Bitcoin is still the most accessible asymmetric bet in human history — here’s why.
Before we begin, it’s important to understand that thanks to the digital age, it has never been easier to access knowledge and information through inexpensive mobile technology.
Making it possible for any individual, anywhere in the world, to participate directly with a swipe of a finger on their smartphone.
Throughout history, however, asymmetrical financial opportunities have been made exclusively accessible for wealthy aristocrats and the upper echelons of society.
Similar to the way through which the internet internet broke the monopoly on information, Bitcoin is set to break the monopoly on finance. With Bitcoin, we are experiencing a complete paradigm shift in finance, economics and how money works.
It is not overly dramatic to say that those who do not have a solid grasp of what’s happening in the world today are set to miss out on one of, if not, the most accessible asymmetric bet in human history.
By the end of this article you will be able to effectively:
- Understand Bitcoin in basic terms.
- Understand how Bitcoin works.
- Understand why Bitcoin is important.
- Understand why Bitcoin is the best money.
- Understand why it’s never too late to buy Bitcoin.
- Understand why Bitcoin is better than banks, dollars & gold.
- Understand and debunk common misconceptions about Bitcoin.
- Understand why Bitcoin is still the most accessible asymmetric bet in human history.
Here are some talking points we’ll cover:
• What is Bitcoin?
• How does Bitcoin work?
• How do you use Bitcoin?
• Why is Bitcoin unique?
• Is Bitcoin money?
• Why should I care about Bitcoin?
• What makes Bitcoin better than banks, dollars and gold?
• Bitcoin isn’t backed by anything.
• Bitcoin is for criminals.
• Bitcoin is too volatile.
• Bitcoin is a fad.
• Bitcoin is a ponzi scheme.
• Bitcoin is bad for the environment.
• Bitcoin is too complex to catch on.
• It’s too late to buy Bitcoin.
• I’ll just wait for the next Bitcoin.
“What is Bitcoin?”
In very simple terms, Bitcoin is a new form of global money that’s completely digital and can be used by anyone, anywhere in the world. All you need is a smart device & an internet connection.
Bitcoin allows you to store, send, and receive money without the need for banks or credit card companies. These intermediaries were once required in order to verify the person spending money actually had that money, something they could check by hold everyone’s funds so that they knew all account balances.
Banks & credit card companies can be slow, expensive, can limit how you access your money, are funded by the fees you pay and worst of all massive taxpayer bailouts, just like in 2008. After the Fed slashed rates on October 29, 2008, just two days later a whitepaper was published online from the pseudonymous person, or persons, Satoshi Nakamoto. The paper detailed a digital peer-to-peer (P2P) currency, now widely known as Bitcoin.
In January 2009, the first Bitcoins were issued with the message “chancellor on brink of second bailout for banks” embedded in the code — a reference to the 2008 financial crisis.
“How does Bitcoin work?”
Picture five people in a room, all wearing masks and each holding an indestructible notepad. They don’t know each other and therefore don’t trust each other.
These 5 strangers represent the Bitcoin network, the masks represent their privacy and the notepads represent the Bitcoin Blockchain.
A stranger hands another stranger a coin and all the other strangers have to write down this transaction in their notepads.
They show each other their notepads to make sure they match and then the transaction is recorded forever.
“But couldn’t someone just write down a fake transaction?”
No, because everyone has records of every coin and every transaction ever made in the room.
If someone were to write down a fake transaction into their own notepad, everyone would see that those coins were never recorded by everyone else, and they wouldn’t accept them.
If one notepad doesn’t match the others, it means someone is trying to fake a transaction and it won’t be approved by the group.
Just like the strangers passing around coins from one person to another, when Bitcoins are sent and received, the change of ownership is broadcasted to Bitcoin’s network, which permanently records it.
Just like the indestructible notepads, the Bitcoin Blockchain digitally stores and permanently records all Bitcoin transactions on the network for everyone to see. But just like the masks, everyone’s identities are protected while transactions are made public.
This blockchain has thousands of identical copies spread across the world, working in sync at all times to record every transaction.
If a transaction is being attempted and all of the Bitcoin Blockchain copies match, then the transaction is approved. But if one doesn’t match, the network will reject that transaction.
Once a Bitcoin changes hands, the transaction becomes automatically and permanently recorded, so the money can’t be spent twice. This how Bitcoin prevents fraud and solves the double-spend problem.
Fiat money like the dollar, pound and yen can help enable fraud and theft because they don’t use a Blockchain like Bitcoin, so it’s hard to prove who owns what. In the US alone it is estimated that between $70 to $200 million in counterfeit bills are in circulation. That’s up to 1 out of every 4,000 real dollar bills.
Because the Bitcoin Blockchain knows where every Bitcoin is at all times and who owns what without revealing their identity, it removes the need for a costly third party like banks or credit card companies to check transactions.
With Bitcoin, strangers all over the world can now quickly and inexpensively exchange money without the need of trust and the need for third parties.
“How do you use Bitcoin?”
When you set up a Bitcoin wallet, either on your computer or mobile device, it provides you with a public online address where Bitcoin can be sent to you as well as your own private keys (your secret password) that only you know.
Think of it kind of like an email address for receiving emails and your private key as your email password to access and send emails.
You use a person’s Bitcoin wallet address to send them Bitcoin, and you give someone your Bitcoin wallet address to receive Bitcoin.
