Five Reasons Why I'm Bullish On Bitcoin
- Estimated read time: 8 min read
- Written by Chad Campbell on Nov 25th 2013
Yes, I’m bullish on speculative money. I’m bullish on a currency whose name isn’t even in the Microsoft Word dictionary as I write this article. Yet, when I step back and think about it, I can’t help but be optimistic about this currency. Please note, this is not investment advice. I’m a software engineer, not an investment advisor. So, the following opinions should be taken with a grain of salt. Read at your own risk. Regardless, here are five reasons why I’m bullish on bitcoin.
Reason #1: Upside potential
One of the best performing stocks over the last decade has been Apple (AAPL). On November 25th, 2003 Apple’s stock closed at $20.68. Ten years later on November 25th, 2013 Apple’s stock closed at $523.74. This means an investment in Apple would have netted you a 5,000% return. However, a relative few saw the frenzy surrounding ios coming down the pike. If you could’ve seen ios coming, you’d at least want to know the upside potential. With bitcoin, the upside potential is based on your belief of what bitcoin actually is.
One viewpoint is that bitcoin is a currency. This is actually how bitcoin defines itself. According to Wikipedia, bitcoin is an open source, peer-to-peer electronic money and payment network. In other words, it can be viewed as a decentralized currency. If you agree with this definition, then the value is based on the supply-and-demand of bitcoins themselves. More on that later.
Others view bitcoin as a store of value. If this is your perspective, we can speculate the upside potential with some math. Currently, there are just over 12 million bitcoins in existence. If you want to evaluate the upside potential of a single bitcoin in terms of dollars, you need the total amount of money on the planet in terms of dollars. If we base it off the M2, we can see there is roughly $60 trillion. Now, imagine .1% of all of that money flowed into bitcoin. In that situation, a single bitcoin could be worth $5000. It could also be worth much more or much less. It’s all speculative, as the various bitcoin exchanges show.
Personally, in the short run, I fall into the second camp. In the long run, I fall into the first camp. I agree with Chris Dixon’s viewpoint of the three eras of currency. Either way, I still believe there is significant upside potential to bitcoin. Ultimately though, the upside potential is dependent on the rules of supply-and-demand.
Reason #2: Supply-and-demand
Value, in the economic sense, is defined as the amount of money that something is worth. Johnathan Reeves stated “Something is only worth what someone is willing to pay for it.” The difference between these two definitions is who is setting the price. I believe the latter definition is more accurate. This can be seen every day from the buying-and-selling of homes to stocks being traded on the market.
The concept of value needs to be taken into consideration when thinking about currencies. If a currency has a finite supply and others have faith in that currency, the demand should increase. As the demand increases so does the value of the currency. This encourages individuals, businesses, organizations, and governments to save. This in turn promotes financial independence. The problem is, popular government-backed currencies are moving away from supply-and-demand and towards velocity.
Government-backed currencies are often times about how fast money changes hands. In my opinion, the reason for this is taxes. Virtually anytime money changes hands, the government collects in some form. For that reason, government backed currencies encourage money to be spent more quickly. That becomes advantageous for a government to create money in an attempt to create liquidity. For a currencies value to be dictated by supply-and-demand instead of government intervention, some rules must be put in place. Bitcoin has such rules.
First, the maximum number of bitcoins that will be created are 21 million. While there are currently 12 million bitcoins in existence, the rate at which new coins will be mined is shrinking. The bitcoin system is designed such that every four years, the number of bitcoins created will be halved. This means the maximum number of bitcoins will be created by 2140. This math-based approach to a currency creates scarcity. Math dictates the rules of bitcoin. Math is a great premise for going virtual.
Reason #3: The world is going virtual not physical
George Costanza was once ridiculed for the size of his wallet. If you carry around credit cards, insurance cards, membership cards and a few loyalty cards, it’s not that big of an exaggeration. The thing is, that particular episode of Seinfeld originally aired on January 15, 1998. That was over 15 years ago when the physical world was perhaps most dominant. Few were using the internet daily at that time. Since then, our daily lives have been trending towards to the virtual world.
Virtual goods are easier to carry. They’re more portable. I think a growing number of people prefer portability. Look at the recent success of the Coin wallet. Look at the fact that Android and Windows have virtual wallets baked-in. Portability is great for convenience, but what does it mean for value?
Gold is portable in the sense that it’s widely accepted. Gold is one of the oldest stores of value in the world. The challenge with gold is that you can spend a lot of money just managing it. There can be expenses tied to identifying, insuring, securing, and transferring your asset. All of this chips away at your return on investment. Plus, who wants to carry around gold nuggets? There’s not a Coin wallet for that yet :).
Please do not view this as a knock on gold. It’s a great asset and store of value. Bitcoin is not bullet proof. It has its own shortcomings. Whether you prefer one over the other, or diversity, they both help you hedge against uncertainty.
Reason #4: Hedge against uncertainty (not inflation)
I’m not much of a student of history. I wish I had more time to dedicate to it. In my limited knowledge of the past century, I feel that things are more volatile now than they have ever been. I believe that the policies implemented since financial crisis of 2008 have helped fan the flames of the current tire fire. Politics and opinions aside, several events have been taken that I believe are worth taking into consideration.
The first event, the one that made me start evaluating bitcoin, was when Cyprus introduced its “bail-in”. This event made me start to ask, could that happen in the United States? Personally, I don’t see why it couldn’t. If it actually will happen, is anyone’s guess. Domestic accounting aside, it’s important to consider how others view our currency.
There is growing momentum to move away from the dollar as the primary reserve currency. Recently, a Russian lawmaker proposed a bill to outlaw the us dollar in Russia. China recently called for the dollar to be replaced as the global reserve currency. China and Russia are more than small potatoes. These are two of the four largest holders of our debt.
Reason #5: Its got gravity baby
Gravity is the force of attraction. In other words something with gravity is more desirable. This in turn makes it harder to leave. The item with the gravity becomes sticky if you will.
In a sense, Facebook has a lot of gravity. You may have joined this service because someone else was using it and invited you. This made the service attractive. Now, try to leave Facebook. Unless you change your lifestyle, it won’t be long before you feel out-of-the-loop. You’ll probably start to miss birthdays, birth and wedding announcements, etc. This makes these services desirable and sticky. Simply because everyone else is using it. So, who’s using bitcoin?
At this point in time, bitcoin appears to still be on the fringes of society. However, when we look back, I think we’ll see that last week was the week bitcoin went mainstream. As long as the integrity of bitcoin remains intact, I think it will gain steam. This adds more gravity to the currency, which makes it more desirable.
These five reasons highlight some of the reasons I’m bullish on bitcoin. While I like bitcoin as an asset class, I’m still unsure how I feel about it as a currency at this point in time. For instance, at this time, I have no plans of accepting bitcoins for my software products. That may be a topic for another article. If nothing else, I hope you found this article interesting. Please feel free to post your comments below.