary to a centralized bank. This makes Bitcoin optimal to not only be seen as a store of value but also used as a means of monetary exchange. The current price of Bitcoin is roughly $19,000, which is up well over 100% in 2020, but still below its all-time high around $20,000 back in 2017.

Over the course of this post I am going to provide some examples that illustrate the power of Bitcoin. I will make the case for Bitcoin as a store of value and as an efficient means of exchange. Let me start off by saying Bitcoin has by no means reached the mainstream yet. It is still in its infancy but has a very bright future. Both financial institutions and retail investors are taking a liking to the digital gold and as more people keep talking about it, using it and putting the right regulation around it, there will remain a bright future for Bitcoin and cryptocurrencies as a whole.

Store of Value

Before I get into Bitcoin as a store of value, let us look at Amazon to better understand why it is a store of value. Amazon is a publicly traded company and as such, allows investors to purchase ownership (shares) in the company. These shares are an equity and they can appreciate or depreciate in value. They are also regulated by multiple government agencies to ensure necessary standards and policies are maintained and enforced. The price of any stock is typically based on forward looking projections; however, it can also fluctuate based on real-time news. When Amazon releases quarterly earnings, the stock typically moves up or down based on what the executives say will happen in the future, not what happened in the past. This means the stock market, by nature, is a measure of what is to come. Investors buy Amazon stock because they believe it will go up in value over time. Most people that hold Amazon stock hold it as a long-term investment. Meaning, they have a longer-term horizon because they believe in the long-term vision and strategy of the company. This has worked out well for investors. The stock is up over 100,000% since it went public. One clear point to make is that Amazon stock is not in itself a currency that can be used for obtaining goods and services. However, it is a clear store of value, that when exchanged, can be used for purchasing.

Let’s bring this back to Bitcoin now. Why does Bitcoin have value? Many people see Bitcoin has a massive speculation, meaning to them it really has no future. As I mentioned previously, Bitcoin only has 21M coins that will ever be in existence. Having a finite number implies scarcity and psychologically, scarcity is important. In comparison to the dollar, more dollars are printed every single day which is why the value of the dollar has been declining over the recent years. Gold is the closest example to Bitcoin. Gold has a relatively constant supply over a period of time while Bitcoin has an exponentially decreasing supply over time. This psychological component makes it even more valuable even if it had no utility. Because of the rapid pace of declining supply, investors mine and purchase more Bitcoin as a speculation that its utility will also increase over time, thus making the coin more valuable. When Bitcoin was first created it was worth pennies. Now it hovers close to $20,000. This proves that as a long-term investment, Bitcoin has held up well. Investors continue to purchase more and more Bitcoin because they believe the value will continue to increase over time. They believe in the long-term technology and utility of the coin similar to believing in a company’s long-term vision.

Another reason why Bitcoin is so valuable is because of the security built into it. The data on the blockchain is anonymous and encrypted. It does not mean that digital forensic companies can’t ultimately uncover some transaction details, but the data is still anonymous. It is also near impossible to counterfeit Bitcoin. Counterfeiting dollars has been a long-standing problem through history, but doing so with Bitcoin would require taking over the majority of the network. Bitcoin also uses SHA-256 encryption and it applies this layer of encryption twice, making it even more secure.

Means of Exchange

The real utility that Bitcoin possesses is its potential for being a means of exchange. First of all, there is no central bank that manages the transfer of coins. This means the middleman is ultimately cut out of the equation. All transactions are made in a peer to peer (P2P) setting. The transaction itself is also made very quickly and for a very low cost. Bitcoin is transacted between what is referred to as wallets. Each wallet has an address and a wallet can hold as little as a fraction (satoshi) of a Bitcoin.

