Why Bitcoin, Why Now?

Honestly, I’ve got lots of sympathy for those who think bitcoin is the plaything of a bunch of degenerates and computer nerds. The space has been rife with scams, scandals and rampant volatility. The media portray it as not just useless, but actively dangerous.

And those who get involved in it are normally denounced as having lost the plot.

But like any good investment, do not confuse the noise with the substance.

Bitcoin is a new form of money, arguably the first since the invention of the printing press, and certainly the first major development in how money works since Nixon took the US off the gold standard in 1971, the start of 50 years of “fiat” currencies (which are paper currencies backed by government promises rather than by hard assets).

Bitcoin is a form of money that was not possible until blockchain technology was invented, and it took many years to get it right. It is still only 14 years since the first coin was minted.

In other words, it is brand new.

So what, you might say! We already have money. We have dollars and euros and pounds and pesos and rupees and renminbi. In fact, there are around 160 currencies on the planet.

The thing about bitcoin is that it brings properties that none of those have and never will have:

• There will only be 21 million ever made – there is a finite supply – 19.5m of those are already minted.
• They can be instantly transacted – and settled - between individuals, without a 3rd party, in any size, at any time, at any place on the planet as long as you have an internet connection.
• No single entity is in control of it.
• It is a complete record of all transactions made on it.
• It has never gone wrong and is therefore verifiably secure.
• It has been created by energy, which has a cost – that is its intrinsic value.
• Like gold, it is a bearer asset, and it is no-one else’s liability.
• It enables you to be your own bank.
• It is divisible to 8 decimal places, or a hundred millionth – it is designed to be huge.

Very impressive, but the question stands…so what?

So, for the first time ever, there is an alternative.

Of course, an alternative wouldn’t be needed if the existing fiat currency system was functioning properly. “If it ain’t broke, don’t fix it”.?

But it’s hard for even the biggest optimist to deny that a lot of things have broken or are breaking – inflation, currency debasement, debt, bubbles, wealth inequality, misallocation of resources, zombie companies and a reserve currency system that makes it very hard for emerging countries to ever emerge.

This is all linked, the common denominator being political and central bank mismanagement of the ability to set interest rates and/or create money.

So, “why bitcoin?”

As I look at it logically, it is the obvious long-term lifeboat, however absurd and unlikely it appears now. I think people will gradually form the same opinion and they will want to own it. It is a form of money that can hold governments to account and anaesthetise their ability to behave recklessly with our taxes and ruin the economies that our children will inherit. It can play the role that gold has historically, but with much greater versatility, particularly since we live in an internet age. I think it can co-exist with fiat currencies, and act as a standard.

In any walk of life, in any industry, at any point in history, if a better product comes along, sooner or later it will replace the incumbent. Bitcoin is a better form of money. This is a huge opportunity. Assuming bitcoin now has around 200 million owners (estimates vary), it has a market share of 2.5% but a total addressable market of every person on the planet. Even at a market capitalization of US$500bn it is 2/1000ths of the combined value of debt, equities and gold.

Why now?

Unless you've been living under a rock, you will have read about the scams that hit the sector over the last two years. It has resulted in bitcoin more than halving from its peak, but it has also cleared out leverage in the system and purged the space of bad actors. There is very little hot money in the market (unsurprising given regulatory pressure), which suggests that today’s buyers are those who believe in its underlying long-term properties and use case. They aren’t just there for a quick buck.

The second thing is that the supply of new coins is programmatically designed to halve every four years. This happens again in April 2024, and has historically preceded the next phase of adoption and price appreciation. On the off-chance it happens again, this is the time when you want to get set.

Lastly, I believe the regulatory environment will become clearer over the next few months. There is increasing pressure on the SEC to approve a spot bitcoin ETF. The 10 largest applicants have a combined US$17 trillion in AUM, so this is a powerful lobby. An approval – which is being strongly resisted - could act as a major catalyst to broaden ownership and give bitcoin greater legitimacy.

But really, I believe that anyone buying bitcoin should be doing so on a multi-year view. Of course, being new, it is volatile. This is why, like any component of a sensible portfolio, it should be sized appropriately. I don’t know what that size is, except to say the asymmetric nature of the bet at this point of the cycle suggests it shouldn’t be zero.

I also believe there are substantial inefficiencies in the market, which present a particular opportunity. For various legal, administrative and behavioural reasons, bitcoin is really only owned by individuals. As depicted in the chart above, institutions are miles away. If and when this changes, it will happen very quickly. It doesn’t take a genius to figure out what the price impact is likely to be.?

“Why Bitcoin?” It’s a genius new form of money that has the potential to be the global financial standard.

“Why now?” Because we are at the tail end of a cycle, everyone has given up on it and leverage has been flushed out of the system. Regulatory pressure can’t get much worse, the halving is seven months away, while the state of global economies continues to drive a search for alternatives.

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