When I first heard of Bitcoin, I had no interest. Even the name “cryptocurrency” sounded scammy. And I guess I wasn’t alone, as one bitcoin in 2010 was worth as little as $0.0008! In other words, $1 back in 2010 could have bought you 1250 bitcoin, which is worth over $11 million today. Welp, I missed that one.
In the last 10 years, cryptocurrency has been “validated.” By that, I mean it’s now a burgeoning part of countries’ and large corporations’ plans. Facebook is planning to launch Libra this year (a cryptocurrency supposed to act like a digital dollar). China is planning their own cryptocurrency. And there are dozens of other “coins” out there.
So at the very least, Bitcoin started a legitimate trend. And the most interesting thing about it, is that it’s a limited resource. Only about 21 million Bitcoin will ever exist. That’s how it was designed. I won’t go into the details of how that works. The point is how it contrasts with the US dollar.
One bitcoin, as of writing, is worth $8,896. The reason I bought Bitcoin is because I expect that number to increase. It almost has to, mathematically speaking.
Why? The USD is inflationary and Bitcoin is not.
The Inflation Game
Because of the impact of COVID-19, a proposal growing in popularity in the House of Representatives would give $2,000 a month to every person 16+ that makes under $130k.
First of all, what 16 year old needs $2k a month? 18 would make far more sense. I digress.
How much money would 2k a month for almost every person cost the USA?
Census.gov says 77.6% of people are over 18. So adding 16 and 17 year olds to that and subtracting people who make 130k should leave us with roughly 80% of the population (328 million people).
Cost: $524 billion per month, or 6 TRILLION per year if it takes a year to get a vaccine.
Add that to the several trillion dollars the Fed and Gov casually tossed into the economy earlier this year (including buying JUNK bonds *vomits*).
That’s trillions of *NEW* US dollars that just entered the monetary supply. Reminder: there are only 21 million bitcoin. Thus, it stands to say that every bitcoin is going to be worth a larger number of dollars in the future.
Bitcoin experiences slight inflation from “mining.” But that activity decreases over time. We are about to enter a bitcoin halving in a few days, where less bitcoin can be created by miners. Thus, the new amount of bitcoin being introduced to the supply decreases over time.
Meanwhile, an inflationary currency like the USD will continue to, well, inflate. That’s the simple reason why Bitcoin should increase in value.
Assumptions Investors Have About Bitcoin
For Bitcoin to increase in value, there has to be demand for it. If everyone in the world suddenly decides that Bitcoin is useless, then it is. That’s unlikely as it has been around for over a decade and gave birth to the whole cryptocurrency idea. But it may be possible if a superior technology replaces it. I forgot my crystal ball in my other pants, but my guess is that it stays around for quite a while. So I assume that Bitcoin will remain as “digital gold” for some time.
The other reason I think Bitcoin will stay is because it can be used as currency. You can buy things with Bitcoin. The number of things you can buy with it are limited, but as it grows in popularity, that’s likely to increase.
The reason Bitcoin was created was exactly because of what we are experiencing right now in the world. Bitcoin is decentralized, meaning that my transaction with you is not dictated and controlled by anyone else.
You might argue that most world currencies behave that way, but look at what’s happening. My country just devalued all of the money I’ve worked hard to earn, and I can’t do anything about it. The Federal Reserve controls the money supply, and inflation. So if a third party can control the value of my dollar, then it’s not exactly decentralized.
Threats to Bitcoin
Governments don’t typically like Bitcoin because it can compete with their currencies. It doesn’t exactly do that yet, but events like the one we’re in could be the catalyst to bring that to fruition. Regulatory action against Bitcoin, or rather, people who have and use Bitcoin, is a risk.
Bitcoin, by its nature, is not easy to control. It is, in fact, used in many criminal operations for that reason and because transactions have greater privacy. So whether or not Bitcoin is at risk of Government intervention is hard to say. I can say that it would not be good for the value of Bitcoin if a government tried to stop it or control it.
Another possible threat is a 51% attack, in which one party “takes over the network.” I won’t get into the details, but some say it’s possible and there are plenty of articles about it if you’re interested.
Final Thoughts
Some call Bitcoin “digital gold.” The price of gold has risen significantly with this global recession. So has Bitcoin. The reason I haven’t bought gold is because I just don’t see it as practical in case things really turn south. If I have a gold bar and the USD is toast, is it really going to buy me much? Perhaps, but I don’t want to have to shave off precise amounts off of my gold bar to buy a few bananas.
Bitcoin is made for the modern, tech-heavy world. It could serve as a store of value and currency in a pinch. (It’s not ideal as currency because the value fluctuates so much, essentially changing the price of everything on an hourly basis.)
The funniest thing about Bitcoin has to be the predictions. They range from $0 to $10 million per Bitcoin or more. Meanwhile, Bitcoin has in reality traded at roughly 5,000-10,000 USD over the last couple of years.
I still hold and use mostly US dollars. I’m not “all in” on Bitcoin. I’m just holding a bit as a hedge against possible significant inflation, and because I expect it to appreciate, especially after the world’s monetary supply has just been pumped up.
It’s up to you if you think Bitcoin is a good idea or not, a promising investment or a Foolcoin. Don’t take any of this as advice. I’m just sharing what I’m doing and why in case you find it interesting.
Be well. Oh, and come back to this post in 2030 and I’ll look like a genius or an idiot.