Alright. Let's talk about bitcoin.
I really dislike bitcoin. This opinion is separate from whether I think bitcoin will continue to rise in value. I simply think it does more harm than good to the world.
I wrote a little about GME when the frenzy was ongoing. Bitcoin is similar but probably worse.
Bitcoin is something which inherently has no value. It's price is purely determined by demand and supply. Over time, the price that people are willing to pay for bitcoin has increased significantly, but there remains no basis for why it is priced at a certain amount, it simply is the market deciding.
That alone isn't a bad thing, that's how the free market works. The problem is that the price of bitcoin is heavily driven by expectations of people believing they can profit off it. These expectations are fueled by plenty of nonsensical narratives out there that make it seem greater than it is.
Let's be clear, bitcoin is just a speculative asset. This is not just my opinion, it is the opinion of many experts including those who do speculate in bitcoin. Many layman supporters of bitcoin will say otherwise though, and I think many of these arguments made are divorced from reality.
Bitcoin is not currency
Some say bitcoin is a new age currency, that it is just like any currency out there except it's not controlled by countries but by a bigger system. The problem is that bitcoin's price fluctuations make it meaningless as a currency. Currency is something that acts as a middle man for trade, so that we don't have to rely on barter trades. Currency is a medium of exchange, a measure of value, and a store of value. Wild fluctuations do not make good currency, just like how hyperinflation in a country is bad.
Some say well, bitcoin is not a currency today, but it can be as we move into the future. That is the envisioned end game of bitcoin for many. Will it really though? Some people seem to hate on regulation and control by governments, but many times good monetary policy is critical to managing the economy. Without central bank control, bitcoin does not have a mechanism to stablise in value. It is simply a maximum of 21 million coins, no more of which can be created, of which actors in the market arbitrarily determine it's price. The instability of bitcoin comes from it's nature and is not just because it's still something 'new'.
With bitcoin inherently not suitable as a currency, it is likely that central banks will not be willing to accept it as one either. They will monitor developments closely, but they will continue to treat it like the speculative asset that it is.
Proponents may say but hey, Elon Musk recently announced that Tesla will be accepting payment in bitcoin. Isn't this a sign that bitcoin is becoming increasingly accepted as currency? Well no. Tesla isn't saying you can now buy our vehicles for 1 bitcoin. It's saying you can now buy our vehicles for $80k, of which we accept payment at the prevailing bitcoin price. It's as good as you paying Tesla $80k, and them using that money to buy bitcoin in the market. Tesla has simply decided to include bitcoin as part of their investment portfolio, and regardless of whether you pay them in cash or bitcoin, they will be buying/selling bitcoin to hold the actual amount they want to have. Do note also that Tesla has a clause that if you seek a refund for a vehicle you bought via bitcoin, they have the right to repay you in either the bitcoin price you paid at purchase or the US dollar price equivalent. In other words, if bitcoin's price falls, they'll pay you in bitcoin and take a profit. If bitcoin's price rise, they'll pay you in USD and take a profit. I don't think this is scummy, it is to protect Tesla from people refunding when the price of bitcoin changes. It does however show that Tesla doesn't think bitcoin is currency.
(On that note while I don't think this clause is scummy, I do have many comments about Tesla though. Perhaps one day I will rant about Tesla as well...)
Bitcoin is not a reliable hedge against inflation / currency risks
People also often say that bitcoin is like digital gold. It is a hedge against inflation or currency risks, where if currency is devalued, the price of bitcoin relative to that currency will rise.
By that definition, most things are a hedge against inflation. Stocks are a hedge against inflation. Property is a hedge against inflation. Anything that isn't the currency itself is a hedge against inflation. If today a government messed up and created hyperinflation, it would be far better to be holding bitcoin than that currency. It is also far better to be holding apples than the currency so that's not saying much.
Most things are better hedges against inflation and currency risk than bitcoin is. Again, this comes back to volatility. The fluctuations of bitcoin are far beyond any changes due to inflation in most countries. Just ask yourself, do you genuinely believe that inflation is a key factor in the price of bitcoin today? Probably not. If so, how is it a good hedge? Bitcoin's price will rise and fall regardless of inflation.
The models out there projecting bitcoins continued growth are pseudo-finance
So yes, bitcoin is a speculative asset. Now this is not to say that speculative assets are inherently bad. Speculation simply means you are making a bet that it will rise in value. People invest in speculative assets all the time because you take on a greater risk with a chance for greater returns.
The problem with bitcoin is that people don't buy it at whatever price it is currently because there is some sound fundamental analysis to believe that the price will rise in the future. I don't think that is even possible given it's lack of inherent value (unlike stocks where the inherent value is the share of ownership in the company). People buy it simply because historically it has gone up, and they believe it will continue to go up.
One of the most popular models projecting bitcoin growth is the stock-to-flow model which proposes that bitcoin's scarcity inherently drives value. Not that many people know that, because they tend to just focus on the pattern of the graph going up. The model shows how bitcoin goes through a cyclical pattern where it loses significant amounts of its value once every few years, but it then rises to a next higher peak that is exponentially greater than the previous. Hold now and get $100k bitcoin soon.
The problem? Extend the model to 2045 and you will find that each bitcoin will be worth 235 billion USD. You decide if that makes sense.
