Like most people who first discover Bitcoin, I learned about it as its rapidly inflating price was making the news. This was in 2017, and I was wrapping up my Neurology residency. The news proclaimed that “blockchain technology” would one day change the world but that Bitcoin itself was only part of that broader technology and not the technology itself. I assumed they were correct. I assumed that the bubble would eventually burst since Bitcoin was being portrayed in the news as the next “Tulip Mania.”
Sure enough, Bitcoin began a long decline in late 2017 in what has been called “crypto winter.” Bitcoin started around $1,000 in 2017 and hit a peak of $20,000 in December of that year. By February 2018, Bitcoin’s price had tumbled to around $8,500.
After the bubble popped, I gave Bitcoin no more thought for the next several years and assumed it would continue an inexorable decline toward $0. This is because I hadn’t done the work to learn about it. I assumed what I was told—that it was a bubble—was correct without giving it any more thought.
I next heard about Bitcoin again in late 2020 when all assets were on a stimulus-induced sugar high following the rapid COVID crash and the resulting trillions of dollars pumped into the money supply. To my surprise, Bitcoin had not died off, and it was actually rapidly approaching its prior all-time high.
This is when I first invested in Bitcoin.
I did not understand it yet, but speculation was plentiful at that time, including the birth of “meme stocks.” Investing in Bitcoin seemed like an easy way to make some money, given how all risk assets were booming with no end in sight. White coat investors don’t allocate high percentages of their income to these sorts of things, but I figured 5% or less as “play money” couldn’t hurt and was within reason. The rest of my portfolio was still all US and international market cap-weighted ETFs.
I now view my Bitcoin investment as much more than “play money” or mere speculation. I view it as a hedge against the fiat monetary system and a truly unique asset. I only developed this view gradually after a couple of years of careful analysis and thought.
Dr. Jim Dahle has argued that he is more or less neutral on crypto as an asset class, and he thinks we as high-income professionals do not need crypto in our portfolios. He also stated that even if crypto does thrive, Bitcoin is akin to AOL, and it will not be the winner when all is said and done. This guest post will hopefully provide you with some insight into my journey down the crypto rabbit hole and why I now view Bitcoin as NOT the next AOL but rather as the prime crypto asset with a chance to provide every individual with property rights and power over oppression from governments.
This is the story of why Bitcoin is now a core holding in my portfolio—and why I think Bitcoin also belongs in your portfolio.
Down the Rabbit Hole
Once I invested in Bitcoin, I quickly learned more and more about it, and I went fully down the crypto rabbit hole. It all seemed easy enough to pick up. Bitcoin was “digital gold” to be used as a store of value. All the rest were “altcoins.” Ethereum was “digital oil” to be used in the daily grind of processing smart contracts via its “Ethereum Virtual Machine” on the blockchain. And there were a host of other smaller cryptocurrencies—Solana, Polkadot, Cardano, Avalanche—that were the so-called Layer 1 protocols—which were faster, cheaper alternatives vying for Ethereum’s coveted No. 2 spot for total market cap in crypto. This was in addition to stablecoins like USDC, BUSD, and Tether (among others).
I figured that even though no ETF existed for cryptocurrencies, I would dollar-cost-average into some of them each month to create a roughly market-weighted collection. I could then be a part of a technology that seemed poised to have a bright future before “institutional investors” would pour their money into them and drive their prices soaring. My investment at this time was fully geared toward speculation.
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Altcoins, the Role of Venture Capitalists in Crypto, and ‘Sh*tcoin Casinos’
Spend any time on “crypto Twitter” or Reddit, and you’ll quickly run into the term “toxic Bitcoin maximalist.” This term refers to anyone who feels that Bitcoin is the only worthwhile cryptocurrency and that all others are scams—not “altcoins” but “sh*tcoins.” I didn’t understand this viewpoint at first. Surely, I thought, diversification made the most sense and that it was the most reasonable approach.
As I delved deeper into crypto, however, I began to see their point. I learned that pretty much every altcoin has a marketing team and a “foundation” that, in effect, acts like the board of a company and ultimately drives the direction of the development of the altcoin. Prior to “going public” and releasing their tokens for sale to the public, all of these altcoins already had made substantial numbers of the tokens available to venture capitalist insiders. See the figure below for percentages of insider allocations by various popular altcoins (it’s 0% for Bitcoin).
