Last week it was Bitcoin Basics, this week I tell you why it’s awesome… or could be…
This week I’m going to tell you why you should mortgage your house and sink it all into Bitcoin.
I’m not really telling you that. That’s not my actual advice. I’m just doing it to see what the arguments are. I started this journey as a bit of a Bitcoin sceptic, but I’ll try put that all aside here and see what the cryptocurrency actually has going for it.
So it’s not really me. If it helps, imagine me in lederhosen and speaking with a German accent.
(stop touching yourself.)
So why is Bitcoin awesome?
The first thing to remember is that Bitcoin is a currency. It’s a form of money. It’s something you use to buy goods and services.
There are some teething problems that make that function a little buggy right now. Bitcoin doubled in value in August, and that’s not something currencies normally do.
But we’re in the adoption phase. In time, Bitcoin will become fully adopted and its price will stabilise.
And when we’re talking about currencies, remember it’s price really points to relative value. What is the Aussie dollar worth against the Yen? What is the Bitcoin worth against the USD?
And remember that all the currencies on earth at the moment are increasing in quantity. Governments are printing more of them each year. The number of Bitcoin is growing too but at a much slower rate. And ultimately, the number of Bitcoins that can ever exist is fixed. You technically can’t make any more of them.
This dynamic alone means that Bitcoin must continue to appreciate against all other ‘inflationary’ currencies.
But if Bitcoin becomes a truly global currency – it’s already traded around the world, and is legal tender in Japan – then there is some seriously huge upside to people who get in early.
Right now, on current pricing, the total value of all the Bitcoins in existence is about US$70bn.
That’s a lot, but it’s also nothing. In Japan, M2 – the supply of money – is worth about US$10 trillion. In the US, M2 is worth $13 trillion.
So say Bitcoin expands to be a currency on par with the Yen – accounting for the same amount of global transactions. That would imply a coefficient of expansion of 135x. Or if it grew to be the same as the US dollar, that would imply a coefficient of expansion of 194x.
Let me spell that out so you know exactly what I mean. If you mortgage the house now and put $1m into Bitcoin, then when it grows to rival the US dollar – which could be only a decade, who knows? Then when that happens, your Bitcoin holdings will be worth $194 million US dollars.
I know, right?
And if Bitcoin grows to become THE dominant currency in the world, becoming the main form of money across the globe..? Forget it. Too many zeros to even make sense of.
This is the upside potential of Bitcoin. That’s why even though we’ve seen some crazy growth numbers in recent months, we’ve barely started.
This is still the ground floor. The doors to the elevator/rocketship haven’t closed yet.
Now critics would say, “But Bitcoin isn’t real. It’s not a real thing.”
But show me a currency that is real.
Take the Aussie dollar. That used to have gold standing behind it. You could take your money and trade it in for gold.
Not any more. The only thing supporting the Aussie dollar is the Aussie government, and the only thing supporting its price is a shared understanding of its value.
It’s nothing but an agreement. It’s nothing but a social contract.
But don’t stop there. Go back to gold. What’s gold actually worth? Take away all the social contracts and shared understandings around gold and what have you got? Not much. Some shiny rocks.
Go back in time and offer a cave man a 5kg bar of solid gold. What will he give you for it? A bite of his mammoth, at best?
There isn’t a money alive today that is ‘real’ in the sense that Bitcoins critics like to use it.
The US dollar isn’t ‘real’ and it’s worth $13 trillion.
But then don’t all currencies need a government to give them legitimacy?
That used to be true. Track the history of money and money emerged under the protection of city states. Once a structure emerged that had a monopoly on violence and could enforce its own rules, then money emerged to facilitate trade.
Money needed someone to enforce the rules around money. It simply died without it.
But this is the genius of the block-chain.
Trust doesn’t come from some authority structure. Trust is built into technology itself.
The value of Bitcoin is set in an open market, and the distributed ledger of the block-chain ensures that no one can mess with the results. What the market says, is.
So the integrity of the Bitcoin currency is the integrity of the block-chain, which is a communal and collective effort hard-wired into the technology.
And if anything, compared to conventional currencies where the supply is controlled by governments on the basis of policy, whim or self-interest, Bitcoin is far and away a more transparent and predictable entity.
In turn, that transparency and predictability gives it value – and we’ve barely scratched the surface of that value.
Finally, it is true that there are other cryptos out there, and the crypto ecosystem is becoming crowded. Bitcoin is still the biggest fish in the pond, but there are others who want to take its place.
But like most things in life, there is a first-mover advantage. Bitcoin was out of the gates before most cryptos were even concepts. It is established. It has set the standard.
And if you want to buy one of the other cryptos, these days you have to pretty much go through Bitcoin to get to all of them.
But how many cryptos does the world really need? Consumers want one – they don’t want the hassle of managing hundreds of currencies. That’s the mess we’ve got now.
So I see Bitcoin consolidating its domination of the space, and setting sail for $200 trillion.
So toot-toot. Time to get on board.
(No, not really.)
What do you think? Have I covered it? I know I’ve got a few Bitcoin traders in the readership here… What other arguments are there for Bitcoin?
Also, for the people who do have Bitcoin (Karan Goda – keen to hear your thoughts) are you holding for the long run, or are you cashing out at a certain price? What price?
NEXT TIME – I flip it all on its head and tell you why to avoid Bitcoin like the plague. You can then tell me which argument is more persuasive.
What pros am I missing?