Image by Kanchanara
In recent years, Bitcoin has rapidly grown from a niche digital experiment into a major mainstream financial asset class. Both individual investors and large institutions have taken notice. As the most widely-adopted cryptocurrency, Bitcoin presents a compelling investment case that everyone should understand.
This comprehensive guide will outline the key factors driving Bitcoin's growth and explain why it may be worthwhile to add some Bitcoin to your investment portfolio. We'll cover topics including:
-
Bitcoin as a decentralized, independent digital currency
-
Its relative scarcity and resistance to inflation
-
Expanding real-world utility and adoption
-
Investment upside potential
-
Portfolio diversification benefits
By the end, you'll see why Bitcoin is often referred to as "digital gold" and appeals to investors large and small. Of course, any investment comes with risks and nothing is guaranteed, so we'll also briefly cover precautions to take if you decide to buy Bitcoin.
Bitcoin as a Decentralized Currency
One of Bitcoin's most important distinguishing features is decentralization. Unlike fiat currencies like the US dollar, which are controlled by central banks, no single entity or government administers the Bitcoin network. It operates based on a decentralized, peer-to-peer protocol that is not controlled by any third party.
This has significant advantages:
Financial Freedom and Stability
Without central control, Bitcoin provides people with open access to a global financial system that cannot be manipulated or restricted by governments or institutions. Your money is truly yours. Even in countries with unstable currencies or strict capital controls, Bitcoin offers an alternative store of value.
For example, during times of runaway inflation in Venezuela, many turned to using Bitcoin to preserve their savings as the local Bolivar rapidly lost value. Bitcoin provided financial freedom beyond the failures of the government-controlled central banking system.
Cutting Out Third-Party Financial Intermediaries
Banks, credit card networks, payment processors, and other financial middlemen each take a slice of transaction fees. Bitcoin's peer-to-peer structure allows people to directly send and receive money across the world without unnecessary intermediaries.
This also speeds up settlement times and reduces costs compared to traditional finance. When you pay with a credit card, the transaction can take days to fully settle between the merchant, issuing bank, card network, and your bank. Bitcoin settles in about 10 minutes directly between sender and receiver.
Censorship Resistance
No central party can block or censor transactions on the decentralized Bitcoin network. Everyone has equal access. This uncensorable nature provides another layer of financial freedom compared to traditional banking, where accounts can be frozen or otherwise prevented from transacting.
Digital Scarcity: Bitcoin as "Digital Gold"
Something cannot be considered real money if it can be easily created out of thin air. Rampant money printing undermines faith in traditional fiat currencies. However, one of Bitcoin's core strengths is its verifiable scarcity, which gives it inherent value.
Limited Supply Cap
Bitcoin's supply is tightly controlled by underlying software rules that limit the total number of bitcoins that can ever be created. This cap is set at 21 million bitcoins. Unlike national currencies, which can be printed without limit, Bitcoin's digital scarcity creates certainty about its long-term supply trajectory.
Roughly 19 million bitcoins have already been mined. The remaining 2 million or so will trickle out over the next 100+ years as miners are rewarded with new bitcoins for processing network transactions. In effect, bitcoin 'mining' mimics the extraction of precious metals like gold - just in digital form.
Predictable Inflation Schedule
Bitcoin's code regulates its supply schedule. The number of new bitcoins awarded to miners automatically halves about every four years. This continual reduction of issuance makes Bitcoin more scarce over time.
Since the supply cap limits total bitcoins and issuance decreases over time, the Bitcoin network is engineered to be deflationary. Therefore, Bitcoin acts as a predictable hedge against the inflationary actions of central bankers who constantly print more money.
Can't Be Devalued by Centralized Actors
Being decentralized, the Bitcoin network has no lever that a central actor (like a central bank) can pull to arbitrarily inflate supply and devalue existing bitcoins. For example, the Federal Reserve has dramatically increased the US money supply over the last several years.
This debases the value of existing dollars. In contrast, the predictable digital scarcity inherent to Bitcoin's network protects value for holders over time. Just as precious metals like gold cannot be arbitrarily devalued by a central party, Bitcoin aims to be 'digital gold' that preserves wealth.
Expanding Bitcoin Utility and Adoption
Beyond just a speculative investment, Bitcoin also provides practical utility as its use for payments and transactions grows in the real world. Growing adoption drives demand. Here are some examples:
More Ways to Spend Bitcoin
Major companies like Microsoft, AT&T, and Home Depot accept Bitcoin payments. Additionally, a growing list of small, independent merchants accepts Bitcoin. Gift card providers like Gyft allow users to purchase gift cards using Bitcoin for spending at retailers like Amazon and Walmart. Expedia and Travala allow people to book hotels with Bitcoin.