After everyone on the inside has their share of cheap coins, they then release the coins to the public, publicize them aggressively to pump up their price, and use retail investors as exit liquidity while the price often dumps.
These altcoins are all securities, and their founders and financial backers are selling these securities to the public without due disclosures. They all pass what’s known as the Howey Test used by the SEC to determine whether a transaction qualifies as a security. To pass the Howey Test, a transaction must involve: 1) an investment of money, 2) in a common enterprise, 3) for a reasonable expectation of profit, 4) and derived from the effort of others. Every altcoin is a security. The exception is possibly stablecoins which do not stand a reasonable expectation of profit, as they are expected to remain pegged 1:1 to the currency which they are designed to track.
In effect, every single altcoin on the market, with the exception of stablecoins, is a security. The good ones are essentially fledgling companies with no products of real utility that are committing securities fraud. The bad ones are Ponzi schemes committing security fraud. We saw this play out when the Luna altcoin famously imploded over almost 24 hours, evaporating almost $40 billion of wealth overnight. Before Luna, there have been countless rug pulls after rug pulls. Even several crypto “custodians” and exchanges such as Celsius, Voyager, BlockFi, and FTX—all funded by venture capital—went under due to a combination of abysmal risk management and outright fraud. As I write this, Binance, the largest crypto exchange in the world, has just been sued by the US government for fraudulently trading against its users for profit. The world of venture capital and altcoin is a cesspool.
Bitcoin maximalists call the companies that sell altcoins “sh*tcoin casinos,” and after following this industry for the last couple of years, boy do I ever agree with this sentiment. You might get lucky by buying these altcoins on their way up and make a huge gain, but more likely, you’ll only ever hear about them after a pump and you’d end up riding the losses down.
The odds are forever stacked in favor of the founders and against you and me. I personally made tens of thousands on altcoins, and as crypto crashed, I lost those tens of thousands. More and more, I began to view Bitcoin as the prime crypto asset and focused most of my attention on learning why Bitcoin maximalists think it’s so darn special. I eventually paused my investments in non-Bitcoin crypto in 2022, and in early 2023, I made the decision to close all of my non-Bitcoin positions and focus only on investing in Bitcoin as a crypto asset. More on this below.
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Bitcoin Is Unique from Crypto
Bitcoin separates itself from all the altcoins not just because it “came first” and because it’s the most well-known cryptocurrency. It stands out for many reasons. Its founder(s) are not known, only existing by a pseudonym known as Satoshi Nakamoto, whose identity was never discovered and who seemed to completely disappear early in the life of the project. No Bitcoins were ever dropped out of the air or “pre-mined” to the founders or any insiders for their benefit. Even Satoshi Nakamoto himself had to use electricity and his own CPU to mine the first Bitcoins. Anyone who knew about Bitcoin could do the same.
This is in direct contrast to other cryptos that allocate ample control and wealth to their founders and venture capital-backed investors before making it available to the public. Bitcoin has no CEO. Bitcoin has no marketing department. Bitcoin is not a security. Anyone with electricity and an ASIC machine can mine Bitcoin, just as anyone with electricity and heavy machinery can pull oil out of the ground or dig gold out of the earth. Bitcoin is a digital commodity—the first ever and only digital commodity. It’s the only cryptocurrency viewed by Gary Gensler and the SEC as a commodity, and he has made this point numerous times publicly. He’s also made the inverse point—that all other cryptocurrencies are securities—many times.
Bitcoin as a Store of Value
What really made me realize the importance of a good store of value was when I started listening to interviews with Michael Saylor—who is, in essence, a Bitcoin maximalist who famously has placed his company, MicroStrategy, on the “Bitcoin Standard” by converting all of its treasury to Bitcoin.
Let’s say you have $1 million and you want to pass it down so that 100 years from now, your great-great-grandchildren can receive it and have the same buying power that it has today. What do you do? You certainly wouldn’t keep it in cash. In the past 100 years, $1 million would have become around $40,000.
You could buy real estate, but then you’d have to keep up with maintenance costs while also paying property taxes. You could rent out the house, but you’d have to have a competent property manager and you’d be at the whim of the local real estate market. What if the house is in the next Detroit? And what if you live in the developing world and your chances of buying a house in the US are akin to the average American’s ability to buy a professional sports team as a store of value?