Because Bitcoin can be transacted so quickly and at a low cost that means it can be an efficient way to send money between countries. In addition, Bitcoin is borderless and can be seen as a global currency. Having a single currency that is equitable and transferable in every country is a major advantage. There are also countries all over the world that are having challenges with their own currencies. Some countries like Argentina or Lebanon have seen their currencies decline rapidly but they have seen a huge influx in Bitcoin purchases because of that. Using a global currency means that individuals don’t have to be exchanging currencies when traveling abroad and spending the enormous fees to do so. In addition, businesses themselves would ultimately see more success if they never had to deal with currency challenges and could accept a global currency. One of the counterarguments to businesses accepting Bitcoin is that the currency is historically more volatile, meaning they could sell a product and lose the value of the exchange instantly. Another related advantage of Bitcoin is that it is available 24/7. That does not mean that it can only be used every day, but that also means it can be transferred and invested in all day every day. In contrast, the stock market is only open nine hours a day, five days a week. Similarly, we are all too familiar with financial institutions giving us the phrase “business days.” Every day is a business day, why don’t financial institutions know this yet?

The Proof is in the Bitcoin

I wanted to provide a few real-world examples to illustrate the power of Bitcoin. The first is related to international transfers.

International Transfers — I have family that lives in the Middle East. Because of how much the country’s currency has struggled lately, it is very hard to send and receive money. It is slow and expensive and often the banks put limit restrictions. To be specific, if I want to send $1,000, it typically takes 3–5 days and can cost anywhere from $20–$50. If you do receive the money, the bank may not let you take it out. For a period of time banks were only allowing withdrawals of less than $1,000 per month. To contrast with Bitcoin, if I send Bitcoin through Coinbase, the most widely known trading platform, it can be received in five minutes and cost roughly $0.5-$3.00. I recently transferred more than $15,000 for the cost of $2.25. Transaction fees can vary a lot. In addition, as previously mentioned, there are no central banks to restrict how much Bitcoin can be transferred. Also, because Bitcoin is gaining popularity in Lebanon, more merchants are starting to accept it.

IOU — I own a real estate investment business with a few partners. We are all working professionals and have a lot of bigger expenses. We also individually own investment properties are are constantly purchasing, selling or refinancing. Because of this, cash reserves tend to run low. All of us own Bitcoin or other cryptocurrencies. Because cryptocurrencies are not currently considered traditional equities, they can’t be used for the purpose of loans. This leaves crypto as an option for us to constantly be transferring IOUs back and forth. If a partner owes $3,000 for a down payment, but can’t pay it at the moment, they will send over $3,000 in Bitcoin as an IOU. I will hold the Bitcoin in my account and once they pay me in cash I will send back the Bitcoin.

Appreciation — When Bitcoin first started trading it was changing hands for less than one cent. It quickly jumped up to around eight cents. This was all back in 2010. Fast forward to the beginning of 2017 and Bitcoin is at $1,000. By the end of the year it hit $20,000. It then experienced a decline over the next couple years only to experience the continued momentum in 2020. It is currently hovering around $20,000, up well over 100% this year. What I am trying to highlight is Bitcoin has consistently gone up like a value stock. One bit of research, prior to 2020, showed that 98% of Bitcoin that was held for more than 1,300 days was profitable. This is further proof that Bitcoin has consistently appreciated over time. It does also highlight the risk. Day trading or swing trading Bitcoin is extremely risky and volatile. If you purchased Bitcoin in December of 2017 and sold it a few months later, you would have lost the majority of your investment. I personally don’t recommend trading Bitcoin, but there are people out there much smarter than me who have made good money doing it. Be careful with all of the Bitcoin scams out there!

Merchants — Lastly, more merchants are starting to accept Bitcoin as a form of payment. Some companies include Overstock.com, Newegg and Shopify. These are well-known companies that are pioneering Bitcoin’s true purpose and utility. These companies see the value in making a transaction that costs them less and is accepted faster.

What is Next for Bitcoin?

As I previously mentioned, Bitcoin is still in its infancy. While the biggest coin, by market cap, has a bright future it also has a long way to go. Here are a few things I would like to see evolve with Bitcoin and the cryptocurrency space.