But remember, your Bitcoin wallet doesn’t store you Bitcoins.
Your Bitcoin wallet simply stores your private keys (your secret password) which give you access to your Bitcoin. You need these private keys to send Bitcoin from your address to another.
Your private key should be kept in a safe place. If you lose it, you lose access to your Bitcoin.
“Why is Bitcoin unique?”
It’s the first digital item on the internet that cannot be duplicated:
Traditionally, assets in the physical world such as gold, stocks, fiat (paper money) and real estate are used as stores of value. Today, in the post-industrial Internet age we can store value online as a digital asset. Think of Bitcoin as the first digital item on the internet that cannot be duplicated, copied or counterfeited. Because Bitcoin cannot be recreated, it is therefore scarce and a new way to store value.
It isn’t controlled by anyone:
Bitcoin is open-source and isn’t controlled by anyone, meaning everyone can see all of its transactions on a digital public ledger also known as a blockchain. In other words, there is no single group that controls the Bitcoin network and anyone can have access to it using the Internet.
It’s borderless, direct and cuts out the middleman:
When you want to send money to another person, Bitcoin removes the middle-man and sends it directly to the receiver’s digital wallet. Unlike other traditional payment systems such as credit cards or PayPal, Bitcoin allows direct and immediate transfer of value between two people anywhere in the world.
It’s deflationary and its supply is regulated by an algorithm:
Bitcoin was designed with a deflationary monetary model, in other words, it produces fewer coins over the years until it reaches a limit, and the value of the coin is designed to increase over time. This is the opposite of the system we use with everyday money or ‘fiat’ money, which is prone to inflation and designed to devalue over time.
It’s uncensorable and accessible to anyone and everyone:
Bitcoin wallets or addresses can be easily set up online without any fees or regulations. Unlike bank accounts and traditional assets that can be frozen or seized, Bitcoin can’t be censored or shut down by governments. Only you can access and control your funds through your cryptographic private key (like a password).
It’s private and more secure:
Personal information becomes more private with Bitcoin because no bank or credit card company has to store it. Bitcoin’s network, for example, has around 10,000 active nodes (powerful computers that support the Bitcoin network), compared with Visa’s 119 data centers, MasterCard’s 98 and PayPal’s 51, making it more secure because its network is decentralized across 100 different countries.
It solves the double-spend problem:
Bitcoin solves a huge issue called the ‘double-spending problem’ because its open-source and decentralized. A Bitcoin transaction is recorded in a verifiable and permanent way on the network to ensure no one can double-spend the same money twice, one of Bitcoin’s biggest breakthroughs as new a technology. (Bitcoin’s never change they only change hands.)
Its faster and cheaper:
Domestic wire transfers can take 24 hours and wire transfers to other countries can take as many as 5 days. Bitcoin can be transferred anywhere in the world and the transactions will usually be completed minutes later. Transactions are broadcasted within a few seconds, and it takes roughly 10 minutes for the transaction to be verified by Bitcoin miners.
$100 transaction = $1.99 fee
$100 transaction = $0.0005 fee
“Is Bitcoin money?”
“Paper is poverty. It is only the ghost of money and not money itself.” — Thomas Jefferson writes to Edward Carrington in 1788 in reference to the creation of banknotes.
The purpose of money is to retain the value you create to store for a later use. Fiat is bad for this because it can easily be printed, losing value over time whereas Bitcoin is ideal because it’s scarcity/supply is predetermined, designed to increase in value over time.
Bitcoin’s deflationary monetary system incentivizes savings, discourages debt, discourages waste and creates more purchasing power over time. Bitcoin is money and its features arguably make it the best form of money available.
To keep this simple lets to start with a definition of money and then analyze how Bitcoin fits the bill.
The Definition of Money:
A medium of exchange; must be widely accepted as a method of payment for a broad range of goods and services.
A store of value; must have the ability to hold value over time so people can buy & sell at different times and at different places. Must be reliably saved, stored and retrieved.
A unit of account; must serve as a common measure of value, to allow people to determine the quality, or quantity of the item(s) the asset(s) is being exchanged for and make this judgment based on the rate of exchange.
Bitcoin as a medium of exchange;
Bitcoin can be used to purchase many things today and the number of merchants accepting Bitcoin is growing by the day. People can purchase flights, hotels, Amazon goods, etc. using Bitcoin and soon there will be a lot more.
Bitcoin as a store of value;
People have lost value in Bitcoin but Bitcoin has regained that value back over time. If we look at the yearly lows (the lowest price at which Bitcoin was traded during a year) for Bitcoin, we can see each time Bitcoin reaches a new high it is followed by an 80%+ crash to a level that is higher than the previous all-time high, making higher lows.
Bitcoin as a unit of account;
Different amounts of Bitcoin will get you differing quantities, or qualities, of goods and services depending on how much Bitcoin you’re willing to give up in exchange for whatever it is you want to purchase. This is no different from spending fiat currency. Allowing you to gauge the quality and/or quantity depending on the amount of Bitcoin that is being asked for by the provider is an important aspect of “money,” by definition, this makes Bitcoin a unit of account.
“Why should I care about Bitcoin?”
“Past instances of very low rates have tended to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime. “
-Mark Carney, Governor of Bank of England
Global debt is rising significantly.
Debt is increasing globally, correlated with low-interest rates and “cheap money”. The Institute of International Finance estimates that total global debt will exceed $257 trillion in the first 3 months of 2020.