So there are now many practical ways to actually spend Bitcoin on real products and services. This gives Bitcoin utility beyond just holding it as a speculative investment.
Use Cases in Poorer Nations
The combination of Bitcoin's decentralized nature and its digital accessibility via smartphones makes it uniquely useful in poorer countries that lack stable financial infrastructure. Users in hyperinflationary economies like Venezuela can rely on the value preservation and censorship resistance of Bitcoin.
Remittances can also be sent home more directly and cheaply using Bitcoin rather than traditional money transfer services. Such use cases demonstrate Bitcoin's utility for underserved people without access to more traditional finance.
Growing Market Depth and Liquidity
As adoption increases, the Bitcoin markets have become more liquid. High market liquidity means it is easy to quickly buy or sell Bitcoin due to ample trading activity and order book depth across various exchanges and brokers. This demonstrates expanding market infrastructure.
For a smaller asset, occasional large orders might move prices significantly or be more difficult to fill immediately. But Bitcoin now has sufficient trading volume that large trades can be executed without dramatic price swings, giving traders and investors more flexibility.
Bitcoin's Investment Potential
The most straightforward case for Bitcoin is as a speculative investment with highly asymmetric upside versus downside risk. Simply put, Bitcoin has much greater upside potential than downside risk over the long-term. Here's why:
Potential for Massive Upside
Bitcoin has already realized tremendous growth since its introduction in 2009. But it likely still remains undervalued if we assume the long-term success of the technology. Therefore, it has significant room for additional upside. In percentage terms, the upside from current levels could vastly outweigh the downside risk.
For example, if Bitcoin reaches a total market capitalization equal to gold's valuation today, that would imply over $10 trillion in market cap for Bitcoin versus under $1 trillion today. Gold's current value provides a reasonable ceiling for Bitcoin's potential if it succeeds as a digital store of value.
Relatively Low Downside Risk
Given the large potential upside, Bitcoin's downside risk appears comparatively minor. The absolute worst case would be if Bitcoin failed entirely and went to zero value. But given its growing adoption and bursts of institutional interest, Bitcoin collapsing to zero seems an unlikely scenario at this point.
The upside of 10,000X over the next decade appears far more likely than the downside of 100% collapse. So when assessing the risk-reward tradeoff, the stark asymmetry makes Bitcoin attractive to investors.
Outsized Historical ROI
Bitcoin has been the single best performing asset class over the last decade. Early adopters have realized exponential returns. While there is certainly no guarantee of similar future returns, Bitcoin's historical ROI lends credibility to the idea that significant gains may still lie ahead.
Portfolio Diversification with Bitcoin
Because Bitcoin behaves very differently from most traditional asset classes, it provides diversification benefits for investors looking to balance a portfolio. Here's how Bitcoin diversifies:
Non-Correlated Asset
Bitcoin has essentially zero correlation to the stock market. Simply put, as stocks rise and fall, Bitcoin trades independently. This means it diversifies away risks specific to the equities market. Even gold is increasingly correlated to stocks. So Bitcoin provides true diversification.
Inflation Hedge
As explained earlier, Bitcoin's supply cap makes it resistant to inflation over the long-term. This makes it a useful diversified hedge within an inflation-exposed investment portfolio to help manage inflation risk.
Digital/Technology Exposure
Bitcoin can provide investors with exposure to the high growth digital and blockchain technology sectors. Bitcoin is the original and most valuable application of blockchain. While risky, the broader crypto/blockchain industry is expected to continue growing rapidly.
Geopolitical/Macroeconomic Hedge
Bitcoin diversifies exposure away from any single country since it operates independently of national borders and monetary policy. This makes it useful as a geopolitical and macroeconomic hedge protecting against localized financial instability.
Taking the First Step
After reviewing the key benefits and investment thesis around Bitcoin, you may be considering taking the plunge. Here are a few brief tips for getting started safely if you decide to buy Bitcoin:
-
Only invest what you can afford to lose. Bitcoin is still risky.
-
Dollar cost average to build a position over time rather than buying all at once.
-
Store your bitcoins securely in a digital wallet you control rather than on an exchange for the long-term.
-
Think long-term - don't obsess over short-term price fluctuations.
Conclusion
While nothing is guaranteed, Bitcoin presents a compelling risk-reward asymmetry for investors. Key properties like its decentralized nature, verifiable scarcity and expanding real-world utility underpin Bitcoin's potential. Regardless of the price at any given moment, fundamentals arguably point to a bright long-term future for 'digital gold' as Bitcoin continues maturing into an established asset class. Consequently, everyone should consider allocating at least a small portion of their investment portfolio to Bitcoin.
Comments
Post a Comment