Yes, Bitcoin. Everybody heard of it. Everybody saw it on the news. Some got rich because of it, and some got poor because of it. Some hate it and swear to never touch it, while some preach it like a gospel. So what’s with all these buzz around Bitcoin? I will breakdown everything I know so far on this fascinating asset class and busting some truth for all the fear mongers and non-believers out there.
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Before I get started, do understand that I am biased in my viewpoint as I am bullish on Bitcoin and cryptocurrency, and before you just scroll away and think I’m just another speculator, hear me out:
Try out the power of blockchain technology yourself. Once you try it, you can come back and discuss Bitcoin with me again, as I believe it will change your perspective about the history of money, how traditional finance is really in a paradigm shift and why the banking system that we use and live in are slowly being disrupted just like Internet did in the 1980s. (How does T+2 wire transfers still exist and banks charging clients for transfer/withdrawal fees???)
Also, if you understood the Gamestop saga and also the 2008 financial crisis, decentralisation is more crucial than ever and I cannot emphasise more of that. When giant institutions gets to manipulate the market (Robinhood) or screwed up big time (2008 Bond Markets Bubble), the governments bail them out but the retail investors with no power gets trampled upon and left with nothing. If you think that putting money in your bank is safe, read on and you will think otherwise.
Before we move on, let me ask you: Would you rather 4-5 individuals controlling the entire monetary system deciding when to start or stop the printing machine while the rest watch and obey or would you prefer millions of individuals maintaining trust and integrity of the platform and no single entity has absolute control? Yup, the latter is what decentralisation is all about.
Bitcoin is the Apex predator of the financial system
There is no doubt about it. Bitcoin is the fastest asset to reach 1 trillion market cap and it did it within 12 years. Yes. 12 YEARS.
What does that imply? This means Bitcoin is becoming more mainstream as the days go by and it has proven itself to be the foundation of a new financial system being created by the internet itself. With more mainstream adoption from the likes of public companies, institutional investors wanting a piece of the pie and the creation of Bitcoin ETFs, perhaps this time Bitcoin is here to stay.
Also, there is a thing to note about financial natural selection, where the most powerful asset class will command the most monetary energy flowing to it in the shortest amount of time. Currently, no other asset is able to accumulate 1 trillion worth of value as quickly as Bitcoin did, and I hope you see the point I am trying to make here.
The term ‘Apex predator” is actually coined by Bitcoin maximalist and investor Anthony Pompliano and here this what he said about Bitcoin:
“Bitcoin is the apex predator of financial markets. You’ve got digital sound money that’s grown at a compound annual growth rate of 200% for a decade.
And if you’re sitting there and you manage a treasury, you’ve got cash on your balance sheet, you tell me where else you’re going to put it where you can get that type of growth. 200% compound annual growth rate for a decade, there’s nowhere else they can put it.
We’re printing an unprecedented amount of money, and so they’re looking for a safe haven, and Bitcoin is that apex predator that everyone is concluding is the answer.”
Why does this matter? Because what many do not understand and are not aware of, is the dangers of quantitative easing, or simply the unlimited printing of money in these unprecedented times by Central Banks worldwide.
Owning Bitcoin is not about getting rich, but how to not be poor in the long run.
Devaluation of Fiat
I don’t need to elaborate on the above, but I want the focus here to be on the US Dollar.
Ever since the inception of the US dollar (Gold Standard) all the way to the end of the Bretton Woods system and the inception of the “fiat currency” from 1970s onwards, the US dollar has been steadily depreciating and for very good reasons:
- Reduce trade deficits (benefits government)
- Lowers interest payments on government debt (benefits government)
- Boost exports (benefits government)
So in essence, the cash we are holding today, regardless of it being USD/SGD/British Pound or Yen or whatever fiat currency out there, they lose value over the long run due to a multitude of factors, and also the concept of Time Value of Money here. The dollar you are holding today will not be worth the dollar it is 10 years from now.
To put things into perspective, the British Pound Sterling (GBP), just like its name, is supposed to denote that 1 GBP was to match the price of 1 pound of Sterling Silver (Silver in short) when it first incepted, but today, to purchase the 1 pound of Sterling Silver you need to pay approximately 272 GBP .(at the point of writing)
Getting my point? While fiat is important for day to day use, it gets more and more risky to hold on to cash over the long run as you are GUARANTEED to lose your wealth over time as a result of fiat devaluation.
Bitcoin Myths Busters
Below are some of the few arguments that naysayers (who simply didn’t bother reading up or are plain ignorant) say about Bitcoin:
- Bitcoin is unlimited
- Bitcoin has no intrinsic value
- Bitcoin is too volatile as an investment
- Bitcoin is a scam and a giant Ponzi scheme
- Bitcoin will never replace cash
The other bearish arguments revolve around these 5 main arguments but lets get into it.
Myth: Bitcoin is Unlimited. (WRONG) Bitcoin has a total supply of 21 million. No more no less. It goes through halving events which means the miners rewards per block get divided by half every 4 years. What does this mean? By using some simple economic concepts, you will understand that the main value proposition of Bitcoin is scarcity.