Even by the most conservative estimates, it would take every working age person in the world to work for free for 2.5 years to of this global debt pile.
The U.S. national debt hit a record level, exceeding $23 trillion in February 2020. This debt has become so massive that it’s almost $65,000 for every man, woman, and child in the United States. That’s double the average U.S. income of $31,177 per person.
In 1988, the debt was only half of America’s economic output (the economy’s total quantity of goods or services produced), today its greater than what America can produce (GDP) in an entire year. The last time this debt-to-GDP ratio was so high was around the 2008 recession.
When a country can’t pay all its bills because the national debt is too high, it becomes a sovereign debt crisis. But for the U.S, that’s unlikely to happen because the nation’s central bank, The Federal Reserve, can keep interest rates low to stimulate the economy. (quantitative easing.)
In an emergency response to mounting concerns around the economic impact of the Coronavirus, the Federal Reserve slashed interest rates by 50 basis points to a range of 1% to 1.25%.
Interest rates have been lowered in order to artificially stimulate economic growth, as lowering the costs banks charge to access money can encourage borrowing and investing. But for savers, this can mean earning less interest on their savings accounts.
However, when these rates are too low, it can cause excessive growth and an oversupply of money, leading to inflation which reduces purchasing power for everyday consumers e.g the prices for goods and services rise.
Interest rates are now historically low, the last time the Fed slashed rates to this level was on October 29, 2008. Just two days later, Satoshi Nakamoto published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
Interest rates are already negative in Europe, the Bank of England just recently slashed rates to 0.25% and as of March the 1st 2020, the yield on the 10-Year Treasury Bond, the benchmark for overall rate concerns, dropped to its lowest level since 1960.
These are the kind of loose financial conditions that can lead to a recession, which leads to a fall in GDP, a rise in poverty, high unemployment, lower wages, and higher government borrowing.
$625,000,000,000 has been printed by central banks since February. Bitcoin is not a safe haven from the Coronavirus, it’s a safe haven against banks and governments printing your savings away to cover up the flaws of the current financial system.
Born out of the 2008 financial crisis, Bitcoin can offer an alternative to the current inflationary money system.
Holding Bitcoin in a portfolio improves both diversification as well as risk-adjusted returns.
Bitcoin can act as a hedge against economic crisis because it has a low correlation to other assets. Since 2015, Bitcoin has shown a correlation of 0.096 to the S&P 500, and a correlation of 0.020 to gold while providing an overall return on investment of around 3,000%.
During the recent Coronavirus epidemic, here’s how Bitcoin performed against other top assets between January 1st to February 29th of 2020:
Crude Oil (CL.1): -26.06%
Commodities (S&P GSCI): -17.83%
UK Stocks (FTSE 100): -12.75%
Dow Jones (DJIA): -10.96%
European Stocks (STOXX): -9.66%
US Stocks (S&P 500): -8.56%
Silver (S100): -6.82%
Gold (GC00): +4.43%
Bitcoin (BTC): +22.25%
After global markets posted their biggest fall since 2008 due to increasing Coronavirus concerns and amidst the Saudi oil price crash, here’s how Bitcoin compared on March 10th 2020:
Crude Oil (CL.1): -46.82%
Commodities (S&P GSCI Index Spot): -27.94%
UK Stocks (FTSE 100): -18.69%
Dow Jones (DJIA): -16.42%
European Stocks (STOXX): -15.29%
US Stocks (S&P 500): -14.99%
Silver (S100): -4.39%
Gold (GC00): +9.30%
Bitcoin (BTC): +12.80%
Bitcoin is open source and accessible to everyone.
If you live in a western country without having your savings completely evaporated by inflation and you also have access to a bank account & credit cards, you might not see the immediate need for Bitcoin.
However, whereas financial opportunities and services were only previously available only to the wealthy and connected, Bitcoin is open-source and accessible to everyone because you don’t need:
⁃ to be well connected
⁃ to earn >250K a year
⁃ to be an accredited investor
⁃ to have a spotless credit history
⁃ to even have a bank account
For the 1.7 billion people worldwide who don’t have access to a bank account and the billions more who cannot trust paper money due to high inflation, Bitcoin is a big deal. Bitcoin is one of the rare asymmetric bets that anyone and everyone can be a part of.
Why is Bitcoin better than traditional banks?
The money in your bank isn’t really yours.
Just like you can receive money in an online banking account, you can receive Bitcoin in a Bitcoin wallet. But here’s the difference, the Bitcoins in a wallet are yours whereas the money in your bank account is simply an IOU from your bank and they can deny you access at any time.
When you give a bank $100, the bank doesn’t actually keep all that money for you. They are legally allowed to spend up to $90 of your money, and keep just $10 in the off chance that you ask for your money back.
This means that if a bank has net deposits of a billion dollars, it needs to only keep 100 million on hand at any given time. This money-making scheme is called fractional reserve banking and it dates as far back as the 14th century.
“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” — Satoshi Nakamoto
This works okay most of the time, only if the bank’s customers don’t try to withdraw all they’re cash at the same time. If that does happen, it leads to what’s known as a ‘bank run’, where this structure can come crashing down if banks fail to meet the number of all of the customer withdrawals.
This launches the banks into a state of emergency, having an almost domino-like effect as multiple banks follow suit with each collapse swiftly compounding and multiplying.
