You can’t go anywhere without hearing about the OG crypto — Bitcoin. Mostly because of its record high numbers, its highest over 58K — for one “coin.”
I know nothing about computers; I resist technology. I was one of the last people to join Facebook. Tech-savvy, I am not. You can call me a Luddite, as many of my friends do. But I’ve been watching Bitcoin for two years — the native currency of the internet. I’ve even purchased some crypto, dipping my toes in, one at a time. I do understand money and how supply and demand work.
The crypto space is mostly a domain for hackers, mathematicians, tech entrepreneurs, and people who get a bit obsessive with Bitcoin and its speculative power. They really dig in, but lately, it’s attracting people like me.
Bitcoin can be a bit complicated even for smart people, confusing if you are new to it. I’ll try to cover the basics.
Some facts: the best-known cryptocurrency is Bitcoin. Bitcoin is trying to be the new gold or the new Swiss bank account, kind of both, rolled into one.
Its main advantage is it acts as a store of value.
Pros and cons of Bitcoin:
- It can be stored digitally, so it is hard to seize by force.
- It is very easy to verify — technologically speaking.
- Unlike gold, it is very easy to send across national boundaries electronically over the internet.
- It’s easily divisible.
- Bitcoin’s authenticity is extremely verifiable. Gold’s is not.
- It can be divided down to millions and trillions easily.
- It is somewhat programmable, so you can put it inside smart contracts.
- It has privacy issues. It’s not really private, they are parts of it that are private, but not entirely.
- It’s untrusted — it’s brand new as far as stores of value go (only started 2009), so people don’t know if it will be around forever. But, every time Bitcoin faces one of these reckonings, and that problem gets resolved, the value goes up.
- It’s dependent on the internet.
- People aren’t sure about the proof-of-work (Pow) mining algorithm that makes it possible, so questions arise like, can it be highjacked? Can it be centralized? Can it have a bug? Can it break?
All great questions, the answers to which we don’t know yet.
A simple way to understand Bitcoin
One way to look at Bitcoin or any cryptocurrency is as a new kind of Swiss bank account.
But, a Swiss bank account with finite space. It has built-in FOMO. There is a limited supply, which is a great way to drive demand. If you want shelf space in that Swiss bank account — with finite space — you have to buy out one of the existing holders.
Imagine a Swiss bank account that is impregnable, a new kind that no government can break into it — that is cryptocurrency.
The space of crypto is secured by consensus across millions of people using massive computation power worldwide. If you want one of those safety deposit boxes, you have to buy it from someone already there.
So, as long as the demand from new people trying to get into this new Swiss bank account is greater than the supply of the people trying to get out of this new Swiss bank account, you’ll have to pay more for that box (more for one coin).
And that is where the speculative power of Bitcoin comes from.
If you want to understand the power of Bitcoin, you have to understand money
The US Dollar is the world’s currency reserve.
Today, more than 61% of all foreign bank reserves are denominated in US dollars, according to the International Monetary Fund (IMF). Many of the reserves are in cash or US bonds, such as US Treasuries. Also, approximately 40% of the world’s debt is denominated in dollars.
What is a money?
Currency is just something we peg as currency. If we all agree the US dollar is currency, then it has value.
Money is just a bubble that never pops. If we all agree tomorrow that it is not the US dollar that has global reserve status, but the Euro does, we’ll switch to the Euro. If we agree that seashells are, the world will switch to seashells. If the world decides that Bitcoin is better than the US dollar, the world will switch to Bitcoin.
Money is a consensus belief. That is all it is.
Bitcoin isn’t a literal coin
Bitcoin isn’t a thing. It isn’t a shiny coin you can hold in your hand, like the beautiful image above. Bitcoin is an entry in a virtual ledger.
This virtual ledger is maintained by tons of machines running across the world. Those machines communicate value and scarcity securely (crypto) across the internet with no third parties in the middle, validating that communication: no government, no corporation, no king.
Cryptocurrency holders are creating their own frontier of finance in the technology industry
Cryptocurrency is a new frontier, like the internet 30 years ago or the Gold Rush during the first half of the 19th century.
What the internet gave us 30 years ago was digital abundance — I can make copies of anything digital and share them everywhere. I can build one web page and ship it to everybody, like this blog post.
What Bitcoin is giving us is digital scarcity, which is an equally exciting idea.