The fact that is is limited and the fact that it gets more difficult to mine over time, solidified its position as a superior asset that offers individuals the choice to store their monetary energy into an something which retains value over time. So no, Bitcoin is not unlimited. In fact, the very cash you are holding in your wallet, tin can and bank account are the ones that are unlimited. You can read up more here.
Myth: Bitcoin has no intrinsic value. (WRONG) To say that Bitcoin has no intrinsic value is like saying Apples are better than Oranges simply because red is nicer looking than the colour orange. One simply cannot compare Bitcoin and an individual stock head to head as it is meaningless.
You cannot conduct any meaningful analysis using traditional fundamental analysis or valuation models such as Discounted Cash Flow because Bitcoin is not a company and it does not generate cash, neither does it generate shareholder value or anything of the sort.
Instead, Bitcoin’s intrinsic value primarily derives from Metcalfe’s Law and Stock-To-Flow Model. What these 2 basically are, are measuring the network effects of Bitcoin and evaluating how valuable Bitcoin is as a store of value respectively. I leave it up to you to do the rest of the due diligence.
Myth: Bitcoin is too volatile as an investment. (WRONG) Volatility does not equate to risk. This has been said again and again but this is something most people won’t get. Volatility itself is not risky, but the human reaction to volatility is what that is risky. Once again, that means whether owning Bitcoin is risky or not depends on your tolerance to irrational behaviours during times of volatility, and again I see volatility as a good thing because price swings are part and parcel of investing and it should not matter if you are in it for the long run, and it is with volatility that allows you to buy during the lows and ride the wave up.
Also, Bitcoin’s volatility has been decreasing over the years as more mainstream adoption and institutional participation takes place, while the growing market capitalisation also means volatility will generally go down over time the larger and more mature the asset class gets.
Myth: Bitcoin is a scam and a giant Ponzi scheme. (HOW SO?) This argument is really something I am puzzled about and a really outdated argument. In the past, incidents such as Bitconnect and Silk Road were high profile cases which tainted the cryptocurrency name as a place where only scammers and cheaters thrive and exchange currency with each other. Unless you have been living under a rock, the crypto space has matured way beyond what it was once thought out to be.
In fact, you can view every single Bitcoin transaction in real time here, which wallet it is going to, what address it is and more. There is nothing more transparent out there than these blockchains. But again, there are still scams and rug pulls out there in the crypto world and the same in the real world, so just be careful and stay alert.
Myth: Bitcoin will never replace cash. (Well it’s not aiming to) In my opinion, I think the word “Cryptocurrency” is really misleading and hopefully one day “Crypto Assets” can be adopted instead of the word “Currency” in it. Why? Because every crypto asset has different use cases and not every coin is aiming to be a currency, or in other words, a medium of exchange.
Bitcoin’s purpose is not to replace fiat but to be a store of value. It is more ‘Gold-like’ than it is ‘Cash-like’, so people usually confuse these two and start bringing the argument that Bitcoin is too volatile to be a currency, which can be true to an extent but again not what Bitcoin is aiming to be.
The crypto assets that are aiming to replace cash instead, are what we call Stablecoins such as USDT (Tether)/USDC (USD Coin) or DAI for example. These are USD-pegged digital coins that aim to be used as a medium of exchange in the crypto world, and also the real world now that Visa announced it here.
Do Your Own Due Diligence
Before I understood the purpose of Bitcoin, I was also skeptical about it just like the early Bitcoin adopters when they first read the Bitcoin Whitepaper.
Whether Bitcoin is simply going to crash like the ICO boom and bust of 2017, one thing is certain:
Bitcoin survived the skepticism, rose in popularity through giant bull runs and survived massive crashes whilst maintaining network effect and managed to become the apex predator and the reserve currency of the crypto world. I can safely say, Bitcoin is here to stay as long as the Internet exists.
While crypto is mostly still a highly speculative asset class as a whole and yet to be deemed as a security by governments world wide (because they haven’t found a way to properly tax crypto yet), the early adopters who saw the value proposition will be rewarded tremendously, but again, nothing that offers attractive returns come without significant amount of risk attached to it. There is always a risk-reward tradeoff.
Therefore, in order to shield yourself from potential scams or unnecessary risks, I always reiterate the essence of what investing is all about as espoused by legendary investor Peter Lynch:
Know what you own, and why you own it.
Short and simple, if you can’t explain to a 3 year old why you bought Bitcoin (or any other asset) and have no idea what it does, then you shouldn’t own it. Always do your research, understand the risk and returns it offers and what intrinsic value it offers.
The most important part is to understand what gaps Bitcoin fill, and that is: solving the problem of money (fiat) devaluation, the imminent debt crisis and the inflationary nature of fiat currencies.
Eventually, when widespread adoption take place and Bitcoin continues to mature, Bitcoin’s volatility will slowly go down, and ultimately be the primary hedge against the devaluation of the fiat (cash) and the main store of value for humanity.
Don’t forget the risks!
But of course: There are also many risk when it comes to Bitcoin, and that includes platform risk (hacks), price fluctuations resulting in panic selling, Hot wallet hacks, Cold wallet private keys stolen and many more. Please do your own due diligence.
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment.
Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stock broker or financial advisor. (Or contact me!)
For those who are already into Crypto
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For those that are interested to learn more about Bitcoin, I highly recommend you to start by watching these videos here: