Bitcoin @ $60k: Bull and Bear case

Should you buy now or take your money elsewhere?

Over the past 5 years, there has not been a topic where I have said to myself: “I see both sides” than when speaking about Bitcoin. It’s a topic that divides opinion…will Bitcoin replace the USD/EUR/CNY or will it just be something like Robux? I will take the next few minutes of your life to list out what the bulls are saying (all the twitter folks with laser eyes), what the bears are saying (generally politicians), and finally, where I stand on the matter.

First, the bull case

1. Bitcoin can become a major world currency

“If we have bitcoin, we don’t need dollars and euros and chinese yuans and [insert your favorite currency here]” is what bitcoin bulls say. If stable, bitcoin can most certainly serve as a medium of exchange. Okay, how much can Bitcoin replace? US Dollars in circulation, as estimated by the Federal Reserve Bank, sit at $2.1T. Given the static number of bitcoins available is 21 million units (not at max capacity yet, but we’ll get there soon with more mining), then we can deduce that if bitcoin replaces all USD in circulation, then price per Bitcoin would be ~$100k ($2.1T divided by 21million). Now, what if Bitcoin also replaces EUR in circulation? As estimated by the European Central Bank, EUR in circulation sits at $1.7T (converted to USD based on April 5, 2021 conversion rate). Ergo, if Bitcoin replaces all USD in circulation and all EUR in circulation, the price per bitcoin would be ~$183k. If you take it a step further and replace the Chinese yuan with bitcoin, then…you get the picture.

But it doesn’t stop there! What if companies start representing their balance sheets in bitcoin instead of USD (Tesla would be a great candidate for this). Then things would get very interesting given that Bond Market value totals ~$130T and Total market value of the S&P500 is ~$30T. If you believe that bitcoin can replace currency in circulation and be used to be the go-to currency to trade in and out of stocks/bonds, then $60k per bitcoin is an absolute steal!

2. Bitcoin gives power back to the people and takes it away from autocratic governments

In a few countries, currencies are not stable (e.g. Argentina and Zimbabwe) and Bitcoin, if stable, can prove to be a great go-to medium of exchange for people in countries that have been punished through the years from irresponsible and poor government decision-making. Bitcoin can restore confidence in people who have been wronged by governments or have become poor overnight due to hyperinflation. During a conversation with Andi Dervishi, growth equity investor at the International Finance Corporation, I was challenged to think of bitcoin in a non-US centric manner. Having a global mindset can help realize the bull case for bitcoin. Andi mentioned that USD is used as a medium of exchange for trade between companies/countries in emerging markets (more info supporting his claim here), but what if those emerging economies used Bitcoin instead?

3. Bitcoin eliminates the middleman (e.g. banks)

According to the bitcoin whitepaper, Bitcoin’s biggest use case enables peer-to-peer payments in a decentralized manner. Instead of you depositing your check in your bank account and then sending money to your friend via a service like Zelle, you simply give your friend a bitcoin (or a fraction of it). How great does that sound? Seems easier, faster, more secure. Sign me up! Bitcoin in, banks out!

Second, the Bear case

1. It is against governments’ interests to legitimize bitcoin

Governments are stewards of the currency for a country. During the coronavirus crisis in 2020, powerful central banks around the world (most notably the Fed in the US and ECB in Europe), stepped in by “creating” more currency and flooding the market with more USD/EUR to avoid a pandemic/natural disaster from becoming a liquidity/financial crisis. This way, governments served as a stop gap or a bridge to help the economy get from pre-pandemic to post-pandemic without experiencing a deep shock that could have resulted in irreparable damage.

Assume that Bitcoin was king during 2020. The US and European governments would be powerless in preventing their respective countries (and therefore the world economy) from entering a deep financial crisis with unimaginable consequences. Governments, by controlling the currency through monetary and fiscal policy, can provide stability in times of exogenous events. Bitcoin holders could very well have come up with an alternative solution to help the economy during a crisis, but the point is that the government would not be able to exert as much influence as it was able to in 2020.

For bitcoin to become a legitimate/lawful medium of exchange, governments around the world would need to make a deliberate decision to take power away from themselves and give it to private players (i.e. biggest bitcoin holders) and that, by itself, is something that goes agains the self-interest of governments, and therefore improbable to happen. Why would governments want to shoot themselves on the foot?

2. Bitcoin facilitates illegal activity and tax evasion

Do you remember silk road? Yea, that’s why bitcoin gained traction initially. Bitcoin bears argue that, if not regulated, bitcoin will continue to facilitate illegal arms trade, drug trade, sexual trafficking, tax evasion, and general black market activity. While there are benefits to independence from governments (e.g. avoid hyperinflation), there are also big negative consequences that can arise from a true anarchy of the financial system. Yes, crime will continue to exist even if bitcoin did not exist. BUT, it is difficult to argue against bitcoin as facilitator of crime…much like Silk Road was and we all know how that turned out: Ross Ulbright is still in jail.

3. Bitcoin does not have the necessary infrastructure to meet system-wide adoption

In a February 18, 2021 presentation at Columbia Business School, Ed Cotler, founder of Gotham Crypto, suggested that there are three main features of a blockchain: 1) Cryptographic Security, 2) Scalability, and 3) Decentralization. There are over 4,500 cryptocurrencies in existence today and none of them can meet all three features above in a successful manner. Secure and scalable cryptocurrencies may not be decentralized (e.g. Ripple controls XRP) whereas cryptocurrencies that are decentralized and secure may not be very scalable (e.g Bitcoin). Given widespread adoption, bitcoin, as it currently exists, would not be able to sustain the volume without significant delays that could turn users away from interacting with bitcoin as a medium of exchange, its primary use case.

Finally, where do I stand?

I DON’T KNOW! I like Andi’s argument about Bitcoin’s plausibility of replacing the USD in transactions involving two foreign countries/companies. I like the idea of bitcoin slowly ingraining itself more and more into P2P transactions. HOWEVER, I believe that for Bitcoin to see widespread adoption (even if/when current scalability issues are fixed), there needs to be some sort of government stamp of approval…but why would governments be incentivized to accept bitcoin? I don’t see a good reason why, especially given bitcoin’s connection with tax evasion and other criminal activity. And who’s to say that governments worldwide wouldn’t just create their own cryptocurrencies to appease crypto lovers? A government-backed coin defeats the whole purpose of bitcoin, but who’s to say that a J-Coin (inspired by our very own J Pow) won’t be created and all the uninformed Bitcoin bandwagoners jump ship and drive Bitcoin price down?

Therefore, at $60k (which assumes bitcoin replaces all USD in circulation based on our calculations above), I am taking my money elsewhere, taking a page out of Ben Graham’s principles by investing in cash-flow generating assets that are generally undervalued by the market, and not exposing my portfolio to absurd cryptocurrency volatility.