Why Bitcoin

Although this was originally written in September 2019, I have continually edited w/ last update as of December 2021.

You have heard about it... Bitcoin. What is the big deal?

Why does it have value? What might that value be? And why should anyone buy some and include it in their financial portfolio? Various parts of these arguments have been made in many places all over the web (some of the best material I know of is linked here), and I am hoping to synthesize both an introduction to Bitcoin along with a bullish argument for investing. The tone of this is meant for a layperson who has not already spent much time in the space, although I believe there is something in here for everyone - especially when you include the wealth of linked information.


I'm not an engineer or computer programmer. As such, I'm not an expert on the technical side of Bitcoin, nor am I going to delve deeply in to the technical aspects of how Bitcoin works. The good news is that I do not believe a deep technical understanding is essential to discuss Bitcoin with you today. I believe that investing in Bitcoin is more an economic and financial exercise than a technical one. I believe that you should generally invest in things somewhat proportional to the amount of understanding you have of what you're investing in. Thus because I argue investing in Bitcoin is a good idea, let's get started understanding a bit about BTC & the value proposition first.

Despite the fact that I am bullish on Bitcoin, this article isn't financial advice. Firstly, nobody including myself knows what will happen, especially with something as complex as Bitcoin and the world economic environment. (Anyone who tells you they know what will happen is probably also trying to get some of your money.) Secondly, everyone's financial situation and risk appetite are different, and what's right for one person or myself might not be right for others.

I'm just a guy with an opinion.


First things first: What is Bitcoin?

For those who don't really know what Bitcoin is, there is a lot of great material on the web that can teach you more or less how it works. I'm going to provide a rudimentary understanding of how Bitcoin works here, and I recommend further study if this article makes you interested. Read this link for a nice short piece on Why Bitcoin Matters. Bitcoin is essentially just a decentralized ledger. Computers all around the world come to consensus on which wallets have how many Bitcoins. You transact numbers on that ledger (bitcoins and satoshis, the smallest divisible unit of a bitcoin) with other people, without having to trust a 3rd party (e.g., bank, PayPal, credit card, etc...) to guarantee the transaction. Very simply, this is Bitcoin. Bitcoin is something permanent and growing, in an age of impermanence. Bitcoin is the cathedral of the digital age. The foundation has been laid, here, in the years since its inception. It is kept on nodes all around the world and grows with every block that is added. And this digitally permanent ledger, Bitcoin, becomes very powerful when people decide Bitcoin has value and treat it as a medium of exchange, unit of account, store of value, asset, and money.


OK but: Why is Bitcoin valuable?

Simply, because now we can do all of this [medium of exchange, unit of account, store of value, asset, money] on a secure system with a defined inflation rate that is not controlled by any entity. Bitcoin is valuable because there is no singular point of failure for counterparty risk. With Bitcoin you don't need to pay for that 3rd party to exist (structural business costs, bank wire fees, credit card fees and interest, etc...) which means you don't have the potential for control or censorship from that 3rd party. Bitcoin is not controlled by anyone and is therefore censorship resistant. Bitcoin itself is very secure. All Bitcoin-related theft is due to carelessness on the part of owners, or incompetency or dishonesty from the companies they used (such as exchanges). Bitcoin transactions are not reversible. If you make a mistake, there isn't a way to undo it. That finality can make using Bitcoin intimidating, especially to new users. But that finality is also a feature which ensures increased security for transactions. Transactions can not be reversed, so you know when bitcoin is transferred it will not be returned without another transaction.


This is a cool chart which shows a potential growth outline of Bitcoin from inception to full blown Global Money.

So, Bitcoin is intended to be an alternative form of money, decentralized and digital money. But Bitcoin isn't there yet. After all, many places don't yet accept Bitcoin. The majority of people don't have or use it. It isn't the easiest to invest in today, and it has, at times, been very volatile for a Store of Value. But it's on a path to getting there. The primary thing holding bitcoin back right now is simply a lack of legal clarity everywhere, and universal acceptance. Think of Bitcoin like a network. It needs adoption. It needs to keep growing.


Is Bitcoin too slow?? The Tortoise & The Hare

Many argue though, that Bitcoin's largest fault is that it can't currently process enough transactions, and not nearly as many transactions as, say, VISA. (This was even a central debate within Bitcoin some years ago and led to the Bitcoin Cash hard fork, which is interesting but beyond the scope of this article) Given that Bitcoin cannot function as a peer-to-peer cash that handles a huge volume of transactions, today, how can Bitcoin be a money then?

I would counter that Bitcoin's most valuable property is not today nor ever going to be its ability to be used as another form of money to buy things every day, even if one day it can be used by people around the world for that. USD, EUROS, and other regular fiat currencies already work very well today when combined with credit cards and other financial instruments in facilitating ordinary daily purchases. So, I can fully understand why people might ask, "Brian, why do I need another internet money to buy things?" You don't. You don't need the amazing and costly security of a decentralized blockchain to guarantee small transactions, such as purchasing coffee for $5 dollars. You just want something like a credit card that works rapidly and conveniently. People living in rich countries with successful currencies don't have a need for this (although people living in countries with bad currencies, or the unbanked - they are another story. There are likely over a billion people worldwide who don't have bank accounts but have cell phones. And I do believe that Bitcoin might be a better option for many of them - even without VISA type transaction speed - and especially if things like the Lightning network end up functioning as intended as layers on top of the base layer. This aside is beyond the scope of this article.).

So, while Bitcoin doesn't have the transactional capacity today to be used worldwide as a day-to-day currency, it does have the capacity to replace international remittance. So forget VISA, and think bank wires and Western Union. Bitcoin is already cheaper and faster than those.