There will only be 21 million bitcoins mined in total — that’s a finite number. As an example, if my ten friends and I own all 21 million bitcoin, no one else can have Bitcoin unless they buy one from us at the price we set. That ability to create scarcity and then transmit scarcity and value through the internet is just as important as creating abundance and transmitting that through the internet.
What is the point of Crypto?
For some die-hards, and there are many of them (which is a good thing if you want Bitcoin to never hit zero), the point of holding cryptocurrency is to be your own bank.
When you own Bitcoin, you create extra sovereign money, so if you ever have to flee the country, you aren’t scrambling for gold. Bitcoin is an unseizeable asset.
For some, it’s the worry about hyperinflation. The US Government prints dollars as its way out of problems, for example, six trillion dollars to fight the coronavirus. If you are worried about hyperinflation (too many dollars decreases the value of each dollar), and the dollars you have are decreasing in value, Bitcoin is another option. Why?
Because of it’s limited supply.
If you know anything about economics, scarcity causes demand. No matter how high the price of bitcoin goes, it cannot induce more Bitcoin production. There is no other asset in existence like this.
Hyperinflation has increased the flight into hard assets. Crypto is one of the few places where you can put your money and defend against something like the dollar reserving as the reserve currency status.
For those scared of a government seizing their money (this happens in non-democratic countries), cryptocurrencies are how to get around that. You can always withdraw your crypto asset from custodial organizations, like Anchorage and Coinbase.
Anchorage and Coinbase are large custodians who hold onto your crypto assets for you.
Or, you can carry your crypto yourself.
You can put it on your laptop, which is risky and challenging. You can store it in a hardware wallet, a specific device designed for carrying crypto, like Ledger or Trezor wallets, these are well-known hardware wallets.
What you are essentially doing when you purchase crypto is replacing the banking system. You’re literally replacing the government, so of course, it will require some level of sophistication.
Since crypto is designed to be completely decentralized, you don’t need the state’s power to enforce the value of cryptocurrency. It allows for truly trustless transactions between humans without some king, authority, government, or corporation having to be in the middle.
Die-hard Bitcoin believers find it liberating to disconnect wealth creation, wealth storage, and wealth protection from the state. And that’s what cryptocurrencies enable.
A decentralized Wall Street.
People participating in the crypto world are building a decentralized Wall Street. They call it Defi (decentralized finance). Unlike Wall Street, this one is 24/7, open 365 days of the year. It’s available around the world to everybody. It is trustless in that there are math, algorithms, and code underneath it and not Goldman Sachs front-running your trades.
Every year that Bitcoin survives and goes through one of the various challenges facing it, it gets more valuable as people entrust it more and more.
It is extremely volatile. When you buy Bitcoin, you are buying a very speculative asset at the moment. Those of us paying attention have witnessed it hit these incredible highs, then crashes back down to a plateau, hangs out at a plateau for a while, and then goes back to a new high.
Bitcoin is here to stay
Why? Because it has die-hard maximalists. These die-hard Bitcoin believers are what makes Bitcoin always tradable, always valuable.
As long as there are 5 or 50 thousand wealthy enthusiasts that love Bitcoin (and I’m betting there will be even more), it isn’t going anywhere. As long as there is some guy, in some location, somewhere in the world who will give you his house for Bitcoin, it will be around. More and more people are being added to that list every day.
As long as that is true, Bitcoin has real, redeemable value.
Paul Tudor Jones detailing why he invested 2% of his assets in Cryptocurrency
When institutional investors get on board, like Paul Tudor Jones, Bitcoin’s story becomes stronger and more credible as a store of value, the set of believers increases, the validation of crypto increases.
There is a more substantial base of holders now more than every before.
Every time one of these well-known people comes in and buys Bitcoin as Musk did recently, it validates the story for everyone else, making the story stronger, increasing the number of believers.
Paul Tudor Jones detailing his multi-million dollar investment into crypto validates it for other hedge fund managers. Those hedge fund managers then validate it for sovereign wealth funds, then sovereign wealth funds validate it for central banks. And so on.
Suppose some country inflates their currency too much by printing too much of it. The currency collapses. No one trusts it anymore. They have to adopt a new national currency, but instead of pegging it to the US dollar, they peg to Bitcoin or some other cryptocurrency. Then, those holding crypto are all even more wealthy than they are now.
It’s about scarcity. It’s supply and demand.
This is not meant to be investment advice. I’m not a financial advisor.