Rethinking Bitcoin

Is Bitcoin a giant ponzi scheme or digital gold for a new generation? It's likely no-one truly knows but here's why I am rethinking my position

Rethinking Bitcoin

A few years ago I wrote of my scepticism about Bitcoin.

It had all the hallmarks of a giant Ponzi scheme. An entirely digital measure of value that depended on increasing demand to drive its price higher so that people could make a profit.

In essence, my concerns were that it depended on the greater fool theory whereby to profit you need to find someone else to buy it from you at a higher price.

In recent weeks I have been rethinking that position. Here’s why.

Bitcoin has now become a widely referenced measure of value that has attracted institutional infrastructure and interest. Hence, although the uptake in the regular population is incredibly small, some big players are now dabbling in the space. This lends it credibility.

Certainly, as a non yielding investment, Bitcoin depends on a liquid market (active buyers and sellers) to provide some reasonable pricing indications, but that is true of any investment. If buyers dry up and sellers want to get out then prices go down.

However what really changed my attitude is the embrace of the younger generation who consider Bitcoin to have gold like qualities.

For those over 50, Gold has generally been considered a store of wealth and an inflation hedge. It has little utility value, just a history of being accepted as part of the monetary system and not subject to the vagaries of governments.

It can’t be ‘made’ and costs money to find (or mine). It has no counter party risk so when you possess your gold you know no one else has a claim to it. There is a liquid market for gold with which you can trade it for other assets.

Bitcoin has many of those characteristics and being digital, it offers a portability that appeals to the new generation.

Let’s consider them individually.

Bitcoin is limited to a maximum issue of 21 million coins with new coins becoming progressively more difficult and expensive to generate (or mine). Like gold, Bitcoin has no counter party risk as the coins you have are yours.

Just like bullion, secure storage of Bitcoin is paramount because they can be stolen and it is almost impossible to trace them once they are gone.

For most of us, the tangibility of gold and its long history is the big difference. We are used to it and many of us understand its role in history. Something entirely digital and backed only by confidence seems anathema.

However, almost everything we invest in is backed solely by confidence that it is desirable to someone else. Sure, some assets have a utility ( you can live in a house for instance) but realising the full value depends on finding a willing buyer.

History is littered with examples of ‘investments’ that became irrationally priced creating legendary mania’s. The South Sea bubble, tulip bulbs, the dot com boom and so forth. Even gold hit a peak in 1980 that took decades to be exceeded in real terms.

The same could be said of Bitcoin when it reached more than $20,000 a couple of years ago. That made billionaires of some early adopters who bought it for a few cents when it launched in 2009. It has since dropped back to less than half of that peak price.

I have to state for the record that I haven’t a clue if my rethinking of Bitcoin is justified or not. To get this far it has required me to remove my own established understanding of value and consider Bitcoin through the perspective of another generation.

However, when one does make that transition to seeing it as they do; effectively a digital incarnation of gold, it takes on a slightly different perspective.

In the years ahead, it is almost impossible to predict what will happen to Bitcoin prices. It could eventually grow to be worth millions or fall to zero. True believers will spruce the former while the pessimists will continually talk it down.

Frankly, I am happy to admit I don’t know. However, the potential risk/reward ratio means buying Bitcoin is an asynchronous bet, meaning the potential reward of investing is many multiples of the potential loss.

That’s enough for me to think about buying some Bitcoin for myself.

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