But wait Brian, Bitcoin still can't process enough transactions to compete with Visa or some other cryptos designed for higher Transactions Per Second. Yes, but by maintaining smaller blocksize bitcoin has guaranteed a much higher level of decentralization. An analogy: Bitcoin is the tortoise. BCash & others are the hare. Slow and steady wins THIS race. Or in this case, I would posit that Bitcoin already won.

Moreover, that way of viewing Bitcoin - as merely another form of digital cash where the highest level of function is simply processing as many TPS as possible - pigeon-holes Bitcoin as something much less than it actually is. I don't even believe "digital cash" is the #1 value proposition anymore (if it ever was!). This is understatement to the point of trivializing, in my opinion. It'd be like picking up an iPhone X today and being really impressed that it makes phone calls anywhere. Yes sure, it does do that - but so did cell phones 15 years ago. The iPhone X does so much more. A camera, internet, text, chats, applications, bluetooth, wifi, etc... And so does Bitcoin.


Bitcoin doesn't derive most of its value from simply being an alternative currency. And I am going to ask you to imagine something that is not precisely like anything else that has come before it. Bitcoin does not neatly fit in to an explanatory compartment and category that has already existed. It is something new, something that blends many different ideas in to one thing. So open your mind, take the red pill, and follow me to see how deep this rabbit hole really goes.

Through the Looking Glass: Transparent Supply

If Bitcoin's most valuable property isn't its transaction speed, what is it? Bitcoin's most valuable property in my estimation is its programmed scarcity. Bitcoin was created with a scheduled inflationary policy. Every 10 minutes when the transactions are processed on the blockchain, bitcoins are "mined" (created) and given to the miners that process these transactions. The number that is created in these blocks is cut in half every 4 years. This process means that every 4 years the inflationary pressure in Bitcoin is cut in half, and that eventually - mathematically - there will be essentially no new bitcoins mined. Right now, (12/2021), there are approximately 18.9 million bitcoins in existence. The final total will be 21 million. Therefore, in Bitcoin's entire future lifespan, there will only be an inflation of 2.1 million more coins, approximately 10% the amount of the current supply. EVER. That seems especially valuable when compared to your local fiat currency controlled by your nation's central bank, whose monetary policy is at the whims of the political climate, special interests, politicians, bankers, and everyone who isn't you nor has your best interests in mind. Now there is a lot of debate about the exact effects of monetary inflation and money supply, and it's an interesting topic to research. I believe that the massive increase in money supply (e.g. Quantitative Easing) that banks are employing, even if it currently hasn't caused demonstrably massive inflation, will eventually cause the continual devaluation of those currencies, and inflation. Here is a chart of the global money supply over the last 30 years, followed by a chart of bitcoin supply:

The first chart shows an exponential growth in Fiat money supply in the world where the rate of supply has been increasing. That might continue or it might not. The Bitcoin supply rate is decreasing, and that WILL continue. It's programmed scarcity. Which of those two moneys would you rather hold, based on the supply curves? This is not a trick question!

More Is Better

Today, monetary policy seems to be focused on keeping interest rates low, deficit spending, and constantly printing more money. This has caused massive growth in Real Estate and equities (SPX, stock markets) in the last 10 years as so much loose money and credit looks for a place to go. There is basically no incentive to save money in a bank, bond yields everywhere are going negative, and US Dollar purchasing power has gone down. Sure, for goods where the technology is continually improved - the Purchasing Power has gotten a lot better (e.g., TVs get better and cheaper). But when you factor out technological improvement, I believe you see quite a lot of inflation, inflation on assets with some scarcity or cruciality of their own: Real Estate, Equities, Health Care, Insulin, Gold, Ivy League Educations, etc... And this was before COVID-19 hit. The COVID-19 response from governments has been to quadruple down on money creation, stimulus, and deficit spending. Stimulus spending has already dwarfed that during the 2008 financial crisis. Estimates vary but a reasonable estimate from McKinsey, in June 2020, is over 10 trillion USD worldwide.

As of March 2021, COVID costs totaled $5.2 trillion in the USA alone. article To put that in perspective, total spending for World War II was $4.7 trillion - in today's dollars.

I couldn't find an article which gives a total amount for worldwide spending, but suffice it to say that it's extremely large. Here you can see the fiscal stimulus packages in G20 countries compared as a share of GDP. article

But what about Gold?

In the current inflationary macro environment, with exponentially increasing money supply, I believe assets that store value and have scarcity will have innate value. Another asset that you might be thinking of at this point is Gold. It is a scarce asset that people perceive to have value. A Saver's asset. Gold has been considered by people around the world to have a lot of value and be a Store of Value for thousands of years. Bitcoin does not have that kind of historical track record, obviously, at 12 years young. Bitcoin also doesn't have practical use, as gold does, as a mineral for various industrial uses and for jewelry. On the other hand, Gold is not a practical form of money, as it is difficult to send, transport, divide... or basically use. Bitcoin, on the other hand, does all of those things very well. Also, the more valuable Gold gets, the more incentive there is to mine it. And more mining means more Gold. So even though Gold is scarce, it is not as scarce as Bitcoin. It is impossible for Gold to be as scarce as Bitcoin. Thus, Gold is NOT theoretically as good of a Store of Value as Bitcoin NOR as useful as a monetary asset. I believe therefore, in the case that Bitcoin becomes increasingly adopted as a Store of Value and digital monetary asset, it will displace Gold in some-to-all regard as the dominant Store of Value asset.


Self-fulfilling prophecy conundrum

In a very real sense, Bitcoin requires people to discover and accept its value as a programmable scarce asset, like gold, but with a whole lot more utility as a money. I can argue this. But money and assets to a large extent are what people believe they are. That's a key part of this story. The self-fulfilling prophecy.