This kind of system built on the trust that the banks can always come through can lead to disasters like The Great Depression and the Financial Crisis of 2008. So, what’s the big deal? Well, it’s about to happen again.
Long term fractional reserve banking = oversupply of money = inflation = cost of living raises for the less wealthy
Banks & credit companies can steal your privacy through your transactions.
When you use services such as credit cards, wire transfers, PayPal, Venmo, etc., you are essentially agreeing to the collection and sharing of your transaction data with advertisers to sell you stuff or even sharing that if info with your insurance company to raise your rates, depending on your buying habits.
Bitcoin doesn’t need your personal details and protects your real identity through cryptography. So instead of using your actual name, it uses a series of numbers and letters such as “1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2” instead of “John Doe”, protecting your privacy and your identity.
Banks & credit companies can limit your access to your own funds.
Bitcoin allows you full control of your money, like being you’re own bank that nobody, no government, VISA, PayPal or any other third party can control, confiscate or stop you from spending your money how you like.
Roughly 6% of all GDP globally is paid to banks and credit card companies to manage and verify trust. In its 11 years of history and $5 trillion dollars worth of transactions later, Bitcoin has never had a single fraudulent activity on its blockchain.
In fact, the Bitcoin network has been functional for 99.99% of its time since its inception on January 3, 2009.
Banks & credit card companies can be slow and expensive.
Americans pay over $329 annually in bank fees on average and banks racked up a total of $34 billion in overdraft fees alone in 2017. Bank overdraft fees cost Americans over $15 billion annually.
You can send a $1,000,000 in Bitcoin anywhere in the world for around $15. That same transaction using banks and other trusted third parties would cost $50,000 to $100,000.
Today, Bitcoin’s transaction activity is twice that of PayPal and is the second-largest transaction network after Visa.
2020 Visa transaction fee: $1.99.
2020 Bitcoin transaction fee: ~$0.35
In a nutshell:
Bitcoin works better than traditional Banks and at a significantly lower cost while being secure and protecting your data.
Why is Bitcoin better than dollars?
Every year, dollars become worth slightly less.
When governments and central banks want to issue new money, either by printing it or adding some zeros into their database, they inflate the national money supply.
What this basically means is; because there is now more money in circulation, there is more money competing for goods and services, meaning the buying power of everyone who holds that currency goes down while the prices of goods & services goes up. This is inflation in the most overly basic terms.
So a fiver dollar bill is still a five dollar bill but now it can buy you fewer things.
Since the 1950s: (USD)
⦿ A pound of flour is up 940%
⦿ Sugar is up 560%
⦿ Butter is up 409%
⦿ A dozen eggs is up 248%
There are 1,900x more dollars in existence today than there was 100 years ago. Today’s prices in 2020 are 2,636.26% higher than average prices since 1907. This is not “organic”.
For some perspective:
1907: $7 billion in circulation.
1 dollar could buy nine bottles of wine
2010: +$13,200 billion in circulation.
1 dollar could buy a single song on iTunes
The Federal Reserve printed $800 billion out of thin air during the 2008 crisis and has has printed over $2 trillion since. It’s only going to get worse.
“The United States can pay any debt it has because we can always print money to do that” — Alan Greenspan, Former Chair of the Federal Reserve of the United States
Bitcoin can protect your savings from inflation.
Unlike the US dollar which loses about 3% per year due to inflation, the supply of Bitcoin is capped at 21 million.
Meaning there will never be more than 21 million Bitcoins and after all Bitcoins are issued in the year 2140, there can never be any new Bitcoins created.
Whereas the number of dollars increases over time, the number of Bitcoins that are produced decreases over time and will eventually stop once the supply reaches 21,000,000.
This fixed supply means Bitcoin is inflation resistant and can’t be printed or re-created by a government or central bank like paper money.
With more demand and a fixed supply, prices go up over time. For each person on this planet, there is only 0.00225764 Bitcoin.
Its purchasing power or value has been designed to increase (if more people demand this kind of money rather than paper money).
The value of Bitcoin will increase over time because there are only going to be a finite number of them. This is why some refer to it as “digital gold”.
In a nutshell:
Holding ‘fiat’ money means that you are continuously losing value, and you need to “beat” inflation or it will eat away at your savings.
Dollars: Unlimited supply, easy to create, mathematically designed to lose value over time.
Bitcoin: Fixed supply, difficult to create, mathematically designed to gain value over time.
What makes Bitcoin better than gold?
Gold, due to its scarcity, has been a historic store of value for over 2,500 years. It has undoubtedly stood the test of time and remains a great hedge against fiat money inflation.
However, Bitcoin has a number of advantages over gold because it can be transported anywhere in the world, in any quantity, in a matter of minutes. It can be easily divided without physically melting it like gold and Bitcoin cannot be faked or counterfeited.
Gold can be faked or counterfeited.
Last year, the British Hallmarking Council found 37% of items sold online as gold had no hallmark and may not be made from gold at all. Fake gold bars –– blocks of cheaper metal plated with gold –– are common in the gold industry.
In recent years, J.P. Morgan — one of the largest suppliers of gold from major refiners for many of the world’s biggest banks, jewelers and investors — was found with $50 million worth of fake gold bars in their vaults.
At least 1,000 counterfeit gold kilobars, the standard 1kg size, have been discovered in the past three years. This is a small proportion of the quantity produced each year — between 2 million and 2.5 million — but the forgeries are increasingly sophisticated.
