Digital gold, speculative tool, currency… we have been waiting for the killer app for Bitcoin for some time, the application that will propel Bitcoin into the mainstream for wider use.
So far, digital gold has been one of the most popular contenders for Bitcoin’s killer app. It is scarce, divisible, easily storable — frankly, Bitcoin outperforms gold on all attributes that make gold what it is. For example, Bitcoin is not only scarce, it is finite. It is not only divisible, but infinitely so (assuming consensus). A lot has been written about this, no need to rehash it.
Similarly, Bitcoin is ideal for speculation! For example, you can buy and sell Bitcoin on the Robinhood app, but you can not transfer it out or in. It is there for pure speculation… even if you wanted to use it for something, you can’t. While most exchanges will allow you to withdraw your Bitcoin, the very fact that there are mainstream brokers that only offer trading functionality is a clear indicator of the demand for Bitcoin as a speculative instrument.. And yes, it is a great tool for speculation or if you are looking for a crash course in day trading!
And digital currency?.. a lucrative, yet elusive use for Bitcoin. While Jack Dorsey and others keep hoping for an independent internet currency that based on an algorithm and not being controlled by a single entity, Bitcoin still has a lot of problems to fulfill that role and be a good means of exchange… from its volatile value to unreliable processing speed. And even if these are resolved, the deflationary character of Bitcoin may make it unsuitable to act as a currency. Why would you spend a currency that keeps appreciating in value? You would just hold it, which will obviate its utility as a currency.
So, what is the killer app?
Bitcoin is digital gold… in waiting.
The killer app for Bitcoin is insurance. We already covered this briefly in our recent article, so let’s delve into if a bit further here.
Gold means I am buying bitcoin to “store value,” i.e. parking wealth into an instrument the value of which I can be reasonably certain will not erode with the passage of time. Insurance is different. When I buy insurance, I am not parking wealth to preserve its value in a direct sense… I am buying an instrument that will protect me against an adverse event. In other words, the value of insurance depends on the outcomes and probabilities of underlying events. The payout of an insurance claim also depends directly on the outcome of an event.
As we wrote earlier, both Chamath Palihapitiya and Ray Daleo are advocating for investors to think unconventionally and to consider holding an asset that can protect them in case, as Dalio says, “this monetary system breaks down and money is redefined.” Chamath himself advocates for people to hold a small percentage of bitcoin as “schmuck insurance” to protect against a similar scenario.
Below we discuss how this insurance would work.
How does this insurance work and what does this mean for the price of Bitcoin.
Viewing Bitcoin as an insurance policy would imply that its value will either go to zero (i.e., the event never materializes or people realize this is not a good instrument to protect against a monetary or similar crisis) or it will go “through the roof,” or to the moon to borrow an expression from the crypto community.
Hypothetical insurance example
So let’s say we agree with Chamath and decide to take 2% of our portfolio and purchase this Bitcoin insurance. And let’s say Dalio’s scenario materializes and money is redefined… it will be in this case that bitcoin turns into digital gold (i.e., a digital form of money that preserves its value due to scarce supply). Assuming it then obtains the same market cap as gold in current dollars, one Bitcoin will be worth ~$500K or more than 50x its current value. In other words, the value of just this holding will grow to 100% of your original portfolio when the rest of the portfolio depreciates to zero, the perfect insurance!. Now, we may argue and nit pick whether the current market cap of gold is an appropriate valuation metric in this case (or what actually happens to your other holdings), but the purpose of this example is to illustrate the idea in broad terms, not to get an exact prediction on the value of Bitcoin (for that, go to our other article, which uses a different methodology to do so).
And what happens if money does not get redefined? Well, if a better insurance product comes along, Bitcoin will go to zero. Or, as long as it has some potential as in insurance policy, it will continue to hold some value as people continue holding it as such.
So, are you saying Bitcoin will only become valuable if the worlds ends?
Not necessarily. One could say that gold itself today is an insurance policy. If we take that view, then if people believe Bitcoin is a better, more efficient insurance policy, it can replace gold as a portfolio insurance instrument and attain a commensurate market cap. So, as more and more people hold the insurance view and purchase Bitcoin for this very purpose, its value will appreciate simply due to supply in demand. There may need to be significant catalyst that will lead to this shift, hence why we prefer to view Bitcoin as gold in waiting. At least for now.