Past performance is not an indicator of future performance - this is a basic fundamental rule of finance. The stock-to-flow model essentially takes past patterns and claims that this pattern will continue into the future. Pseudo science is used to pretend that there is a reason for the pattern, but these claims when properly investigated actually make no sense.
Let's not complicate things. Bitcoin has risen because as it gets more hyped up and become increasingly mainstream, more people want in, and are willing to pay more for it. The value tanks sometimes because people get spooked after it has been rising for awhile and think it's time to cash out. That's all.
Will bitcoin continue to grow? Sure. I believe it is entirely within the realm of possibility that it grows another 10x, 100x even. Let's be clear why that happens though, and know that the opposite could happen as well. It is demand and supply. Any analysis of scarcity merely reflects upon the supply side factors but don't forget what is truly the most fickle is demand, especially when it comes to things with no inherent value.
Which finally brings me to my main point.
Bitcoin is nothing but a speculative asset where people try to profit off it at the expense of others
This is very similar to what I felt for GME. It's a massive game of chicken. Prices go up because people are buying and selling at higher and higher prices. Since bitcoin is not currency, holding bitcoin merely represents an option to convert that into currency. So if bitcoin is worth $60k today, no you don't own $60k, you own a bitcoin that today could be converted to $60k if you exercised that option. If you want your $60k, you have to sell it to someone who is willing to buy at that price.
While it is rising, everyone is happy and they think they are winners. Eventually though to make use of bitcoin, you have to sell it to someone who is willing to buy it from you. When there are more sellers than buyers, that's when prices fall. If there are dramatically more sellers than buyers, that's where it crashes.
Bitcoin is worse than GME because GME has at least some inherent value. If you were a bag holder who bought GME at it's peak, you could still hold on and hope the company indeed transforms itself. There's nothing like that for bitcoin.
So there will be winners, and there will be losers. And like what I said about GME, even if I trade bitcoin and end up a winner, I don't think there is any pride in that because you win at the expense of others. It can ruin the lives of people. It is blood diamond.
One last thing, I think the day of reckoning for bitcoin will come
There is still plenty of possible runway for bitcoin to rise given it's not as mainstream as many stocks are today. So perhaps we may continue to see demand continue to rise. Like I said, I don't doubt that there is a possibility that bitcoin can increase another 10x or even 100x.
But right now, I don't see how it can eventually convert into something that has inherent value. And as long as it doesn't it is simply at the whims of demand and supply.
I think over time, it will become more and more clear that bitcoin will never be a currency. It will continue to remain a speculative asset, and one that has no inherent value. As that happens, people will start to cash out given there is no longer a promise for it to hold on to.
This can be also accelerated by other factors.
Governments may step in to regulate bitcoin. Over dependence on bitcoin is bad for a country because of its volatility and also many other factors I won't go into (eg. taxation, underinvestment in other areas). There is already some of that brewing, although most are still adopting a wait and see approach since the slice of the pie is still quite small.
The negative societal and environmental impact of bitcoin may gain more traction. We don't hear much about this now beyond bitcoin being primarily used by criminals. There is more though, in particular the huge energy drain that it represents. Bitcoin mining (basically the creation of bitcoin) relies on proof-of-work, which essentially entails solving complicated math problems using computers. Bitcoin is structured such that the closer we get to the maximum limit of 21 million bitcoin, the more complex these problems become and the more energy is required to mine these bitcoins. Bitcoin mining today uses more electricity than many countries around the world, and often times miners will look for the cheapest source of electricity, clean or not. So basically huge amounts of energy are being consumed to create new coins which are inherently worthless. As climate change becomes increasingly important, at some point in time it will clash in a big way with bitcoin mining.
Or maybe it will be something as simple as how it's impossible to get a graphics card now and perhaps in the near future HDDs and SDDs too because they are all being snapped up for mining. It may trigger something in consumers - hey this is not normal, this is not okay.
Other cryptocurrencies or digital currencies may overtake bitcoin. As the problems of bitcoin become more and more apparent, people and government may switch to others. I don't know as much about other cryptos so I can't say too much, but I understand that Ethereum which is the second most popular crypto is switching from proof-of-work to something else called proof-of-stake due to the energy concerns. Bitcoin can't do that because it is set in stone. Perhaps future developments in digital currencies may address the main problems governments have with bitcoin today. Whatever it is, bitcoin may be the most popular of it's kind today, but it is also the one that is unable to adapt to the future.
Final Words
Bitcoin will not fully disappear, not when many people have put their monies into it. Today people are still holding GME (and it's price has gone up quite a fair bit again actually) in large because the people who have bought at high prices see no point in selling low and realising their loss. Hence they rather just hold it and hope for the best. What the price will be in the future, I do not know. Perhaps for the next hundred years it will be a higher price than what it is today. But I do think whatever promise it holds today of having some sort of inherent value is but a pipe dream.
If you're considering buying bitcoin. Honestly it's up to you. I won't do it because I personally refuse to play these games. Sure there is some level of FOMO, I feel it too when I see BTC rise, but I just remind myself it is a lose-lose situation. I either expose myself to risk and ultimately become a bagholder, or I make a quick buck but know that it is at the expense of someone else.
You may not agree that it is blood diamond, sure I admit that is more subjective so it is up to you. But you should know that the risk of this speculative asset is real. Do not buy in because of the hype, be aware of the misinformation that is out there, know what you are getting yourself into and if you decide to take this risk to trade bitcoin, let it be an informed one.
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