You could buy a basket of stocks. We take this for granted in the US, but there are 2 billion individuals across the world who are unbanked and who have no hope to partake in the returns that equities have to offer. Moreover, when times have gotten tough for countries or when governments have taken a hard turn, entire stock markets have been shut down and all the wealth “stored” in them evaporated overnight.
Next up is gold. Gold has been the most enduring store of value in human history. Why? Because it’s “hard money.” If your civilization uses seashells as a store of value because they take time and energy to collect but a technology is developed that allows for the extraction of unlimited amounts of seashells from the ocean, seashells will become valueless. Even for other metals such as copper and nickel, if their price goes up sufficiently, people will become incentivized to increase their production such that those who use these metals as a store of value will soon find themselves without any value left at all.
Gold, however, is remarkably hard to mine, and despite wild fluctuations in its price, its total supply increases relatively slowly each year. According to the CME group, from 1965 until 2020, the annual growth in the percentage of gold has been remarkably consistent between 1.1% to a max of 2.1% per year. Even with a meager 1.5% inflation rate, $1 million would be whittled down to only $220,000 over 100 years. And although gold has been the best store of value we’ve had as a society, it has its flaws. In a digital world, how can you transmit gold across the world to pay for a good or service? How do you easily divide it as needed to pay for small amounts of goods? And if war does break out, lugging around a large suitcase of gold certainly would not be inconspicuous.
With every area of weakness that gold has, Bitcoin shines. It is highly portable—all you must do is remember 12 words and you can take a lifetime’s worth of wealth anywhere in the world. It’s highly divisible—the smallest unit of Bitcoin, one Satoshi, is currently only 2 cents. It cannot be counterfeited. A bar of gold could be filled with various metals plated with gold making it hard to verify its authenticity quickly, but Bitcoin can be verified by your own node in your own home within seconds. It’s incredibly scarce—its current inflation rate is 1.8%, and this will be cut in half every four years. Ninety percent of the supply has already been mined. This means that the cumulative rate of inflation over the next 120 years will be 10%, or 0.08% per year over this period.
This next point is a very important one. History has shown that, over time, value flows from weak stores of value to strong ones. This is why societies no longer use seashells, glass beads, copper, nickel, or other similar metals as stores of value. Bitcoin has the best technical characteristics of any store of value that has existed in the history of man, and it’s readily available to anyone with an internet connection and a smartphone—in any amount from a fraction of a penny to billions of dollars. Billions of dollars can be transacted within minutes across the world with absolute finality in a non-censorable way with no need for trusted intermediaries. This is absolutely unprecedented in human history. There is no other technology that has done this. As time goes on, how much of the purported $400 trillion of global wealth will flow into it?
Bitcoin as a Weapon Against Tyranny: Proof of Work vs. Proof of Stake
Even more importantly than any of the above, Bitcoin, unlike any altcoin, is truly decentralized. This is its greatest strength. In early 2022, the government of Canada halted bank transactions that were sent to support participants in demonstrations against COVID mandates. The banks did not put up a fight. They had to comply. A democratic government took an autocratic turn, and the current banking system was absolutely inept and unwilling to fight for its customers.
Bitcoin transactions to the protestors, however, could not be stopped. Bitcoin has no CEO or board to “go to” to reverse a transaction or freeze an account. It is truly permissionless and uncensorable. Contrast this with Ethereum whose “Tornado Cash” app was effectively shut down by the US government. There are also several instances of the USDC stablecoin, which runs on Ethereum and several other Layer 1 chains, holding certain transactions from going through. This can happen because most protocols besides Bitcoin are “DINO”—decentralized in name only.
One of the biggest reasons people call Bitcoin “outdated technology” and argue it will be replaced by a cheaper, more energy-efficient crypto is that Bitcoin uses what’s known as Proof of Work (POW). Most other cryptos, including Ethereum, use Proof of Stake (POS). In brief, POW requires “miners” to make guesses via a specific algorithm (SHA-256) that requires brute force to guess a specific number. Once guessed, it can be readily verified by any “node” within seconds. The computers that mine Bitcoin are making these guesses to the tune of about 350 quintillion guesses per second. As more miners exist to make guesses, the Bitcoin algorithm automatically adjusts to become harder. This is what guarantees that Bitcoin cannot inflate any more than it is programmed to do—the more people mine it, the harder it gets to mine. All of these machines require electricity. In today’s world, with people’s concern about electricity use and global warming, it’s clear to see why some attack Bitcoin due to its electricity usage.