Swiss Customs reported 655 forged bars in 2017 and 2018 to local prosecutors in Ticino, a region bordering Italy that contains three of Switzerland’s four large gold refineries. Unlike gold, Bitcoin uses cryptography to guarantee coins can’t be counterfeited.
Gold is harder and more expensive to transport & transact.
Can you imagine entering into a store with a bar or certificate of gold to purchase something?
It’s rare that anything can be bought directly with gold. Even though gold is a great store of value, it’s not ideal for everyday use outside of its relatively small utility in jewelry and electronics.
Not to mention the problem of shipping and insuring vastly expensive quantities of gold. Even just the security detail needed to safeguard the gold on its slow and cumbersome journey carries enormous costs.
Unlike gold that’s difficult to transport and transact, Bitcoin can moved easily and quickly across borders for little cost because it’s purely digital. In January of this year, a Bitcoin user paid just $0.25 to move $450 million.
Gold’s supply is unknown.
Gold’s supply is anything but constant, and it’s estimated we’ve more than doubled our world’s supply of gold in just the last 50 years. However, there is no way to verify the total gold supply because it is dependent on the amount mined out of the earth’s crust.
With Bitcoin, the supply is limited to 21 million and anyone with an internet connection can verify every transaction in Bitcoin’s history. Bitcoin also has the advantage of being highly auditable because its nodes ensure the ability to independently verify any Bitcoins received, as well as the entire historical ledger.
Gold is costly to store.
Large amounts of gold require trusted intermediaries such as third-party vaults for storage. Bitcoin is highly portable even in large quantities, unlike gold. Bitcoin private keys can be memorized with a simple 12-word phrase and can be stored digitally. Billions of dollars can be securely stored on something as small as a flash drive like Trezor or a Ledger.
Gold can be confiscated.
Gold can be and has been confiscated by governments. When President Roosevelt made ownership of gold bullion illegal in 1933, all Americans were forced to exchange their gold for dollars under The Emergency Banking Act of 1933, which were eventually devalued by decree under the same administration. Soon after, the price of gold rose by 40%.
But why would the government seize gold? Facing its most severe financial crisis, the US government needed to stimulate the economy, “paper money” was insufficient and so it confiscated all gold. Although Roosevelt didn’t call it gold confiscation; he preferred the term “gold hoarding.”
It is important to understand, that under extreme circumstances such as a severe financial crisis, the U.S government can still keep you from “hoarding” gold if it wishes to do so.
However, Bitcoin is extremely difficult to confiscate, with the ability to simply be stored by memorizing a series of 12 words or offline in cold storage, or on personal devices such as mobile phones.
Over a decade ago, Satoshi Nakamoto envisioned a commodity that was as precious as gold but could be transported almost instantly across digital communication channels.
While Bitcoin has many advantages over gold, both undoubtedly offer significant opportunities as safe-haven assets. However, the objective truth is Bitcoin will supersede all other forms of money because at its core it is verified by mathematics, not how much can be extracted from the earth’s crust and not by blind trust in governments to always do what’s right.
Bitcoin > gold:
1. Divisibility (e.g you can own or send a fraction of a Bitcoin.)
2. Verifiability (e.g. gold counterfeits are common)
3. Portability (e.g. Bitcoin can be transported anywhere in minutes)
4. Permissionless (e.g no need for third-parties like gold storage vaults)
5. Scarcity (21 million Bitcoin vs. gold’s unknown total supply)
“But, I thought Bitcoin was for criminals?”
In its 11 years of history and $5 trillion worth of transactions later, Bitcoin has never had a single fraudulent activity on its network.
What most don’t know is many global banks constantly pay fines for fraud and money laundering. But instead of prison time, they can pay out huge fees to the government and stay in business.
In February of this year, the US government fined Wells Fargo $3 billion dollars for fraudulent activities dating as far back as 1998. These activities included the creation of fake agreements, fake accounts, forging signatures, opening new debit cards using client credentials (without permission) and more.
The total value of fines paid by banks since the 2008 Financial Crisis is approximately $243 billion, more than Bitcoin’s entire total value (the value of all the Bitcoin in the world).
If Bitcoin is used by criminals, then so are dollars. Can you see how this argument doesn’t really make sense?
Bank fines for money laundering:
$160m — Wachovia
$237m — Citigroup
$670m — Deutsche Bank
$700m — Bank of Australia
$900m — ING
$1.9b — HSBC
$2.05b — JPMorgan
“But Bitcoin isn’t backed by anything.”
Bitcoin is Backed By De Facto Law:
Fiat currencies are supposedly “backed” by their issuing government under de jure law. Meaning they are enforced under law by a legal system & courts.
The problem with this is governments and banks have free reign to create money out of thin air whenever they wish to do so. Bitcoin on the other hand is backed by de facto laws.
De facto laws, meaning “matter of fact”, are universal laws that simply exist in reality without the need to be enforced by a government or political body, such as the laws of physics or the laws of mathematics. They just exist.
Bitcoin is backed by pre-programmed de facto laws of mathematics, upholding the integrity of its monetary policy instead of relying on governments to issue, distribute, and validate transactions. Meaning its network, nodes, private keys, addresses, algorithms and everything else are backed by the laws of math.
Bitcoin is backed by a global network of computers:
There are essentially two types of powerful computers that back the Bitcoin network.
