Just reading the word Bitcoin may have created anxiety-laced thoughts like: Ponzi scheme, speculative bubble, criminal tool, internet play money. If so, you are not alone. Warren Buffett said Bitcoin is “probably rat poison squared.” Jamie Dimon, JP Morgan's CEO, has called it a “hyped-up fraud.”
It doesn’t take much research to assemble a list of other prominent detractors including Joe Biden, Janet Yellen, Charlie Munger, Christine Legarde and Elizabeth Warren. Given this, it is understandable that many busy folks, even those in the wealth management world, have dismissed Bitcoin as unworthy of deep exploration and of a meaningful place in any financial portfolio.
But ...
What if Bitcoin’s biggest detractors are people that don’t understand it. Or maybe they do understand it but reject it because threatens their power, wealth or world view. What if Bitcoin’s proponents are not speculators looking for a quick return but are advocates of a revolutionary network that brings fairness and transparency to the global monetary system. Are misconceptions twisting the general public’s perception of Bitcoin and causing many to miss out on a massive opportunity?
It is worth noting, despite its known propensity to volatility, that those who have not yet invested in Bitcoin, have missed the best performing asset of the past decade and the best performing asset in Q1 of 2023. Maybe this is not the market behavior of a scam or a speculative bubble, but of an emerging technology and philosophical approach to money that the world is still learning to understand and appreciate.
Purpose
When examining Bitcoin, it is best to start simply and understand its purpose. At the highest level there are two objectives: to create a digital version of cash, and to break the government monopoly on money.
The Bitcoin White Paper, published in October of 2008, begins with the sentence, “A purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” Why is this important? The concern is that the world is rushing toward a purely digital financial system in which there will be no cash-like bearer instrument. If this were to happen, banks, financial institutions or the government will hold the powerful capability to authorize all digital transactions. For many people, especially those living in places that are prone to abusing civil rights, this creates a massive amount of uneasiness. (Already there are regions in China where money is purely digital and access to the monetary system is used as a means of social control.)
In addition to controlling the monetary system, governments have largely held an authoritative position over the money supply. Their track record overseeing it is flat-out horrible. Given enough time, governments around the world have an almost perfect record of either mismanaging or corrupting their money supply to the point of failure.
In ancient times, it typically was via debasing coins of their precious metals, and in modern times it has been through uncontrolled money printing. At present, several countries including Argentina, Lebanon and Turkey have printed themselves to annual inflation rates of 50% to 150% and face the real possibility of a complete collapse of their currency.
It would be unlikely that a government, or fintech company tied to the existing financial system, would create a technology that eliminates their authoritative role over the monetary system and the money supply. After the advent of the Internet, several start-ups in the private sector attempted to create peer-to-peer digital cash but all failed. They faced several obstacles, but at the core, their failure was technological because producing a digital currency that is completely reliable, impervious to corruption and free of any outside assistance is a tremendously difficult endeavor.
Creating a system that allows two parties to interact confidently without a middleman requires solving a riddle called the Byzantine Generals Problem. This riddle was one that the computer science community had for decades thought to be unsolvable, but Satoshi Nakamoto miraculously gave birth to a solution with Bitcoin. Importantly, Satoshi created a system in which new money can only be created through the effort of a computer network, where the rate of issuance of new money is known, and where the terminal point of the money supply is defined and unchangeable. In short, this means in Bitcoin the money supply can never be manipulated and, ultimately, inflation is impossible.
Clarification
There are several misconceptions and fears about Bitcoin, and they largely come from either a lack of understanding or disinformation.
There is a difference between Bitcoin and bitcoin. When spelled with an uppercase B, Bitcoin refers to the entire ecosystem including the network of miners that process transactions, the network of nodes that validate the transactions and maintain the blockchain, and the network protocol itself. When spelled with a lowercase b, bitcoin refers to the unit of account representing the digital currency.
Bitcoin is not very liquid. The Bitcoin network, and most exchanges that interact with it, operate 24 hours per day and 365 days per year. Bitcoin is always open for business. It could easily be argued that it is the most liquid asset in the world because it can be bought, sold or used at any time and from any location in world.
Bitcoin cannot scale to handle large volumes. In 2022, Visa processed just under $6 trillion of transaction value while MasterCard processed $2.5 trillion. In that same year, Bitcoin processed $8.2 trillion of transaction value almost the same as those two combined. Bitcoin is also capable of processing transactions of any size with amazing efficiency—there are several examples of over $1 billion of value being processed for less than $5 of fees with transaction finality occurring in less than 30 minutes.
The Government is going to shut Bitcoin down or regulate it to death. Bitcoin is the most decentralized network ever created. It has no owner, no central governing body, and it is secured by a collective of millions of servers and nodes scattered all over the globe. The computing (hashing) power of the collective network dwarfs the combined computing power of world’s governments such that even a coordinated attack by all of them against Bitcoin would be futile.
