The Argument to Acquire Bitcoin
I originally wrote this for Seeking Alpha, but they don’t believe bitcoin as an investment is interesting to their audience. And if want to stay up to date on what’s going on in the bitcoin space, subscribe to my weekly newsletter.
I am bullish about bitcoin the currency because I am bullish about the technology known as the blockchain. While they are one and the same, which I will explain later in the article, I ask that you stop thinking about bitcoin the currency until I mention it lower.
What I want you to think about is the technology because once you understand that, it will become much easier to understand why I am so bullish on bitcoin.
How the Blockchain Works
The simplest way to think about the blockchain is that it is a peer-to-peer public database that keeps track of transactions that take place around the network. Rather than one person controlling the database, which we have seen time and again be a significant problem, this database is held by the masses. There are thousands of people that run full nodes, which act as copies of the P2P database I mentioned above.
When transactions take place, they are placed into blocks that “bitcoin miners” then attempt to seal. To do that, the bitcoin mining hardware must do advanced mathematics in an attempt to solve the “equation” and seal the block.
Once the block has been sealed, no other bitcoin miner can access it. That block is then placed onto the blockchain, which solidifies it as a verified set of transactions. Once it is there, it can never be removed. On top of that, anyone can look at the transactions and see every single one. If they spent some time, they could even trace every single one back to the genesis block. This was the very first block created when Satoshi Nakamoto first started running the protocol.
Here’s why everything above matters. By having a completely decentralized ledger (thousands of nodes running) that no one can manipulate because the blocks are locked, you always know that the bitcoin you are receiving are, in fact, valid. You don’t have to worry about counterfeit bitcoin because the transaction won’t be approved if they can’t be traced back to their previous block.
This solves the problem that many people have online: can I trust the person who is paying me? You don’t have to worry about whether you can trust them or not. You only have to decide if thousands of decentralized people are worth trusting enough to verify a transaction based on a preset number of rules.
All of this results in a transaction going from me to you in minutes rather than days. And in the 21st century, when I can stream music, laugh at what my grandmother is posting on Facebook, and write this article all at the same time, don’t you think that the ability to send money faster than a few days is kind of a cool idea?
Blockchain Technology Can Be Used for Most Sectors
Once you realize that the blockchain is just a decentralized P2P public database, you start to realize that its potential starts with basic finance, but that it can expand to so many more sectors.
Naturally, bitcoin is going to disrupt the remittance market. Those that hold Western Union and Xoom Corp. will see those companies start to lose marketshare. It’s not because Western Union doesn’t offer a viable service, but because it takes too long to get from point A to point B and the amount of money in fees that they charge is atrocious.
Every year, there is approximately $500 billion sent from a developed country to a less-developed country in remittance. For example: someone who lives in the United States but has family back in India might look to send some money back home to family. And a lot of that is eaten up by fees.
Companies that are able to streamline the remittance process will be able to charge much smaller fees, which will result in more people wanting to use it.
And there are plenty of different bitcoin companies that are in the remittance space. The one that interests me a lot is Abra, which has a network of individuals that handle the transfer of funds.
But another sector that people don’t really think about that is ready for disruption is the international business transactions business. Let’s say that a company in Italy needs to bill a company in the United States for $10,000. The US company would initiate a wire transfer, which could cost as much as $40. Then it would take anywhere from two days to a couple of weeks to get from the US bank to the Italian bank. Once the Italian company decided to claim the wire, it would also be charged $20. Finally, there could be an additional spread on the foreign exchange transactions.
All told, a company could be spending a ridiculous amount of money in fees. The reason this is the case is because there are so many separate systems that are touching that $10,000. And each system that touches it wants to take a little bit of money for themselves. That $10,000, when all the fees were taken out, would be ~$360 less because of fees.
The blockchain allows for the transaction to be done the same day or sometimes up to two days later. The company that I really think is going to do great here is Align Commerce.