Most other cryptos use POS to be more energy efficient. This uses a “staked” or locked amount of crypto and much lower computational power—thus, much less electricity. “Bad actors” would lose their staked crypto, thus incentivizing good behavior by the transaction validators. Unfortunately, POS’s fatal flaw is that those with larger amounts of crypto will see power accrue to them disproportionately over time, similar to what happens in systems with fiat currencies. In our economy, those with more starting capital make a profit much more easily on their capital over time, and the effects can be monumental over generations and contribute to income inequality and oligarchies.
Similarly, those with more Ethereum to start with (insiders and the Ethereum Foundation) will only gain more Ethereum and more power over the network in the long run. In contrast to this, Bitcoin’s POW mechanism ensures that regardless of how much Bitcoin you may have, you do not get more control over the network. Anyone can stand to mine just as much Bitcoin as anyone else if they “do the work.”
It’s this essential feature of POW that makes it absolutely necessary to have a truly decentralized cryptocurrency over time. Without proof of work, anyone’s control or power in the system can be changed at the click of a button by the foundation of an altcoin—a crucial hindrance to wide trust and adoption. It’s just numbers on a screen with every crypto besides Bitcoin. Once you understand this, you see that Bitcoin’s “bug” of relying on “outdated” POW is its shining feature. And in the POW world of crypto, Bitcoin’s hash rate is 1 million times higher than the two next largest POW cryptos (Dogecoin and Litecoin).
Bitcoin is the 800-pound gorilla of truly decentralized cryptocurrencies, and the next two largest are the 0.0008-pound fleas on its back.
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Bitcoin Stands Alone: Why Bitcoin Belongs in Your Portfolio
Now, you may be telling yourself that all of the above is well and good, but why the heck should you care about it and why should you have Bitcoin in your portfolio? I recently decided to sell my other cryptos and go 100% Bitcoin for my portfolio’s 10% crypto allocation. I chose this percentage because I believe a reasonable price target will be at least $250,000 per Bitcoin if it becomes a global store of value protocol (more on this below), and this would represent a nice boost to my overall returns without risking too much capital.
I could retire just fine without this 10%, but I would get a meaningful boost in spending power if this 10% of my portfolio does a 10x. Even so, we, as physicians, would be just fine from an investment return standpoint never investing in Bitcoin. We could settle for market average returns. We don’t need home runs. However, as I tried to argue above, Bitcoin is not some hot stock. Its unique properties of decentralization and uncensorability make it a special asset to hold.
Consider this quote from Vladimir Lenin: “There are centuries when nothing happens, and there are weeks when centuries happen.” We all saw this play out firsthand in early 2020 when mask mandates were rapidly rolled out (and were welcomed by most), trillions of dollars were printed, and our day-to-day lives were completely upended. We saw it again when the relative post-Cold War peace between global powers abruptly ended as Russia started its treacherous campaign into Ukraine in early 2022.
The events of these last few years are not without consequence. Consider (figures below) the total US dollar money supply (M2), the total assets held by the federal reserve, and the total US public debt. It’s not a surprise to most people that the US has a tremendous debt of $31 trillion and an extra $60 trillion in unfunded Social Security and Medicare liabilities. How does the US pay off its bill? It can either raise taxes or continue to borrow and balloon the deficit further.
This is not a new problem. Since the time of the Roman Empire, largess in spending has led to hard decisions about how to reign in the deficit, and time and time again, it’s proven more politically expedient to debase the currency and cause a “soft default” over time rather than raise taxes. As for the Romans, they debased their currency by diluting their coins with cheaper metals. As for the US, Richard Nixon took the US off the gold standard and the US unofficially defaulted on its debt in 1971 with the ability to print more money as needed. We thankfully have remained the world’s global reserve currency despite this.
Unfortunately, the US government recently decided to weaponize the US dollar against Russia. This served our strategic interests in the short term, but undoubtedly in the long term, it will make all countries that store their wealth in the dollar question if their wealth, too, can be frozen as a political weapon. Ultimately, all fiat currencies have suffered the same fate in the end.
I highly recommend “Big Debt Crises” and “Principles for Dealing with the Changing World Order” by Ray Dalio for much more comprehensive information and background about what governments have historically done during these times. In short, if hyperinflation hits the US, it might be hard and it may be fast. Capital controls would likely be quickly enacted, and bank accounts and brokerages would possibly be frozen. Just as COVID mandates were not seen as overt intrusions by the government by most citizens—especially at the time—most will likely welcome these “necessary measures.” It would then become glaringly obvious that all of our portfolios were just numbers on a screen.
J.P. Morgan said before Congress in 1912, “Gold is money. Everything else is credit.” Governments began to seize gold from the populace at large around World War I in the case of Britain and in 1933 in the US with Executive Order 6102, making gold illegal to hold for 41 years and stripping the individual of power while giving vast amounts of it to the government. Consider also that in the not-so-distant future, global governments, including the US, will be rolling out Central Bank Digital Currencies (CBDCs) which will give governments and central banks unprecedented oversight into how we spend our money and what we are allowed to do with that money. Central bankers want to boost the economy? In the next recession, they could program your money to either be spent on goods or sit idly in your checking account, losing x% per year as a penalty for not spending, while simultaneously being programmed such that it can’t be sent to any brokerage. Buy too much carbon-positive beef this month? Your CBDC is turned off from buying more beef until next month.
I know all of the above must make it seem like I’m a raving Orwellian who sits in his basement clutching a shotgun waiting for the world to end. I promise I’m not! However, I am a realist and a student of history. As Jim has said many times to all white coat investors, the real risk to a portfolio is not volatility but rather it’s inflation, deflation, confiscation, and devastation. Holding Bitcoin won’t stop a bomb from dropping on my head, and stocks and real estate do well enough dealing with inflation over the long run. Holding Bitcoin does, however, provide me with true protection against confiscation in a way that stocks, bonds, and real estate do not. No one can take away my Bitcoin or dictate how I spend it. No one government can place capital controls on it. This property makes Bitcoin an invaluable part of any portfolio, even that of a white coat investor.
I invest 90% in stocks hoping for the best. I invest 10% in Bitcoin prepared for the worst.
In summary, Bitcoin is wonderfully unique. It’s a truly decentralized protocol that, unlike all other cryptocurrencies, is not a company or run by any organization or group.
- Bitcoin has no competition; any cryptocurrency that appears to compete with it crumbles away under any real analysis.
- Bitcoin is insurance. Bitcoin protects against currency debasement by providing an exit ramp from fiat currency if a global fiat debt crisis occurs. Like any insurance, it’s best bought before you need it.
- Bitcoin is freedom money—the separation of money and state. You don’t need anyone’s permission to spend it, and no one—not even the almighty government—can stop you from spending it when and how you like.
- Bitcoin is digital scarcity. No matter how valuable it becomes, it is programmed to only be produced in diminishing amounts each year; this is codified and cannot be changed in response to price or political pressure.
- Bitcoin is digital property. It gives every human on earth who has a smartphone and internet access to property that cannot be confiscated under coercion.
Bitcoin is not the next AOL. It’s a protocol growing stronger by the day with no competition, and it’s already too big to be stopped. Bitcoin is the next TCP/IP upon which AOL and the internet were built, but for money. Bitcoin may well stand to be the future base layer protocol of the global monetary system.
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Appendix: Answers to Common Criticisms of Bitcoin
#1 Bitcoin Is Too Volatile to Hold
The least volatile asset to hold is the US dollar. It’s lost 88% of its purchasing power since 1971. For those who understand what they own and only allocate a responsible portion of their portfolio to it, it can be a wonderful complement to other assets in a portfolio. What I look at to value Bitcoin’s success is not its price. Instead, it’s 1) the growth of the number of users in the network, 2) the growth of its security (ie., its hash rate), and 3) the growth of conviction of the users of the network.
1) The number of Bitcoin addresses with a non-zero balance has been steadily growing since its inception according to @IntoTheBlock.
2) Despite fluctuations in its price (black line in the chart below, via Blockchain.com), Bitcoin’s hash rate (blue line) has been up and to the right since its inception. The only hiccup was in 2021 when China banned Bitcoin mining, but it quickly recovered as miners relocated, demonstrating the resilience of the network.
3) Despite all of its price fluctuations, most of those who own Bitcoin understand it and know what they own—and they aren’t selling. Fifty percent of Bitcoin has not moved in more than two years, an all-time high. This only serves to increase its scarcity.