So even though Bitcoin has a perfectly programmable inflation supply, there are theoretically an infinite number of other crypto coins that can be produced that have similar properties.

What makes Bitcoin special?

Why not buy another crypto coin that's much smaller?

Why buy any cryptocurrency at all??

Within crypto, the already ancient 12-year history, largest amount of decentralization, lack of central point of control and failure, security already establish for a network worth over $1 trillion USD, etc... are the key features and moat Bitcoin possesses. But beyond that, simply the shared belief. You can make this same argument with Gold versus other rocks/metals/substances. Or art. Or pretty much anything. Humanity collectively decides that one thing is what it is and that shared belief becomes our reality. It doesn't have to stay that way forever, but knowing how way leads on to way, quite often we never go back.

Bitcoin has a number of advantages that create the largest moat in crypto. Additionally it has a clear and large first mover advantage.

Bitcoin is ultimately a network. It needs more people to realize its great properties, its use cases, and buy it. And if that continues to happen, then eventually Bitcoin will become the Store of Value, Unit of Account, and Digital Currency that right now its believers and investors think it might. In that sense, Bitcoin should exhibit some properties as a network. And so far, most people in the world do not own Bitcoin.


It is still very early in an adoption cycle. While a significant number of people have used or own Bitcoin, the vast majority of people in the world, and money available for investment, are still on the sidelines. So while Bitcoin acceptance has been growing, there is still has much room to grow between now and being a fully accepted monetary asset world-wide; fulfillment of the self-fulfilling prophecy.

Nobody Backs Silly Worthless Magic Internet Money

But, some might question, who is backing Bitcoin? Why does it have any value? It's just numbers on "the ledger" in a computer. They are right, and they are wrong. There is no central authority backing Bitcoin - but ultimately all authorities derive their power and consent from the people inside of the system. So while the US Government backs the dollar, it is ultimately our mutual consent and support of our monetary system, and in the value of the dollar, that is fundamental to its success. As with other forms of money, you have to believe Bitcoin has value, in order for it to ultimately have that value. That value comes from its utility and acceptance by others. We accept the dollar in America because our government prints it, backs it, and collects it for taxes - and other people and businesses accept our dollars when we want to buy things - despite the fact that it's merely a piece of paper or a number in a bank account. Bitcoin isn't backed by a government, that much is true. But, while some see this as a bug, I will turn that around and argue it is actually a feature! Instead of a central authority, which can fail, it simply has a ledger of transactions and keeps a Unit of Account backed by Proof of Work done by all the miners in order to decentralize this authority and disperse it to everywhere. So, while "nobody" is now responsible - Bitcoin is potentially the most robust form of money we have ever created because there is no singular point of failure.

Ultimately, all money is worth something only because someone else will accept it in a transaction. Money by itself is generally worthless, and just a value holder everyone accepts in order to efficiently transact in a society. This allowed us to move beyond basic bartering and trading, to specialize labor, and so on. There is nothing inherently more valuable about a currency because it's backed by a government. It might provide a greater perceived security in that currency, because of that central authority. I would submit, however, that many, many, governments throughout history have destroyed the worth of their currencies, and you've seen all kinds of hyper-inflationary events, like the Weimar Republic, Venezuela today, and others. As of October 21, 2020, Bitcoin had already made an all-time high vs 7 currencies affecting about 500 million people worldwide, despite being only about $13,000 USD (or just under 70% of the USD all-time high of around $20,000). Today, 12/31/2021, Bitcoin stands at about $50,000 USD and is at or near an all-time high against every currency in the world, including the USD. Additionally, states can and do fail, which tends to be bad for their currencies as well. So, while it seems like you want your money to be backed by a country - I would turn that around and say that you should prefer your money to be backed by no one central authority and instead be decentralized. And the longer the time frame you zoom out, the more this becomes obvious. As great as Rome was, it eventually fell. Historically all empires and nations have fallen and been dissolved, consumed, or conquered.

Bitcoin is the truth in this regard. It's a self-fulfilling prophecy of the inevitable march of monetary soundness.

Some have seen it. One day more will see it. Then all will see it.

Humanity has NEVER had a money like this. A money with no singular point of failure. A money where there is a defined future inflation which trends to zero. I repeat: there will only ever be 10% more Bitcoins produced than the current supply contains.

Bitcoin is simply the best way to save. Because of the scarcity, Bitcoin rewards savers more than any other asset ever has.


Bitcoin: the Fort Knox of asset security

And there is more. I posit that Bitcoin is also the most secure asset. Not only can your bitcoin not be hacked, it can't be seized from you. Someone could put a gun to your head and you still wouldn't have to give them your bitcoin if you didn't want to. Literally everything you own can be taken by force, even if you were willing to do anything - even die - in order to try and stop that. Your property can be seized by the government. (Maybe you trust your government.. but imagine all the people worldwide who do not feel this way.)

Your possessions can be seized, or if you are robbed, they can be forcefully taken with or without your consent. Bitcoin isn't something you physically own. Bitcoin cannot be taken without your consent. (This isn't to suggest that if someone puts a gun to your head, or a government threatens jail time, you wouldn't give up your bitcoin. But you would have the choice not to; your consent is required.) You can access it, but your bitcoin is essentially just an agreed upon number that exists on the Bitcoin blockchain on computers around the world. You alone control access to that, and with relatively simple security methods, you can easily ensure that nobody can access your Bitcoin without your consent. There is literally no asset in the world today that is as secure as Bitcoin, if you choose to privately store and maintain your Bitcoin. And that is an important distinction I am making here - CHOOSE. Bitcoin will have the level of security that its owner chooses. There are easier and less safe methods to store your Bitcoin, in other solutions. You will lose some of the absolute security I've just discussed (by trusting a 3rd party) but gain in ease-of-use and defend against personal carelessness.


