Bitcoin isn’t done — here’s why

Bitcoin has lost over half its price since its lofty December 2017 peaks, however I believe there has never been a better time to buy Bitcoin. To understand why, it’s important to see where the real value of Bitcoin lies — and also where it doesn’t..

Bitcoin is (for now) a hedge against state failure first, and a currency second

Critics of Bitcoin like to compare it to fiat currency like the United States Dollar and are quick to point to factors like how few merchants currently accept Bitcoin, sometimes slow transaction speeds and network fees. However this is disregarding Bitcoin’s current place in the financial landscape; it isn’t a competitor to USD or Mastercard, it’s a competitor to Gold (for now).

When financial systems fail, fiat currencies (Dollar, Yen etc) can lose their value. In such events, minerals such as gold have been used as a safe-haven asset that will hold its value through the crisis (and often appreciate). The reason Gold has been the hedge asset of choice is due to its historical use as a currency across continents — in fact, when the US started printing fiat currency (notes) they legally had to have convertible gold reserves of equal value to the notes to back the value of the gold — this was to convince people of the value of the fiat currency. President Nixon only repealed this law in 1971 (purportedly as a temporary measure).

In both the dot-com crash and in the 2008 financial crisis gold posted impressive gains against fiat currencies. When the S&P dropped -22% in 2001, gold saw a 25% gain.

Of course, one could argue that Gold is the real safe-haven asset. However..

Bitcoin is to Gold what Amazon is to old retail

Another common argument against Bitcoin is that Gold is a better alternative to Bitcoin as a safe-haven asset. I disagree since the reason these assets are attractive as safe-havens is owing to the possibility they could be accepted and used as more mainstream currency in the future event of financial (or political) collapse.

Gold proponents cite Gold’s extensive track-record as a means of currency across continents. However, this ignores the fact that modern markets aren’t localised like they were when gold was popular as currency. Modern buyers would demand access to goods and services globally via ecommerce. Some argue that gold contracts could facilitate this, however this is ignoring the fact that such a contract would require somewhere to hold the gold. Necessarily, this would also require a centralised authority to protect the gold, inherently defeating the original purpose of an asset robust to the corruption of man & failure of authority.

There is also the inconvenient truth that there will always be demand for unregulated currencies due to the black market of illegal goods and services. While readers might not agree ethically that this is a good thing for society, it would be naive to think that there won’t continue to be demand for it. For this reason I don’t think it’s possible for Bitcoin to ‘crash to zero’ (at least not without being usurped by another crypto to be used on the black market).

All of this is relevant now because..

Political instability precedes economic failures

There is a saying that ‘history never repeats itself — but it does rhyme’. The Argentinian Peso collapsed in 2001. In this event, the Argentinian Government reneged on a promise to its people that the Peso was worth exactly 1 USD & forcibly exchanged millions of its own peoples USD accounts to Pesos at a quarter their promised worth). During this period Argentinians scrambled to change their Pesos to Dollars which was (in part) responsible for the devaluation of the Peso.

For many people now (especially the younger more tech savvy), the default financial crisis hedge asset is Bitcoin since the Dollar would be unlikely to protect against the possibility of a wider financial collapse involving market contagion.

In the case of Argentina, the failure of the financial system that destroyed hundreds of millions of dollars of wealth and the wellbeing of the countries’ people was preceded by unchecked political control. This took place in a democratic political system that failed its people by allowing the successive ruling governments to operate without restriction and incur large debts (this was achieved by ruling parties appointing only their own party’s judges to their supreme court).

This is especially relevant today in the United States where it seems the political system is driven more by partisan divides than by any sound or consistent moral grounding. This is demonstrated by the extremely firm lines on which Republican and Democrat senators voted in support of Kavanaugh’s appointment (with only 1 republican and 1 democrat senator defecting from their party lines in the final vote of 50–48 in favour) highlighting the senators expedience in favour of thoughtfulness or moral grounding.

Events like the Kavanaugh appointment diminish the faith that the people have in their institutions and their elected representatives to act in their best interests. And for good reason, in the case of Argentina it was the one-sidedness of a Supreme court that facilitated the autocratic decision making that led to their financial collapse and wiped out 75% of the wealth of their people when their currency collapsed in value.

Other current economic warning signs are abundant, ranging from Trump & Xi’s trade war to a mounting national debt that appears to be running away like a snowballing timebomb. Nobody knows where exactly the next crisis will come from, however it is easy to argue that there is an increasingly dangerous political climate of self-service, corruption and blissful ignorance adding fuel to an overheated market that looks like it could go up in flames.

Of course, none of this matters if the Bitcoin price is overvalued, however..

It’s not a bubble (anymore)

It is impossible to completely quantify the distribution of the sentiment of the people with their money currently invested in Bitcoin, however I like to think of Bitcoin’s composition of capital as being decomposable into three groups of Fundamentalists, Followers and Traders:

Fundamentalists; these are the people who believe (like I do) in the future of Bitcoin. They see the potential for a global decentralised currency to become the “people’s money” and believe it could offer advantages over Gold in a financial collapse or fiat currencies for buying and selling services in the long term.

Followers; these are the people who invest in Bitcoin mainly because of the performance of its price change.

Traders; these are the people who attempt to profit from price swings in Bitcoin by buying and selling.

Leading up to the Bitcoin collapse in December 2017 it felt as though the distribution of capital in Bitcoin was dominated by the Followers. Back then, enthusiasts took comfort in the idea that even if Bitcoin crashed (as it had done in the past) it would mirror prior crashes and quickly recover. However this ignored one crucial point — prior crashes occurred in periods of ‘Fundamentalist money’ dominance. Fundamentalists were less likely to sell out during a crisis. However in late 2017 Followers who were chasing a quick buck (and had never seen the price dive) were dominating the distribution of Bitcoin capital.

This was (quite rightly) labelled a bubble and when the price wavered these people of course did sell, accelerating the free fall in price.

Now, however it seems the distribution of capital is different with less ‘Follower money’ around to chase quick gains. This bodes well for the price sustaining market fluctuations moving forward.

Disclaimer

These are just my opinions and reasons I personally own Bitcoin, none of this should constitute financial advice.

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I’m a commercially focused Data Scientist / Analytics consultant.