Full Node: A full-node is a computer that downloads and continuously updates a full copy of the Bitcoin-blockchain transactions.
Mining Node: A mining node is a computer that participates in the verification of transactions on the Bitcoin-blockchain.
Every time a transaction takes place, the Bitcoin network has to verify that it is real. This is done by solving complex mathematical problems. So individuals, or a group of people called Bitcoin ‘miners’, use powerful computers to solve the math problem and come up with an answer called a nonce. Once this problem or nonce (mathematical number) is solved, the transactions can be completed.
The person, or group of people, who work hard to solve the nonce are paid a transaction fee for their work by the Bitcoin sender. They also receive new Bitcoins through a process called mining. When they successfully solve the nonce, they get their reward (Bitcoin).
So Bitcoin is actually backed by mathematics, economics, a global network of computers, governed by its regulations.
“Bitcoin is too volatile.”
Bitcoin’s price is determined by supply and demand. As demand goes up, so does the price and value of Bitcoin. Bitcoin is still young in the grand scheme of things, so its price is still volatile because people are still speculating on its actual price and value.
However, Bitcoin’s volatility is actually decreasing.
The average Bitcoin volatility has declined compared to the first half of the decade from 6.4% (2011–2015) down to 3.7% (2015–2020).
Bitcoin yearly volatility & lows:
2011: 16% ($1)
2012: 11% ($4)
2013: 14% ($65)
2014: 13% ($200)
2015: 8% ($185)
2016: 5% ($365)
2017: 6% ($780)
2018: 7% ($3,200)
2019: 5% ($3,350)
2020: 3% ($??,???)
Every Bitcoin all-time high so far has been followed by an 80%+ crash to a level that is higher than the previous all-time high, making higher lows. As Bitcoin adoption grows, its volatility will naturally fall and Bitcoin will become increasingly more stable.
Bitcoin can’t be seized.
“But I’m not a criminal, the government is not going to seize my money.” You don’t need to break the law for the government to take away everything you have. Under the name of ‘civil asset forfeiture,’ government federal agents can legally seize and withhold your money based merely on the belief that it may have been involved in a crime. This is quite important today when we are hearing more stories about governments seizing large sums of cash from its citizens.
In August of 2019, the Drug Enforcement Agency (DEA) seized a retired man’s life savings — worth just under $83,000 — even though he was neither accused nor suspected of a crime. After he handed the money to his daughter so that she could deposit the cash in a joint account, the DEA seized the money at the Pittsburgh International Airport as she was boarding a flight.
In mid-October, the DEA informed the man and his daughter that the agency would be permanently seizing the cash under its asset forfeiture program. The crime? He was just someone who kept his cash in a box rather than a bank.
Unlike bank accounts and traditional assets that can be frozen or seized, Bitcoin can’t be shut down by governments. Only you can access and control your funds through your cryptographic private key (like a password).
Carrying $83,000 in cash through an airport is risky, but with Bitcoin, you can memorize a mnemonic phrase and still access that $83,000 when you land in a different location, without carrying a single physical dollar.
“Bitcoin is a bubble”
Bitcoin is often compared to the 17th century Tulip Mania bubble, when speculation drove the price of tulip bubbles to crazy levels and the Dotcom Bubble of the late 90s when investors went crazy over internet-startups, inflating the Nasdaq Composite Index up by more than 200% in just one year.
The Tulip Mania lived for only 3 years (1634–1637) and the Dotcom bubble only 8 (1994–2013). Bitcoin has outlived every major financial bubble in history, entering its eleventh year already.
Based on the volume-weighted average price — measuring of the average price at which Bitcoin traded over a certain period of time — Bitcoin’s price today is actually higher than in any other year in history despite being down 50% from its all-time high of $20,000.
For 2020, the average for Bitcoin in dollars is $9,120, higher than in 2017 when then the volume-weighted average was just $6,125. This means most of the money that moved into Bitcoin in previous years would have been still been profitable in dollars today if they still held on to their Bitcoin.
“Bitcoin is a ponzi scheme”
Unlike a Ponzi scheme, Bitcoin doesn’t make any guarantees of profit but many retail investors who bought at the 2017 price peak are quick to label it as such. However, using a dollar-cost-average strategy — buying a $100 of Bitcoin every month for 3 years starting in 2017 — would have turned $3,600 into $7,839 (+117%). The same strategy investing in Gold only returned +21% & the DOW Jones only +15.91%.
“Bitcoin is bad for the environment”
It was discovered in 2018 that the combined power draw of global PS4, Xbox One, and Wii U units running four hours a day (4.9 GW) was higher than the entire Bitcoin mining network (4.7 GW).
Bitcoin financially encourages the development of cheap and clean renewable energy sources because Bitcoin miners — we spoke about them earlier — need the cheapest electricity in order to make a profit.
With hydropower being cheaper and cleaner than coal, the vast majority of miners have set up close to cheap hydro facilities. A report into crypto energy-use by Coinshares, found that 77.6% of global Bitcoin mining is powered by renewable energy.
Yes, Bitcoin mining uses energy and resources, but far less than legacy financial systems. Imagine all the resources wasted by an inefficient banking system? Banks poured $1.9 trillion into fossil fuels between 2016–2018.
In 2014, CoinDesk concluded that the business of printing cash released 3.2 million tonnes of CO2 per year.