#2 You Can’t Actually Spend It
Approximately 15,000 businesses worldwide accept Bitcoin. Additionally, companies such as Strike exist that can convert Bitcoin to local currency, instantly allowing you to spend Bitcoin even where it’s not directly accepted.
#3 It Takes Too Long for Transactions to Settle
The Bitcoin block time is approximately every 10 minutes. However, the Lightning Network, which has been rapidly increasing in the number of transactions in the last couple of years, can settle transactions on top of the base Bitcoin network in seconds with finality.
#4 Bitcoin Can Only Handle a Limited Number of Transactions Per Second
This is a common argument made by the other so-called Layer 1 cryptocurrencies. There is a commonly cited “Trilemma” in cryptocurrency: speed, security, and scalability. You can only have two out of the three on the base layer. Bitcoin has opted for speed and security. However, this is not a real problem as Layer 2 solutions, like the Lightning Network, enable exponentially more transactions than the base layer allows, vastly increasing scalability and eliminating this problem.
#5 Bitcoin Is a Ponzi Scheme; It’s Not ‘Worth’ Anything; There’s No Way to Know How Much Bitcoin Will Go Up or Down in Price
I hope I’ve proven how much value Bitcoin uniquely provides as an asset. If more and more people wish to save some of their wealth using Bitcoin due to its superior attributes as a store of value, this will drive up its price.
Let’s assume that Bitcoin is a better store of value than gold, and over time, its market cap comes to equal that of gold, which is currently around $13 trillion. This would make each Bitcoin worth $620,000 (13 trillion divided by 21 million, which is Bitcoin’s fixed cap). Consider that the total sum of all of the stores of value in the world is approximately $550 trillion at a minimum ($325 trillion in global real estate; $115 trillion in global bonds; $100 trillion in global stock; $10 trillion in gold; $10 trillion in antiques, cars, collectibles, art, etc.). Let’s assume 75% of these are necessities, and only 25% is true excess storage of wealth.
As we discussed, Bitcoin is a superior store of value to all of these. Bonds provide minimal returns above inflation. Real estate has property taxes and maintenance costs. Gold is difficult to store and to move around in large amounts, and it’s hard to quickly verify its authenticity. Over time, value flows from weak stores of value to the strongest. If this 25% eventually (over the next several decades) makes its way into Bitcoin, it would place each Bitcoin at $5.5 million. So, are you still scared to buy Bitcoin at $20,000-$70,000? Also, consider that the price of any asset is determined at the margins. A bottle of water may cost $1-$3 dollars in normal times. But if it’s the only bottle of water in a desert with 100 millionaires on it, its price suddenly becomes the net worth of the richest millionaire who wants it. Similarly, if there is a shock to the legacy fiat systems, the price of Bitcoin may rapidly inflate as the ultra-wealthy scramble for the exits.
#6 But Bitcoin Doesn’t Have Any Smart Contracts
This is true for now. But consider this. Smart contracts are useful when you want the blockchain to automatically execute a function under a set condition. However, you could also just use a regular company to do this. For instance, if I want to have a smart contract that will pay me 5% interest if I loan out my “sh*tcoin” to someone else, there is something known as a bank that can facilitate this process. Now, the blockchain does remove the middleman and automates the process, which provides some value. However, if you’re talking about billions and billions of dollars at stake between large players, the security and immutability of the base settlement layer becomes of utmost importance. The only chain that is not reversible and under the control of any foundation is Bitcoin. It’s the only cryptocurrency that’s not a de facto company. A company that can be controlled is no better than a bank or any other company. Therefore, any smart contract network that will gain wide adoption by the “big players” will have to be built on top of the Bitcoin network if they are to be trusted for transactions of consequence.
#7 If It’s Such a Great Store of Value, Why Has Bitcoin Not Been an Inflation Hedge?
Bitcoin has had booms and busts due to excessive leverage, speculation, and greed. But all of that aside, it’s been the best-performing asset on the planet since its inception, and it keeps hitting higher lows. If you can stomach its early volatile phase, it stands to provide great future returns. If you wait to buy it once it’s become more of a globally established store of value, the volatility will be diminished. But so will future returns.
There is a saying among Bitcoin maximalists: Don’t wait to buy Bitcoin; buy Bitcoin and wait.