Will the Use Cases EVER run out? (I'm getting tired Brian!)

Bitcoin is easy to store. There are currently compact hardware wallets that are very secure - such as a Trezor - which you can carry with you and access your Bitcoin via a USB port (or not carry with you and therefore not be able to access). Bitcoin is easy to transport. You can carry it with you whenever and wherever you want, traveling anywhere in the world with the ability to access and send/receive as much of your Bitcoin as you wish. What other asset is that easy and practical to use?

Bitcoin is divisible to the satoshi. There are 100 million satoshis in a Bitcoin, so Bitcoin is divisible to any amount you would conceivably need to send, further making it easy to transact. It can be sent relatively quickly (it is not currently as fast as instant transactions SEEM to be, such as Credit Cards (these "instant" transactions actually take much longer to finally settle but you experience them instantly), but much faster than Bank Wires). It has relatively low fees, often cents, that are not based on the amount sent. Thus, Bitcoin is perfect for sending and receiving large amounts.

Bitcoin is the perfect asset for storing liquid net worth. I believe that one of Bitcoin's primary use cases WILL be the best way to store net worth that you want to keep liquid. Rather than holding a fiat currency which will devalue over time because of inflation, someone will instead choose to keep their liquid net worth in Bitcoin, which can then be quickly exchanged to a fiat currency of choice, if not used directly.

There are a growing number of options to buy, sell, and store Bitcoin. Further, it is becoming easier to invest in or speculate on Bitcoin, without having to own it directly. There is an over-the-counter stock, Grayscale Bitcoin Trust (GBTC), which functions similarly to an ETF. With a variety of investment approaches, Bitcoin offers scalable levels of security and of ownership. Thus, Bitcoin can be different things to different people.


Going Full Network

All things considered - one is logically forced to admit that Bitcoin has amazing properties that just might make it the greatest monetary instrument that man has created to this day. The only thing holding it back at this point is simply mass acceptance worldwide. To achieve its potential, an asset needs to be widely accepted - otherwise its value is limited. Despite not being universally accepted, slowly more and more people are owning Bitcoin, and this growth needs to continue for Bitcoin to ultimately succeed. The world, especially zoomed in, isn't necessarily logical and rational, and individuals often aren’t. But I would bet that the emergent decisions we make economically will tend to be logical and rational. Logically and rationally, as I've mentioned a few times already, Bitcoin seems to be a network. A monetary network. And interestingly, Bitcoin's growth in price as an asset over time has so far conformed to a network growth model, which makes intuitive sense to me.


In the chart above, you can see the similarity between Bitcoin and what a network growth model would predict along a logarithmic growth curve. The upper and lower bounds in red and green resemble a wide log function. The vertical blue lines represent the 3 previous halvings & the future one in 2024. The halvings have created a cyclical 4 year bull/bear cycle thus far because mining supply has been the dominant supply source. It's unclear going forward if that will continue to be the case as mining supply is starting to be outpaced by a number of other factors.

Also, this network concept has many interesting parallels as an investment. Tech companies such as Google, Facebook, Amazon, and Apple - are all essentially networks. Google w/ search, Facebook w/ family & friends, Amazon w/ digital shopping, Apple w/ dematerializing things in to the phone. Once these networks grew to a size of $100B, and had a majority market share - they continued to progress from there, increasing 10x or more as they went on to peerlessly dominate their respective fields.

Bitcoin is a network that pools monetary energy. That is why it is growing as a network growth model would predict. It currently has a market cap of over $1 TRILLION USD. Now it is simply a matter of growing to dominate this field. But the field I am discussing isn't clear, because what is Bitcoin? You can't say it is JUST digital gold - going for the Store of Value asset domain, as it can be used for a bunch of other purposes. So now, we need to try to estimate what exactly Bitcoin can grow to encompass.

Smart People's BTC Valuations

Now that hopefully you agree that Bitcoin has value, the next step is trying to wrap your head around how to try to estimate what Bitcoin's value could be. Pfeffer attempts this in his article on Cryptoassets, a seminal paper discussing Bitcoin's value. Despite being 3 years old, his paper is important, and timeless. I would highly recommend it. He postulates the following sources of value: 1) Replacing Gold Bullion 2) Becoming an International Reserve Currency 3) Unit of Account for international trade 4) International payments & Domestic payments in countries w/out stable sovereign currencies. The total speculative range he gives for this if Bitcoin were to become the dominant monetary store of value cryptoasset and realize some or all of those use cases is 4.7 - 14.6 Trillion USD, which gives Bitcoin - fully diluted (all 21M) a range of $260k - $800k per Bitcoin.


I would add another potential use case: Bitcoin taking a share out of the offshore private banking market; a market which has been estimated as worth over $21 trillion USD. Therefore, an addendum to that would be 7 - 25 Trillion USD (10%-50% of offshore private banking), which gives fully diluted Bitcoin a range of $350k - $1.2million per Bitcoin.


PlanB models scarcity by quantifying it as a stock-to-flow ratio, and gives this mathematical prediction for Bitcoin's value based on this in his work HERE. It's very interesting. To take a simple snippet, his estimation for Bitcoin's worth after the May 2020 halving event is $55,000USD. Every 4 years, Bitcoin increases in scarcity with each successive halving, and thus increases in value. While I don't necessarily agree w/ the very long-term implications of PlanB's price estimation model and think there is likely divergence years down the line, I think it is a very interesting look and take on scarcity and interesting for price implications for this current cycle.

People ask where the money comes from to get Bitcoin from its current price levels to the types of valuations that are being discussed here. "People ask me where all the money needed for $1trn bitcoin market value would come from? My answer: silver, gold, countries with negative interest rates (Europe, Japan, US soon), countries with predatory governments (Venezuela, China, Iran, Turkey etc), billionaires and millionaires hedging against quantitative easing (QE), and institutional investors discovering the best performing asset of last 10 yrs." Imagine someone wealthy living in a country with a predatory government wanting the ultimate get-away quick plan to escape with some of their wealth should they need to. Bitcoin is literally perfect for them. 10 million on a Trezor, ready to go in your pocket, instantly, anywhere.


So, Bitcoin is a swiss army knife of utility that could displace value in a number of important areas: gold/SoV, international remittance, international unit of account, offshore banking, treasury reserves for corporations and nations. It's unclear if Bitocin will displace value in each of these areas, and if so, how much. But there is the potential for Bitcoin to be worth over $1 Million USD in 2021 dollars... which could be significantly more 2030 or 2040 dollars.


Who else is buying Bitcoin and where this might go

Just recently a NASDAQ listed company, Microstrategy MSTR, purchased over 38,000 bitcoins for over $400 Million US Dollars, deciding to invest in Bitcoin as its Primary Treasury Reserve Asset. **Article**

Michael Saylor, the CEO of MSTR, has a great 2-part interview series here where he explains his thinking and process of investing in Bitcoin. PART 1 // PART 2

Square (SQ) invested $50 Million US Dollars for the same reason. PayPal also allows its 350 million users to buy, hold, and spend Bitcoin. Tesla has followed up, and now there are a number of companies hold Bitcoin.

This link **HERE** lists all the Bitcoin holdings by public companies.

For now though, Bitcoin is too volatile for many companies to want to hold it in lieu of cash on the balance sheet. But the larger Bitcoin gets, the more stable it gets, and the more attractive it becomes for companies to hold on their balance sheet.

So not only are private investors deciding to buy Bitcoin, but now legitimate companies are joining the fray.

Today (Dec 30, 2021), Bitcoin is the 14th largest currency in the world as calculated by Marketcap size (below the Brazillian Real & Swiss Franc, and above the Russian Ruble), *here*


Just comparing Bitcoin's price to the M1 money supply, we can see that BTCUSD hasn't returned to the all-time high from 12/2017 yet. In other words, given the inflation of the money supply recently, Bitcoin's price in USD has merely kept pace with monetary expansion/inflation. But it hasn't moved to price discovery territory given monetary expansion. Look at the chart below.

I think that says that there is still room to go despite the already extraordinary price-increase in Bitcoin in the last year. BTCUSD simply matching the previous ATH of 5.66 from a few years ago, would imply a price of approximately $116k USD today. I believe that makes this a very good "at least" target for the current bull-run that has taken us from 10k to the current levels of $50k + or - 15k.


Now imagine one day in the future, when Bitcoin is multiples larger in size, say 3x the current price, placing it 7th on the Fiat Market Cap, behind the KRW (Korean Won) and ahead of the INR (Indian Rupee). In this world, Bitcoin would be legally accepted worldwide. It would have been established as secure for even longer, and have even greater trust in its security that relies on no central authority or individual. There would be BTC ETPs (exchange traded products) everywhere. It will have legal regulations and rules. Many individuals, institutions, and companies will be owners. Next up, will be countries. This wall has already been broken by El Salvador, which has become the first country to publicly announce Bitcoin purchases and holdings as well as officially make Bitcoin a legal currency. Bitcoin will make the move from being only privately owned to being an international reserve currency, as countries want exposure to an asset not controlled by any one country and that country's financial policy. From a Game Theory perspective, I believe this is inevitable. It is a matter of when, not if. And Bitcoin is likely the answer. New customers have stepped up with obscene purchasing power, and the hardest, scarcest asset ever continues to rise. The farther Bitcoin goes, the more likely it is to keep rising.

Bitcoin: Momentum ---> Lindy Effect


Can anything slow down the train?

Previously I initially posited that the biggest hurdles would be legal clarity in the USA. The USA has been legalizing crypto and especially Bitcoin in the 2.5 years since I wrote this article. The SEC has even allowed a futures-based BTC ETF on the market. And while this isn't as good for investors as a spot-based ETF, it does mean the USA is promoting and legalizing Bitcoin and not going after it. Next I posited the mining concentration in China, but after the summer of 2021, this is no longer an issue. China banned Bitcoin mining, and while this had the negative effect immediately of exacerbating the downturn significantly, it had the positive long term effect of stopping Bitcoin mining concentration. Mining has now moved to the rest of the world and not only ameliorated this as a potential issue, but because Bitcoin overcame this issue relatively smoothly, it also helped show how robust the Bitcoin network really is.

Today, I really don't see anything that can stop the Bitcoin train. Bitcoin is by far the most decentralized cryptocurrency. It literally can't be shut down. There is no central point of control and nodes can be run on personal computers anywhere in the world. Mining can move if necessary. Other cryptocurrencies have leaders, foundations, and in order to process their much higher Transactions Per Second, they require centralized cloud computing centers to run their nodes and process their entire blockchain. Bitcoin is by far the most anti-fragile, decentralized cryptocurrency which makes it uniquely suited for exactly the use cases I have outlined in this article. And at this point, I don't see how it fails other than some technical issue that although I am not qualified to deliberate about, I am knowledgeable enough to know experts don't think likely.

(The old section that is pretty outdated maintained in <<<>>> below for posterity)

<<<The biggest hurdle currently, in my view, is legal clarity in the USA. I believe many large banks are taking a conservative stance on Bitcoin due to the lack of full legal standing as an asset, commodity, or currency, and are waiting for further clarification by the government. Part of this process involves increased regulation on trading, on clarity for Bitcoin ETFs being set up, etc... ETFs would be a huge step in the right direction for receiving the US Government's blessing. All eyes for this are on the SEC, and especially its Chairman. The current chairman, Jay Clayton, hasn't been friendly to Bitcoin ETF proposals. But, he will be replaced in 2021 by President Biden. And while some might fear regulation - even have a philosophical aversion to it - it is ultimately regulation and government approval that will allow serious institutional money to flow in to Bitcoin.