By eliminating intermediaries, Bitcoin can eliminate unnecessary waste caused by some aspects of the financial sector, freeing up a large segment of the economy and resources for more productive purposes. Bitcoin’s carbon footprint is extremely moderate considering its the world’s largest computer network and like all new technologies, it will only get better.
Costliness of money (annually):
Gold Mining: $105B
Paper Currency and Minting: $28B
Banking System: $1,870B
Bitcoin Mining: $4.5B
“Bitcoin is just a fad”
Bitcoin’s daily volume is over $1.9 billion.
Bitcoin’s daily transactions are over 300,000.
Bitcoin has passed half a billion transactions in total.
Bitcoin ATMs worldwide have reached over 7,000.
Bitcoin addresses holding 1 or more Bitcoins have reached 784,000.
Bitcoin CME futures contracts top 15,000 BTC open interest, $125 million.
Bitcoin is becoming more available to retail investors through the likes of Robinhood, TD, Etrade, Swiss Exchange, and Etoro.
Remember we spoke about Bitcoin ‘full-nodes’ (computers that download and continuously update copies of the Bitcoin blockchain) and Bitcoin “mining nodes’ (computers that help verify transactions on the Bitcoin blockchain)? Today there are over 10,000 Bitcoin Mining Nodes and 100,000 Full Nodes across almost 100 different countries. Bitcoin isn’t just surviving, it’s thriving.
“Bitcoin is too complex to catch on.”
Millions of people use the internet every day without actually understanding how it works. Understanding the technicals of Bitcoin is not necessary for everyday people to use it and benefit from it. Most of us don’t understand how the internet works, let alone the money in our wallets. Bitcoin is the next logical step in money and its core fundamentals lie in being open source for everyone, no matter how tech-savvy they are.
“It’s too late to buy Bitcoin.”
It’s definitely not too late to buy Bitcoin. Bitcoin is in its infancy still and, while it has grown tremendously, it still has a long way to go.
If we compare Bitcoin’s market capitalization with other assets and industries, we can get a perspective of just how early it is for Bitcoin in the grand scheme of things. A market capitalization is based on the total amount of units in existence multiplied by the market price of each unit.
(Example: the total amount of Bitcoin in existence x the price of one Bitcoin = Bitcoin’s total market capitalization)
Comparing Bitcoin to traditional assets.
For perspective, with a $170 billion market capitalization for Bitcoin, this emerging asset class is still tiny in comparison to gold ($8 trillion USD), stocks ($90 trillion USD), fiat money ($150 trillion USD) and real estate ($220 trillion USD).
Comparing Bitcoin to gold.
The total value of all the world’s gold is over $8 trillion, Bitcoin’s market capitalization is less than 4% of Gold. If Bitcoin were to reach the same total valuation of gold, each Bitcoin — assuming 21 million eventual Bitcoins — would be worth approximately $400,000.
Comparing Bitcoin to global payment networks.
Let’s say in theory that Bitcoin could replace the largest international payment networks, such as Visa, MasterCard, and Paypal. (Keep in mind, Bitcoin is the second largest transaction network after Visa.)
If we combine the stock market capitalization of the above-mentioned payment processors: Visa at $409.791B MasterCard at $341.436B and Paypal at $140.156B, we get to a total market cap of about $891.383 billion dollars.
If Bitcoin were to reach the same total valuation, each Bitcoin — again, assuming 21 million eventual Bitcoins — would be worth approximately $42,000 USD.
Comparing Bitcoin to traditional money.
In this next example, let’s say in theory if Bitcoin could become a global reserve currency, replacing all of the world’s coins and banknotes worth around $7.6 trillion USD, each Bitcoin — again, assuming 21 million eventual Bitcoins — would be worth approximately $362,000 USD.
“The world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be Bitcoin” — Jack Dorsey, CEO of Twitter
Bitcoin still isn’t mainstream.
It’s estimated that only 11% of Americans and 0.32% of the world’s population own some Bitcoin. Bitcoin clearly isn’t mainstream yet, but its scarcity means its price will increase if more people adopt it into their everyday lives.
For example, there is only 0.00225764 Bitcoin for each person on the planet but there will only ever be 21 million Bitcoins. In reality, this number could be more around 15 million since so many have been lost or locked up over the years, especially in the early days when they had little value.
Once you apply the basic economic theory of supply and demand, the price can only go up.
The Bitcoin Halving.
With the third Bitcoin Halving fast approaching, this year could be a great time to learn more about Bitcoin.
Like we discussed earlier, there will only ever be 21 million Bitcoins and after that, no more will be ever be created. Every 4 years a Bitcoin “halving” occurs where ‘mining’ Bitcoin becomes more difficult — just like how it gets harder to find new gold deposits over time.
Remember how Bitcoin ‘miners’ get rewarded for helping the Bitcoin network by solving highly complex mathematical problems? Well, this feature cuts the reward in half, so every time the “halving” occurs, miners get 50% less Bitcoin for verifying transactions and securing the network.
Miners sell the Bitcoins they are rewarded to cover expenses etc. and right now 1,800 Bitcoins are ‘mined’ every day, but the halving will cut this in half to 900. 12.5 Bitcoins are mined and rewarded to ‘miners’ every 10 minutes, this will drop to 6.25 in May of 2020.
Ultimately this means is that after the next ‘halving’ there will be $50 million a week and $2.6 billion a year less selling pressure. In basic terms, fewer Bitcoins can be sold on the market, reducing in half the amount of selling pressure.