#8 Isn’t Bitcoin Supposed to Be Terrible for The Environment?
This is a common argument by the mainstream media. According to the Bitcoin Mining Council (BMC)—a global forum of mining companies that represents 48.4% of the worldwide Bitcoin mining network—renewable energy sources accounted for 58.9% of the electricity used to mine Bitcoin in Q4 2022. That’s a significant improvement compared to the 36.8% estimated in Q1 2021. What’s more, Bitcoin actually incentivizes the use of renewable energy. If you develop a coal plant, you can burn more coal when needed to adjust to the demand on the energy grid. However, if you build solar panels or windmills, you have no use for that energy when the grid does not demand it, and you miss out on potential profits. If you can mine Bitcoin with the excess energy, you’ve effectively found a way to generate income even when there is no demand for your source of renewable energy, thereby helping to subsidize the cost of the investment.
This can be a boon to the development of more renewable sources of energy and can help provide further stability to the power grid. There are even companies that harness flared methane from natural gas operations and help decrease how much harmful methane gets into the atmosphere. The topic of Bitcoin and energy is much more complicated than it would appear at first glance. Furthermore, consider that clothes dryers use more energy on a yearly basis than Bitcoin mining. Where is the outcry about this and why is there not a push to ban them? We can all hang out our clothes to dry, but this use of electricity to secure the best store of value ever created and a means to escape government oppression cannot be achieved without the use of sufficient energy to secure the Bitcoin network and make it resistant to attacks.
[Founder’s Note: I hate to add a lengthy note to an already lengthy post, but on a controversial topic such as crypto (and yes, Bitcoin is crypto even if the maximalists don’t like the rest of the world saying so), it must be done. You need not assume that because you just read a lengthy, relatively positive article about Bitcoin on this website that I have somehow changed how I feel about it. I have not. I still think it is an optional asset class at best and not one that I have any plans to invest in. In fact, as time goes on and crypto still hasn’t changed the world in a way meaningful to me, I lose more and more faith that it ever will. Unlike the author who admits he jumped in despite not understanding the investment mostly because the price was going up, I’ve known about Bitcoin from nearly the beginning, and I certainly understand the basics of how it works. Every couple of years, I look at it again to see if something has changed enough to make me want to own it. So far, no, and the arguments in this post are neither new nor convincing to me. I’m still content to stand on the sidelines and see what happens. I don’t need to invest in everything I find interesting.
The author stated he would convince us that Bitcoin is essential to protecting our property rights. He wrote that it would prevent our oppression by the government and that it should be in all of our portfolios. I would argue he has failed to do so. He contends that Bitcoin is the best store of value ever invented, yet as much as 25% of it has completely disappeared as its owners have lost their keys. Not to mention the fact that its wild volatility makes stocks and precious metals look tame in comparison. The author feels that Bitcoin cannot be confiscated. Yet the very presence of the blockchain makes it relatively easy to track down criminals who have transacted with it, and the IRS now requires crypto traders to report that activity on their tax returns. When you’re threatened with jail or have a gun held to your head, you’ll find those Bitcoin keys pretty quickly.
At the end of his post, the author addresses my primary criticisms of Bitcoin. Although the Lightning Network and similar improvements have made strides in addressing a couple of them, the rest still stand. It is ridiculously volatile. I still can’t spend it anywhere I’m interested in spending money (and would generate capital gains every time in order to do so). It has no underlying value, uses massive amounts of electricity, doesn’t offer smart contracts, and doesn’t seem to be particularly good during inflationary times. If it never gets better than this, I just don’t see it changing the world. But my faith in humanity and technology is such that I still hold out hope that these problems can be addressed by a modified Bitcoin or, more likely in my opinion, an entirely new cryptocurrency as Bitcoin goes the way of AOL.
I truly am fascinated to see how the world might change as a result of Bitcoin and similar technology. But after 15 years, I’m no longer holding my breath. Bitcoin is a speculative instrument, and I don’t put those in my portfolio. If you choose to, limit it to a single-digit percentage.]
What do you think? Do you have Bitcoin in your portfolio? If not, would you consider adding it? What other arguments for and against Bitcoin can you make? Comment below!
[Editor’s Note: The author is a neurologist practicing in the Mid-Atlantic who is five years out of training. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]