*** Now in Feb 2021, with companies like Tesla buying $1.5 BILLION in BTC, and many HNW individuals and funds buying BTC, there is further validation. Anyone with S&P exposure now indirectly has BTC exposure. This is like armor that will protect BTC from destructive government regulation and bans. If I had to guess now, I'd guess that regulation is no longer the biggest threat, and instead mining being clustered in China due to cheap hydro power is the chief worry at present. ***>>>


ETF approval: BTC's elusive unicorn

When trading firms allow accountholders to buy and sell Bitcoin - whether it is through approved ETFs, or because the institutions work out storage solutions privately and then process the transactions (with fees) - it will open up easy access to all the money private investors hold in their brokerage accounts, especially tax sheltered money. To get an idea of how bullish this might be, take a look at gold when ETFs opened up in 2003:

While it likely isn't reasonable to give all of the credit to ETFs for this price explosion in gold, I do think the new ease of speculation and opening of demand channels played a part. For Bitcoin, not only would an ETF have the same effect on demand channels - it will additionally convey a legal blessing and legitimacy, which was not an issue for gold. Exchange Traded Funds & Products (ETFs & ETPs) are being opened up in economies around the world. For now the US ETFs are not spot-based but futures-based. Unfortunately, this is much worse for investors because they have large roll-over costs. That said, the path for easy investor access to the asset is being laid, and every year that goes by it will become easier and easier for investors with any level of sophistication to get exposure to Bitcoin in a wide variety of methods with differing levels of security.


Cryptocurrencies: BTC & Altcoins

I believe that now that this idea is out there, something will become a decentralized, digital Store-of-Value, unit of account, and currency as expressed as a monetary network. Once the proverbial cat is out of the bag, then you can't put it back. I believe that Bitcoin is by far the best option, but why not something else? While I do think it's possible that Bitcoin doesn't realize this and something else does, I think that is unlikely. There are some other cryptocurrencies out there that have been started with other features, e.g., Ethereum, Link, EOS, etc... A lot of these have good features and will likely be useful and valuable for what they are designed to do. But different functions have different values. First, let me differentiate between the value of a cryptocurrency in so far as it supports some other project - vs the value of a cryptocurrency in so far as it is a digital store of value. Pfeffer discusses this in some depth in his paper and makes the argument that the primary value is in becoming the dominant digital store of value. It's a somewhat intricate argument that I would suggest reading, especially if you own ALT coins or are seriously considering investing in them. The basic premise is that ALT coins will not accrue value like Bitcoin if they are trying to perform some specific function (DAPP platform, decentralized betting market, etc...), because even if their chain is used, there is no direct function or reason why the token itself will accrue the value the chain is being used for. The token is not like stock in the company, it is not a part of the total value being passed by users of the blockchain. It really just represents the grease inside the machine, necessary to process the transactions, and will likely converge to the value of the processing power needed to run the network. This differs because whatever is being used as a digital store of value will accrue the value of what is used to invest in the network, as it is storing that value. It's an interesting argument with some merit.


The flip-side to this, is that even in the real world, despite the fact that people store value in M1/M2 monetary systems/currencies as well as many other assets (real estate, money markets, equities, etc...), there is actually many multiples more of total value in derivatives. You can see this breakdown HERE . I believe there is a good chance that eventually the crypto market will look like this as well, with Bitcoin being the base monetary/SoV layer, with other layers acting as derivative layers on top. In this world, coins like Ethereum and the dAPP projects on top will be that derivative layer. The reason why I still recommend Bitcoin primarily has to do with competition to realize the value of the use-case. It is NOT because I think other crypto coins are useless or will not have value. Bitcoin has won the race to be this value/SoV base layer. What will happen with the layers on top is much more up in the air. Outside of Bitcoin, the only other coin I hold in some form is Ethereum. I believe it has the best chance to be that dAPP protocol base using smart contracts, and compared to its L1 competitors it is significantly more decentralized and has many more developers and usage. (Although a lot of this has come at a cost in terms of processing Transactions Per Second, which IMO is a much bigger threat for Ethereum than it is for Bitcoin. Ethereum MUST have a very large TPS in order to function as a DaPP protocol L1. If it fails in this regard, it is hard to see ETH succeeding) Long-term, will that accrue value and be worth more than Bitcoin's appreciation? I don't know. I do know that Ethereum has a lot of bullish things happening in the next year as well as a greatly increased demand for the coins through defi-farming, NFTs, and other projects. Additionally, ETH's race for king of dAPP protocols is one that hasn't been won, and therefore more risky. It has a lot of competitors: Solana, Cardano, Luna, Polkadot, Avalanche, etc...


In a space where Bitcoin fully-realized is likely a 10-20x+ return on investment long-term from $50k USD (to $500k - $1M), I posit that even if some other projects could have greater returns (more than 20x), using basically Kelly Criterion / Sharpe Ratio analysis I believe that BTC is still the best investment. I go over this in more detail HERE in a twitter thread. I have been in crypto for years. I have my ears to the ground and feel comfortable moving in and out of positions based on a variety of factors. I feel like I will make +EV decisions with regards to keeping ETH - or other coins - vs BTC. If you can't write a short essay and explain to a friend who isn't an expert about why you feel you should hold X, Y, or Z coin vs Bitcoin - or sell them back for Bitcoin - then you should not bother in the first place. Thus, for the beginning crypto investor, the best play for them is to just buy and hold Bitcoin. The absolute worst case that happens all the time for beginning crypto investors is that they get scared when the market is at the worst, try to save their investment, and sell the bottom.


And why won't one of these coins take over Bitcoin in its place as the dominant digital SoV? I would argue firstly that most of these coins are being designed for specific applications, and because of this will always be inferior to Bitcoin in terms of only and simply being a secure monetary network. Also, Bitcoin has a large first mover advantage. Its name is much more popular and it's more well known, both important for network growth. Additionally, in terms of being a currency, Bitcoin has been proven to be secure for 12 years, with network valuations of $1 Trillion USD and higher. No other blockchain has anywhere near this long of life, stability, security, and proven track record. The blockchain is open, on the web, not behind a firewall, thus open to hostile attacks and hacks - and has remained safe. When it comes to simply being a money, tradition and track-record are positive features. Many projects aren't nearly as proven and aren't decentralized enough - and IMO centralization and control would largely defeat the point and one of the main attractions of this type of digital currency. Think about the end game buyers and holders of the sovereign digital asset/SoV: large multinational companies & countries. They are not going to buy a coin that is centralized and a foundation, founders, small group of miners/stakers, or anyone controls. That just won't fly. Bitcoin is really the only cryptocurrency option in this regard. This moat will only grow wider as time passes. So while Bitcoin is almost certainly not the highest return out of the thousands of options in crypto, it will have the most reliably positive return.


Bitcoin has shown it is reliable and robust, and those things are both extremely important for a currency. I don't believe it will be replaced by a newer cryptocurrency because no added feature will be worth more than that reliability, robustness, or security already established already by Bitcoin as a SoV, Unit of Account, and currency. And some features (such as quantum-proofing), if they proved valuable, could eventually be added to Bitcoin if deemed necessary (through a hard fork, which is beyond the scope of this article).

Precisely Bitcoin's status as the oldest, largest, most reliable, secure, resistant-to-change, defended-by-users Crypto - is exactly why it is the best Crypto to be the dominant, digital, SoV monetary network. And why another one won't replace it.

REMEMBER: Bitcoin is a network that pools monetary energy. That is why it is growing as a network growth model would predict.

BTC as an Investment

I believe the Sharpe Ratio, or return given risk, of every single Alt Coin is significantly lower than Bitcoin when considered as an investment. Therefore at the current time, I believe the best long-term allocation for a prospective beginning investor buying Cryptocurrency is 100% Bitcoin. Some are drawn to Altcoins because they are turned off by how expensive and large Bitcoin is already. It is true; you can't get 100x+ type returns investing in Bitcoin anymore. And lots of people want to get rich quick and roll the dice in the crypto casino. I hope this article has shown that Bitcoin still has the potential to get much larger than it is today. That said, it is likely that one or more of the thousands of other crypto coins will outperform Bitcoin in the next 5 or 10 years given how much larger Bitcoin is as opposed to some small market cap Alt coins. Granted, I don't believe it will be easy to pick which coins will prevail, and furthermore investing in an array will almost certainly do worse, as a group, than Bitcoin. Bitcoin is already a speculation on whether or not "crypto" will work out. And additionally, many of these other cryptos do nothing today and are additionally speculative plays on BOTH their use case working out AND winning the competition game within their domain. All of that on top of the "crypto" speculation play that you are already making when investing in Bitcoin or any Alt Coin. Thus, in a situation where Bitcoin is already a high-risk/high-reward play, increasing the risk, often greatly, usually makes for a poorer investment (and poorer Sharpe Ratio).


I also believe Bitcoin is likely vying for the most valuable segment of the crypto market, or at least the most valuable for the next 5-10 years. AND Bitcoin is the clear leader for what it is trying to do within "crypto". The case for Bitcoin as an investment today is clear, rational, and reasonable. Almost all other Altcoins trying to achieve a specific function have not already won the race to do the thing they were created to do. Given open sourcing in crypto, there will be competition, and most will not win the competition within their field. Be warned that many Alt Coins are not necessary: with no need for the token (other than to enrich its creators) or no need for a decentralized blockchain to accomplish the coin's goal. So you can swim through all that mess, OR you can pick Bitcoin. Bitcoin has essentially already won the race to be the dominant crypto that realizes a decentralized, digital SoV, monetary unit of account, reserve currency, and medium of exchange. And, at the end of that rainbow is a valuation of multiple Trillions, with a T.


100% BTC Allocation?? GTFO

This is essentially the argument for a 100% Bitcoin Crypto allocation for the new crypto investor. After being in the space for a while, and developing a deeper understanding of coins and what they should be worth, then an experienced Bitcoin holder could consider investing in some Altcoin plays, beginning with Ethereum. That said, the all too common problem is the exact opposite. Beginning crypto investors think they missed the boat with BTC, get enamored with the potential of blockchain and promises of the various Altcoins, and try to buy the "next Bitcoin". (Already this phrase shows the foolishness of this perspective. There is not another Bitcoin.) You see beginning crypto investors load up on Altcoins that over a relatively short time horizon of a few years rarely outperform Bitcoin, and they are stuck "holding the bags" as we like to call it. Whereas experienced crypto investors are often more weighted towards Bitcoin for their long term holdings. They've seen multiple Altcoin cycles, where the old Altcoins already hit their peak and are on the relentless descent towards ZERO as the founders have cashed out before producing any lasting value. Vaporware. In fact, most experienced crypto traders and investors that I know mostly view Altcoins (at this point in time) as potential trades to earn more Bitcoin, not long term holds. As the market matures I do expect that some of these Altcoins (the best projects that win the competition in their respective domains) will be used regularly, and they will have value for their utility. If you really get in there and do your research, you might be able to pick some winners while they are really cheap, and in doing so outperform Bitcoin. Even though I think this is possible, It is DEFINITELY NOT something I would recommend for a beginning crypto investor to even consider for a second. And if you had to set your crypto portfolio for 5 to 10 years and couldn't change it; I am confident the right play today is 100% BTC.


And one last word for people who are already in crypto: if whatever you are doing (trading the market, trading/holding other coins) does not beat just holding bitcoin (ie, your crypto actions are not making your # of BTC increase), then immediately stop everything you're doing, move everything to Bitcoin, put it somewhere safe, HODL and DO NOT TOUCH. Crypto-decisions should be denominated in BTC (not USD). Bitcoin is the king, and simply holding Bitcoin is a great +EV long-term investment. Whatever you do should be +EV in BTC - not USD - and if not, don't do it.


This is a LONG TERM play

When considering Bitcoin as an investment, I think an investor should think about it like this: You are making a long-term investment speculating in Bitcoin realizing the use cases and properties discussed here. If it achieves this, it's very likely to reach much higher valuations than today (today Bitcoin is about 50k USD). Let's say that we are looking at a short term price target of 200-300k by 2025. But really, once Bitcoin is there - I would be wary of how much you sell, even if you want to rebalance, because now due to the momentum / Lindy effect, it is probably extremely likely to continue growing to a more fully realized MCAP/price even higher. Taking lessons from the Kelly Criterion, the more likely a bet is to work out, the more you should feel comfortable allocating to it. It is a linear relationship. The EV does matter, but you never allocate a higher % to a bet then its likelihood to succeed. Even wildly +EV bets. Therefore, the fact that Bitcoin has become significantly more likely to succeed is very important, even though the payout buying today vs 1+ year ago is obviously less. Simply, even if I rebalance my Bitcoin to other assets, I plan on holding Bitcoin for life.


If Bitcoin doesn't work out, or if there is some kind of systemic problem, the value of Bitcoin is likely to crash and it's unclear how much of the value you might be able to recover. For simplicity's sake, let's say that you are looking at Bitcoin going from 50k to either 0 or to 250k in the next 4 years OR to either 0 or 650k in the next 10 years. So, for this bet to be +EV, it only has to be successful 20% or more of the time on a 4-year time horizon or 8% or more on a 10-year time horizon. With this view, this is a very asymmetrical bet with potential upside much greater than the downside. High risk, high reward, that even if it is +EV should be taken with some caution. That said, I consider the likelihood that Bitcoin fulfills these potentialities to be significantly higher than 20% and 8% respectively, and therefore think buying BTC to be +EV long term. (Obviously a Bitcoin bear would likely disagree w/ that probability allocation). Additionally, this simplification is actually one that underestimates the actual EV somewhat significantly. Why? Because in the times Bitcoin doesn't hit these price targets, it isn't always because it is worth zero. Bitcoin could be 150k in 4 years or 400k in 10 years and it would still be a very successful investment, even if it didn't hit these price targets.

So a reasonable investment plan is something like buying Bitcoin today, holding for some years and then taking profits at certain levels (200k, 300k, 400k, etc...) in order to rebalance in to other assets such as real estate.

*** When I first wrote this article, the price estimation was from a 10k price-point to 100k target & 500k long term target, with respective probability thresholds of 10% & 2%. ***

Previously Bitcoin was not very correlated with the stock market, but recently it has started to be much more so. This makes sense given the large amount of inflows recently from investment funds and other large sources of capital that are desperately searching for places get rid of cash to hedge against inflation. Because Bitcoin is currently a risky bet on the network continuing to grow, it performs badly when the market crashes.

I think eventually when BTC becomes a more fully realized network we should see the correlation to equities markets cease. So, right now a Bitcoin allocation has a place in an investment portfolio as a high-EV high-risk investment. But seeing as how it is correlated to other parts of the market, you have to decide your risk appetite of BTC vs equities vs other correlated investments, as correlated investments increase a portfolio's risk of ruin. Eventually, however, a BTC allocation should change to a low-risk, better-than-cash substitute and consequently be a different part of a balanced portfolio.


CONGRATS! You made it

So that's it. Hope you enjoyed this introduction. The rabbit hole goes much deeper. The goal here was to push you over the edge. Once you start falling, gravity does the rest.

Bitcoin: the self-fulfilling prophecy of the inevitable march towards emergent monetary soundness.

"And those who were seen dancing were thought insane by those who could not hear the music." ~Nietzsche



Other good Bitcoin resources:

Blackrock 2020 shareholder letter - In particular read section 4 about Bitcoin re energy usage.

Arthur Hayes Blog on Bitmex - A series of extremely well written blog articles about various crypto topics written by the former CEO of Bitmex (formerly the leading crypto derivative exchange)

Lyn Alden Blog - Series of blog articles about wide variety of economic topics.

Cobie "CryptoCobain" Blog - Recently started blog articles about various crypto topics written by an English trader who formerly anon'd himself as Kurt Cobain

7 Misconceptions about Bitcoin - An article w/ similar goal to this: discuss with beginners + bullish arguments

Pfeffer on Cryptoassets

Bitcoin in the Boardroom // Bitcoin Bull Bull Bull - 2part podcast w/ Michael Saylor

Light & Su Zhu on Art of Trading - Uncommon Core podcast w/ Hasu Ultimate Bitcoin Argument podcast w/ Murad & Pomp - good podcast with discussion about why Bitcoin is important

Glassnode On-Chain Data & Intelligence Platform

Woobull charts by Willy Woo - interesting charts modeling different aspects of Bitcoin

Youtube Channel of Aantonop - youtube channel of best Bitcoin speaker/evangelist

Bitcoin Second Layer Medium article - discussion of bitcoin layers and how they will interact. Important to understand how BTC might scale


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