You’ll notice that I didn’t really talk about buying things with bitcoin online. While there are amazing ways to buy things with bitcoin (my recommendation is to look at purse.io), I am not terribly bullish on this. The amount of work that goes into buying bitcoin isn’t worth it for many in the developed world. Many vendors have tried to accept bitcoin and they have not seen great results. I am sure that a company will figure it all out, but right now, it doesn’t make sense to me.
Blockchain Needs a Token
Now we are getting to the part that I want you to start thinking about bitcoin the currency.
The blockchain requires a token to transfer value. In the above example, the United States company would initiate a transfer of money, the bitcoin company would buy enough bitcoin to cover the amount of dollars being sent, and then transfer them over the blockchain to the Italian company’s account. It would then be converted back into Euros. So in the case of bitcoin technology, the token is bitcoin.
And the blockchain also needs a token because it needs to reward the miners for the work they do. That reward is hard coded into the system: bitcoin. Miners are rewarded in bitcoin for validating transactions. So bitcoin acts as the reward mechanism and the token of transfer.
Therefore, if international businesses start to use this system, it will increase the volume of money going over the blockchain. That means companies like this need to increase the amount of bitcoin they hold to ensure that the transactions can take place. This, in turn, increases the demand for the currency.
We know for certain that bitcoin has a finite supply. We know that the rules dictate there can only ever be 21 million coins created. By being able to control the supply, we can do very basic math to see what could suddenly happen if demand increases.
It is basic economics. When supply stays constant and demand increase, price has to increase to satisfy this. So as these tools that rely on the blockchain (and therefore, rely on the bitcoin token to transfer value) start to see more usage, the demand for bitcoin will increase.
And That’s Why I Am Bullish
The market cap of bitcoin right now is a little over $3 billion. If price were to stay constant, as each coin was released, that would slowly go up over time.
Let’s look at a few sectors. If all bitcoin companies were to receive $5 billion of the global remittance market, which is only 1% of the market, then there would be yearly demand of $5 billion in bitcoin. That is already greater than the current market cap, so what would that do to the price? And the reality is, I have little doubt that bitcoin companies will be able to get far more than 1%.
You’ve got companies like Bitcoin Investment Trust and Winklevoss ETF that will both support an increase in demand. As the price starts to go up, people will see these as viable options, which means they’ll buy them. That, in turn, will result in more demand.
As each sector that bitcoin touches starts to see demand increase, they’ll need to acquire more bitcoin to ensure that the transfer of value can happen seamlessly. And each time this demand increases, the price will follow.
Then there is the gold market. Once bitcoin gets past its speculation stage and into an actual growth stage, people will start to realize that it is a great store of value. They’ll see that the finite number of bitcoin, the inability to manipulate it, and the fact that it is growing in value as more people are using it are all three attractive qualities for a scarce commodity.
The gold market is a multi-trillion dollar market. If bitcoin can take a chunk of that, then what?
Bitcoin Will Either Be Dead or Worth More Than $230
At the recent Inside Bitcoins NYC, Barry Silbert talked about the price of bitcoin. And what he said was that bitcoin would either not exist or it would be worth a lot more than $230. Because of supply and demand, the price will have to go up as more people use it. And if no people use it, then it’s dead. But if the past five years have shown us anything, it’s that people are using it and that there are a lot of great companies building on top of the blockchain. Time and again, people have proclaimed bitcoin dead and it has risen from the ashes.
I am comfortable predicting that bitcoin will be worth much more than it is today. Will I join the extreme bulls who think it’ll take everything over and be worth $1 million a coin? I believe that number requires a lot of gold conversion and e-commerce transactions, so I can’t be truly bullish for that number. But over the next four or five years, I would predict that the value could be closer to $5,000 than it is today. The basic supply/demand economics mandates that this increase happen.
And if not, then bitcoin has failed. But as each day goes on, I see that becoming less likely.
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