During my second year at university in 2010, my housemate introduced me to something that would someday change my life. Jacky, who was originally from Hong Kong but grew up in Norway, was totally immersed in internet culture and as such I often relied on him to keep me up to date with the latest happenings in the tech world. The pages of a national daily are perhaps the most embarrassing place on earth to reveal that we had a habit of watching animé together, but I promise this is going somewhere.
One night in between episodes of Bleach, Jacky mentioned something about bitcoin, a sort of online currency that was created to be out of the government’s control or something. We were both regulars on a popular internet image board called 4Chan, so I later went to check 4Chan to see what this ‘Bitcoin’ thing was about. I discovered that ‘BTC’ was cryptographically secured so that it was virtually unhackable, and that with £5, I could purchase about 800 BTC. I had no idea what Bitcoin was, or what real world usefulness it had, but it seemed so cool that I actually bought 833 BTC which was stored in a program called a “Bitcoin Wallet” on my laptop.
When my laptop crashed and I bought a new one a few months later, I discarded the old one, bitcoin and all. I did not even remember that I had ever purchased bitcoin until about 7 years later when I woke up one morning and the news headlined informed me that 1 BTC was now worth over $17,000, which meant that my 833 BTC sitting on a condemned laptop hard drive in a landfill somewhere in the East Riding of Yorkshire was now worth approximately $14.1 million.
Bitcoin is a good thing
This belatedly-realised “loss” ended up becoming an incentive to learn more about this strange, wonderful thing called bitcoin. For months I took in article after article, book after book, whitepaper after whitepaper until I became something of an authority on the subject. I even began writing for some of the world’s biggest cryptocurrency-focused news publications including CCN.com, BeInCrypto, CryptoSlate and BTC Manager among others. I also became a writing consultant for several Initial Coin Offering (ICO) projects in 2018 as my knowledge of the space grew exponentially.
While this was happening, a more momentous bitcoin-led revolution was happening around me. For the first time, Africa suddenly had access to a payment and remittance solution that worked seamlessly across borders and took mere minutes in comparison to the days or weeks the legacy SWIFT system threw at them. An entire ecosystem of digital nomads like myself began to flourish in cities like Lagos, Nairobi, Accra and Kampala, newly unencumbered by arbitrary limitations like PayPal’s refusal to send money to Nigeria and Ghana.
Assuming the US Federal Reserve is indeed printing too much money, who is going to devalue the US dollar? Christine Lagarde? Godwin Emefiele? And then what will it be devalued against? The euro? The Japanese yen? All of these currencies measure their own value against the US dollar
Freed by the possibilities opened up by bitcoin and its several “children” including USD-backed stable coins, it became clear that bitcoin and the wider crypto space was in fact, more than just a speculative bubble. There was real value here to be created – value that could fundamentally reshape the world economy by removing the nonsensical financial service barriers erected before the developing world. Bitcoin and other cryptocurrencies demonstrated that they could facilitate global trade at a scale and efficiency that often far exceeded anything that the USD-denominated SWIFT system could manage.
Amidst all of this positivity however, one problem remained.
“Why” bitcoin?
The big selling point about bitcoin from an investment point of view is that as a non-inflationary asset (bitcoin has a fixed and unchanging supply of 21 million), it is a hedge against the perceived excessive money printing of central banks, especially in 2020. The market’s wisdom is that as central banks print more fiat currency, it becomes devalued, which destroys any wealth stored in cash. Storing the wealth in bitcoin shows up as the smart play because its supply cannot be expanded (you cannot mint new bitcoin outside of the 21 million BTC), and apparently everybody wants it.
MicroStrategy CEO Michael Saylor recently explained his decision to put 75 percent of the company’s cash holdings (about $425 million) into bitcoin, describing the USD holdings as “a $500 million melting ice cube.” Sentiments like this on the part of extremely liquid investors like Saylor explain bitcoin’s recent record-busting price highs as institutional money surges in, strengthening the infamous FOMO (fear of missing out) feedback loop. The ‘Crypto Greed and Fear Index’, which measures investment sentiment toward bitcoin, hit a joint all time high earlier in December. Clearly, everybody wants bitcoin, but this raises a simple question – why?
The US dollar is the global reserve currency, which means that roughly 88 percent of transactions in the $19.5 trillion annual global trade market are denominated in US dollars. If as some have said, bitcoin will “disrupt” the US dollar, that means that at its current all time high market valuation of $500 billion, it is worth only about 2.9 percent of the $17.17 trillion in global USD circulation. In addition, even if it somehow exceeds the USD’s market cap, it must be noted that there are actual diplomatic treaties and agreements that underpin the USD’s unique status. How will bitcoin get around the inconvenient fact that the USD’s hegemony is partially enforced by the largest and most extensively funded military in human history?
Moreover, the USD’s position as global reserve currency effectively outsources all domestic inflation risk to the rest of the world. Assuming the US Federal Reserve is indeed printing too much money, who is going to devalue the US dollar? Christine Lagarde? Godwin Emefiele? And then what will it be devalued against? The euro? The Japanese yen? All of these currencies measure their own value against the US dollar, which makes its sustained, long-term devaluation materially impossible. So from an investment point of view, what problem exactly is bitcoin solving? “Why” is bitcoin?
In economics, the “Greater Fool” theory states that it is possible to profit from assets regardless of their underlying quality, value or price rationality, by buying them and selling them at a markup to whoever is stupid enough to pay the requested price for it – the “greater fool.” Of course this Greater Fool sentiment has inevitably been at the bottom of every market bubble in recorded history, from the Dutch Tulip bubble to the 2008 financial crisis. Bitcoin will at some point cease to be the hysteria driven bull machine that it is. Bull runs do not last forever. When the current bull run ends, what will be there?
Is bitcoin a fantastic global payments system? Perhaps, but it has since been surpassed immensely by newer cryptocurrencies and stablecoins like XRP, USDT and LTC. Is bitcoin a store of value? For now, but only until the global economy rebounds and central bank interest rates go up, making liquidity more expensive. Also it is existentially threatened by its 21 million BTC supply limit, as 18.5 million has already been mined. Once the limit is reached and bitcoin mining is no longer profitable, the entire blockchain network’s cryptographic security will be fundamentally broken. Again, this is a weakness that other (less valued) cryptocurrencies do not have.
So in the course of answering the question “Do I invest in bitcoin or not?” it is important to answer the “Why” question. Why do you want bitcoin? If you believe in the prospects opened up by cryptocurrencies, there are hundreds of cryptocurrencies with much higher utility upsides. You might want to consider investing in some of them. If you are simply looking to join a “rocket movement” and sell on later at an eye-watering profit to a “Greater Fool,” it is always important to remember that timing the market is and will always remain a fool’s errand.
The “Greater Fool” could in fact, end up being you.