As for regulatory concerns, Gary Gensler, chairman of the SEC in the United States, has already declared that Bitcoin does not pass the Howey Test, which the Supreme Court has recognized as a test determining whether transactions qualify as investment contracts, and therefore is not a security. On-ramps and off-ramps from Bitcoin to the establishment financial system are likely to be points of regulation and oversight; however, it is virtually impossible to prevent transactions from occurring if they are within the Bitcoin ecosystem.
Bitcoin is a Ponzi scheme. A Ponzi scheme is defined as a fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.
Bitcoin is a real enterprise that solves real problems and does so with technology that is ingenious and irreplicable. It has worked flawlessly for 14 years and 100% of all transactions it has processed are transparent and verifiable. Certainly, those that acquired bitcoin early have reaped tremendous rewards, but they are no different than early investors in companies like Amazon, Google or Facebook. However, bitcoin holders are generally long-term savers and not investors seeking quick returns in dollars. Many have no intention of ever selling regardless of price. As evidence of this, measurements taken in April of 2023 show that one-half of the entire bitcoin supply had not moved in two years, and one-third had not moved in five years (source: Glassnode.com).
Bitcoin is too volatile. It is certainly true that bitcoin’s price has been a rollercoaster ride when measured against the U.S. dollar. In its 14-year life, bitcoin has had a few price drawdowns in the range of 80%. This is understandably scary, but it is worth repeating that bitcoin has been the best performing asset of the past decade and was also the best performing asset in Q1 2023. The reality is that bitcoin’s price has recovered from each drop to establish to a new floor and a new all-time high.
There are many parallels between Bitcoin and the Internet. The Internet is considered to have launched in 1983. Had it been possible to buy a token in the Internet itself, it is likely that the first 14 years of its pricing history would have looked similar to bitcoin’s. A core group of people with technology backgrounds and vision would have been buying heavily and holding, while other folks would have been trying to trade its volatility or jump in when FOMO started brewing. Most people grappled to understand the Internet’s potential and the power of its core technology for the first few decades and vastly underestimated the breadth and depth of its impact on the world. For instance, the 2008 Noble prize-winning economist (and noted Bitcoin detractor) Paul Krugman once statedin 1998, “by 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's." So, there would have been big winners and losers, but the biggest long-term winners would have been those that bought early and held.
Of course, this all looking at the optics of bitcoin through the lens of the U.S. dollar. There are many areas of the world like Argentina or Lebanon where bitcoin’s performance relative to the local currency is completely different. Many of these folks who don’t have access to U.S. dollars or a banking system they trust so bitcoin is considered stable and a safe haven.
Role
Bitcoin has almost 100% awareness within the mainstream public globally. It has already proven itself as viable by flawlessly executing tens of trillions of dollars of transaction value and going 14 years without a single hack to the blockchain. A cap of 21M bitcoin gives it an absolutely scarce money supply without inflation, and Bitcoin delivers permissionless, around the clock access to the world’s most secure digital network.
At the core, Bitcoin is a network much like the Internet, cell phones and Facebook. When these types of networks grow, they follow exponential curves that appear gradual at first but then suddenly turn into a tidal wave. This is because of Metcalfe’s Law, which states that a network’s power grows by the square of the number of users. Bitcoin has quietly grown to 45 million addresses that hold at least a fraction of a bitcoin, and it sits on the doorway of growth that may well rival the Internet in the late 1990s.
It is understandable that in the past financial advisors have largely discouraged their clients from holding some of their wealth in bitcoin or Bitcoin related companies. It is also likely that in the past many clients did not push back too hard, or they simply went and acquired small amounts of these assets themselves. The general public is now becoming much more educated about Bitcoin and its merits. There is a distinct possibility that the next wave of Bitcoin adoption will hit in the very near future and, if so, expect it to be an order of magnitude higher than the previous one. As a result, it would be prudent for each financial advisor to dig deeply and acquire an in-depth knowledge of Bitcoin because they may soon be facing a horde of passionate and educated investors demanding advice and participation.
One last thing to consider is the following. The Internet ate, and continues to eat, entire companies and industries, and it created unimaginable beasts like Amazon, Facebook and Google. Those investors and companies that bet completely on the old system and ignored the Internet lost everything. Bitcoin is an alternative monetary system competing with the establishment one. Whether it ultimately eats the entire existing establishment monetary system or co-exists with it remains to be seen, but is clearly already having a major impact. The bottom-line and main consideration is that just like the Internet, a choice to not participate becomes a de facto short position on Bitcoin, and as every financial advisor knows, a short position is one that carries a tremendous amount of risk.
Bob Burnett is CEO of Barefoot Mining.