Regulation is a hot topic for cryptocurrencies and there are varying opinions. Some are of the mind that regulation is bad and not what was intended with creating a decentralized currency. I am of the mindset that regulation is important for mass adoption and for the evolution of cryptocurrencies and blockchain technology. I would ultimately like to see Bitcoin treated like other equities. Sure, there are downsides to that, but ultimately if the end goal is a global, digital currency, there has to be regulation around it. Regulation needs to be in the form of tying identities to transactions, specific tax guidelines, creation of new coins, security requirements and buying, selling and transferring policies. I see regulation as eventually minimizing volatility and instilling more confidence in the technology and utility of crypto.

Institutional interest must be there for Bitcoin to gain mass adoption. I believe with more regulation will come more institutional interest. The recent institutional interest is so important because the financial firms manage so much money. They have the ability to send the price of Bitcoin to the moon. The counterargument is they then have the ability to tank the price and manipulate the market. The other reason institutions are so important is they have the ability to bring Bitcoin to the masses. They can start putting Bitcoin in index and mutual funds and allow people to trade it on major platforms. I believe that a big game changer will be when Bitcoin can be added to a retirement account. There is already early talk about smaller firms allowing this, but once a Fidelity or Charles Schwab lets you put Bitcoin in a 401K or IRA, it will be game over.

Bitcoin must be easier to purchase. Currently, there are very few platforms that even allow you to purchase Bitcoin with US dollars and those that do have too many restrictions on when you can buy, sell, withdraw and how much, based on your tier of confirmed identity. Buying Bitcoin needs to be a no-brainer, something my grandparents can do. Thinks like wallet addresses or gas, blocks, etc. needs to all be behind the scenes. Those important components that make up cryptocurrency should not be part of the user experience.

In addition to purchasing Bitcoin, handling taxes need to be made much more user friendly. Coinbase, the largest crypto side in the United States, still does not give out tax forms. They allow me to download a transaction report. I had to pay my CPA an extra $100 to compute all of my crypto taxes. There should be 1099 forms and other tools to make computing taxes more effective. However, I understand that some of those shortcomings are due to a lack of regulation.

Lastly, there must be more merchant adoption. It is great to have companies like Shopify and Newegg support Bitcoin. It is also great to hear about companies like Square managing Bitcoin and most recently, PayPal. What I am really waiting for is companies like Amazon, Facebook, Google, Apple, Starbucks, Nike and other widely recognized and used companies to start accepting Bitcoin payments. That will be a signal to all other companies that Bitcoin is a legit form of payment and supporting it becomes business critical.

Conclusion

Bitcoin does indeed have a bright future. Analysts predict Bitcoin’s price can possibly reach $200,000-$300,000 in 2010 and at some point in time, surpass a million dollars. There is a long way to go to get there and mass adoption will be required. I see mass adoption as 10% of the world. Data suggests that 10% of the monetary system flowing into Bitcoin equates to a price of roughly ten million dollars. There are various models out there that support that theory. One popular model is known as the Stock to Flow model, which the analyst known by his pseudonym as Plan B has researched and examined extensively. This model projects a price between $100-$288K, by the end of 2021. In the meantime, merchants should spend time learning more about the benefits of Bitcoin and look to offer it as a form of payment. The government should spend time assessing the necessary regulations that will instill more confidence, while not stifling innovation. Blockchain technology and security needs to continue to be developed. Most importantly, more people need to start buying Bitcoin and not necessarily holding on to it for dear life (HODL), but realizing the potential in its utility and exchanging it across borders and using it to purchase products. Somewhere, out there, Satoshi Nakamoto is rejoicing at the sight of how much his baby has grown up, but even he knows, Bitcoin is still only crawling…

Questions? Comments? Feedback? Reach out to me at trythepracticalworld@gmail.com or find me on Facebook, LinkedIn, Twitter and Instagram (@thepracticalworld)

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The Practical World
Coinmonks

Written by The Practical World

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I write about the Practical World, from my own experiences. This includes finance, real estate, health, nutrition, fitness, family and leadership

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