Bitcoin’s supply will also drop to an annual rate of around 1.7%. Now, this is also important because it means Bitcoin becomes less inflationary than gold (2–3%) and than central banks (2%), making it the hardest form of money in existence.
From the second halving in 2016 to the top of the 2017 price peak ($19,400) the Bitcoin price jumped ~29X. Prior to the last halving, Bitcoin is up 1,570% today and the next halving occurs in less than 75 days.
Price one year before the 1st halving: $2.55
Price on the 1st halving: $12.44
Price one year after the 1st halving: $1,079
Price one year before the 2nd halving : $268
Price on the 1st halving: $672.
Price one year after 2nd halving halving : $2,525
Price 1 year before the 3rd halvening: $7,100
There is still a lot of opportunity in Bitcoin.
Bitcoin has outperformed every other asset class for its entire 11 year history and its still as efficient today as it was in 2009.
When we do a cross-asset risk-adjusted returns comparison against traditional assets such as bonds and stocks, Bitcoin offers a greater risk to reward tradeoff.
Commonly used in traditional markets, the Sharpe ratio is a tool that helps investors assess the returns of an asset against its risk.
Understanding the Sharpe ratio:
- A negative Sharpe ratio either means the risk-free rate is greater than the asset’s return, or the asset’s return is expected to be negative.
- A ratio under 1.0 is considered poor.
- A ratio higher than 1.0 is considered acceptable.
- A ratio higher than 2.0 is considered very good.
- A ratio of 3.0 or higher is considered exceptional.
Bitcoin’s 4-year Sharpe ratio has been consistently above 2.0, giving a higher risk-adjusted return than any other major asset class. In 2019 it reached above 3.0 and today it sits at 2.77.
Sharpe Ratios as of February 2020:
US Stocks: 2.36
US Real Estate: 1.63
Bitcoin may have higher volatility than other major asset classes but it also generates higher returns.
Note: The Sharpe ration is a supporting tool to evaluate the risk/return of an asset or portfolio. If considered in isolation, it does not provide much information on an asset’s or portfolio performance in terms of price movement and prediction.
Bitcoin clearly belongs in a well diverse, risk-adjusted portfolio. You don’t need to go all in to benefit from it’s returns. As the chart above shows, just a 3% Bitcoin allocation in your portfolio could improve its performance substantially..
The most bullish case for buying Bitcoin is it’s utility increases as its demand increases, this combined with its inelastic supply & programmable scarcity causes roaring rises in price. All this, while providing an alternative to the creeping depreciation of money many nations face globally. It’s one of the few accessible asymmetric bets in a lifetime.
“I’ll just wait for the next Bitcoin.”
There won’t be another Bitcoin. There are most definitely some promising cryptocurrencies in the space, but Bitcoin has survived 11 years of non-stop attacks, media spins, attempted government shutdowns and a blitz of altcoins.
Bitcoin’s “network effect” — its liquidity, the number of people who hold it, its community of developers, its brand awareness — is what all its competitors lack. Essentially, new money, new investors, new institutions, new developers and new adopters will flock to the asset with the greatest “network effect”, that will be Bitcoin.
Despite everything, Bitcoin continues to thrive while remaining the purest and most decentralised cryptocurrency available.
- Bitcoin is hard money: it’s scarce and its supply cannot be tampered with.
- Bitcoin is decentralised: it’s open-source and isn’t controlled by anyone.
- Bitcoin is transparent: all transactions are broadcasted to the network.
- Bitcoin is universal: it can be used by anyone, anywhere in the world.
- Bitcoin is cheaper: it’s cheaper to transact than other payment methods.
- Bitcoin is faster: transactions are broadcasted in 10 minutes.
- Bitcoin is counterfeit resistant: a Bitcoin can’t be copied or duplicated.
- Bitcoin is censorship resistant: anyone can use it without permission.
- Bitcoin is inflation resistant: a definitive maximum supply of 21 million.
- Bitcoin is true ownership: Bitcoin is ownership based, fiat is debt based.
Unlike gold, Bitcoin is:
- Easy to transfer
- Easy to secure
- Easy to verify
- Easy to divide
Unlike fiat money, Bitcoin is:
- Predictable and limited in supply
- Not controlled by a central authority
- Not debt-based
Unlike banks & credit card companies, Bitcoin is:
- Faster to transfer
- Cheaper to transfer
Bitcoin takes the best attributes of both cash and gold, boiling them down to their purest form.
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If people were more informed of on the impact inflation and the creeping depreciation of diseased money has on their everyday lives, they’d maybe think twice. But that’s another topic entirely.
One of the best things about Bitcoin is that it can act as an incentive for people to learn more about monetary history, central banking, inflation & economics.
Unfortunately, the traditional education system fails to cover many of these topics.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
― Henry Ford
So go ahead and share this article with those who don’t yet know or understand Bitcoin, hopefully now you will be better equipped to explain Bitcoin to anyone and everyone.
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Note: This original article contained over 15,000 words and is continuously updated. The language, analogies and technical jargon used are constantly improved in order to make the subject matter accessible for everyone. If you have any suggestions or ideas on how it can be improved, please comment below.
Disclaimer: All facts and figures were correct on original date of publish. This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the securities discussed in this commentary may involve risks and such decisions should not be based solely on the information contained in this document.