Bitcoin is a decentralized digital or virtual currency, created in 2009 without a central bank or single administrator, that can be sent from user to user on the peer-to-peer software cryptography technology or Bitcoin blockchain (network) to facilitate instant payments.
A public electronic ledger, that resides on thousands of computers (called nodes) all over the world, records all Bitcoin transactions. A pre-determined minimum standard of these computers have to verify the validity of the transaction, before it is permanently recorded on these nodes, to update the ledger with each new transaction.
So Bitcoin is a consensus network that enables a new payment system and a completely digital form of “money”. From a user perspective, Bitcoin is pretty much like cash for the internet. It’s introduction, adoption and use has been widely heralded as the first introduction of a new asset class to the investment world in over 150 years.
The prices of cryptocurrencies today are highly volatile (similar to internet company stocks in the 1990s), which means that they are highly risky, but certainly does not mean that they are bad investments, just as companies like Apple, Microsoft, Amazon, Google, Cisco, Intel, etc. weren’t bad investments at the time they all launched their companies in the 1990s to piggyback the introduction of the internet. Most financial advisors today still say there is little harm — and potentially a lot to gain — with investing a small portion of ones portfolio in the assets (5-10%), typically no more than you could afford to lose.
If you were to ask anyone “what is Bitcoin or its uses”, you would likely get multiple different answers the more people you ask. Some of the common answers are discussed below.
Uses of Bitcoin:
1. Currency or medium of exchange – The talk is now all about “adoption” of cryptos by institutions, and for good reason. Banks are about to enter the crypto space. You may not remember or be aware that the Comptroller of the Currency (OCC), who regulates the U.S. banking system, last summer (July 2020) issued a letter that I highlighted in my last blog post showing they are giving domestic banks their “blessing” to offer crypto services to their customers.
Currently adoption of crypto is tiny compared to other tech (only about 200M people) of a total potential market of over 5B internet users. But according to Fintech analytics company Portfolio Insider, the current Bitcoin adoption rate has been outpacing the internet’s user growth rate and will reach 1B users within the next four years. That’s almost 2X faster than it took the internet to reach that level of users.
Consider the major U.S. financial firms readying their offerings of crypto services to their customers. The numbers of people they could potentially bring to this emerging asset class is astounding: Wells Fargo=70M; BofA=66M; JPMorgan Chase=55M; BNP Paribas=33M; Deutsche Bank=24M; Morgan Stanley=8M. This equates to about 300M checking accounts.
For the first time, customers of hundreds of U.S. banks will shortly be able to buy, hold (custody) and sell Bitcoin through their existing bank accounts. That is not all; these major institutions are planning to introduce bank accounts that pay interest in Bitcoin too. Imagine logging in to your checking account, clicking a button, and transferring money to another account that pays interest in Bitcoin. What impact do you think that will have on the number of Bitcoin users?
Additionally, credit card companies are starting to bring crypto into their user services. Visa recently and successfully introduced crypto-linked cards that make it easy to convert and spend cryptos at 70M merchants around the globe. Visa has over 3B users. Mastercard is also offering the option to customers to spend their digital assets anywhere Mastercard is accepted. That’s another 975M potential users. Amazon’s payment acceptance team is searching for a crypto expert to lead their team. Amazon has as many as 300M users. Twitter is exploring Bitcoin…that’s another 300M users. Square could bring as many as 200M users too. Altogether, this totals about 5B potential new users about to enter the world of Bitcoin. This phenomenon has the potential to dwarf the similar event when in the 1990s/2000s we witnessed firsthand the rollout of the internet to the world.
Keep in mind, there will only ever be a maximum of 21M Bitcoin, and about 4M have been lost, forever. So that number is actually about 19M. What do you think all this potential new user demand will do to the price of a limited number of Bitcoin? We have never seen this many new users enter the crypto space, and we will only see it occur once. Once! If you don’t participate in this flood of potential new users into cryptos, and the impact it will have on crypto prices, you never will, because it will only happen once. Make sure you understand that phenomenon.
Also, to initially buy any crypto other than Bitcoin, you need Bitcoin. Of all these new users coming into Bitcoin, many will progress on to smaller coins. And as these coins are much smaller than Bitcoin, they’re much more sensitive to increases in usage. It’s these smaller coins that will experience life-changing increases in values as more and more people buy them, just like the dot-com/NASDAQ listed stocks of the 1990s representing the companies introducing apps to run on the internet back when it was initially introduced; the same thing, I contend, that is happening with the blockchain today.
2. Store of value – Reference my blog post of Aug. 29 in which I demonstrate why “Bitcoin is a far superior wealth builder and store of value than gold, in numerous, and significant, ways.” I then outlined those ways in that blog post. Additionally, you can reference my blog post, dated Sep. 2, in which I conclude “…people of massive wealth and influence, have concluded that Bitcoin is a better version of gold.”
3. Inflation hedge – The supply of Bitcoin is limited to 21 million as it is written into the algorithm that created Bitcoin. In this time of high inflation (approx. 12% in 2020) this limited supply gives Bitcoin greater value than it would have otherwise. Additionally, it is written into the code that every four years the amount of new Bitcoin that can be minded (read: created) is reduced by half (this is what’s known as a Halving). It is this code written into its algorithm that automatically reduces its total supply of new Bitcoin, or fulfillment of its allocation, of no more than 21 million Bitcoin by 2140.
However, I would argue that the supply of new Bitcoin to the market is going to dry up over the next year or so. Reason being is that miners previously had to sell part of their annual supply of new Bitcoin in order to raise cash to pay their operating expenses. They were unable to access the capital markets because of the speculative high risk associated with Bitcoin. But they can now raise capital in the public markets as a result of the popularity of Bitcoin. So if they can borrow money at say 5-10% annual interest rates or attract equity capital, and mine new Bitcoin that will increase in value over the next year by 25-50-100%, why would they sell their newly mined Bitcoin?
4. Investment – “If you invested in bitcoin in July 2020, it would have grown 252% over the 12 months ending July 2021. If you zoom out further, the growth curve is even steeper. On July 26, 2016, $1,000 would have bought you 1.52 bitcoin at a price of $656.17 per coin. By July 2020, that investment was worth $58,900, representing growth of 5,805%. Going back 11 years, bitcoin’s percent growth is six figures. In July 2011, two years after it was created, one coin cost $13.91. Back then, $1,000 would have bought you 71.89 bitcoin, which would be worth $2,785,737.50 today. That figure represents growth of 278,476.56%.
“A $1,000 investment in the S&P 500, by comparison, would be up 39.3% since last July, 123.78% since 2016 and 305.97% since 2011. That means that your $1,000 would have grown to $1,393.31 in the past year, $2,237.84 in the past 5 years and to $4,059.68 over the past decade.
“Unlike bitcoin, which is known for its volatility, the S&P 500 is a considered a relatively reliable investment. It also has a decades-long track record of providing returns for investors.
“When it comes to crypto, remember that past performance is no guarantee of future returns, and experts have cautioned investors to put no more money into cryptocurrencies than they are comfortable losing.
“If you do decide to get into crypto, consider not making a large purchase all at once, but instead dollar-cost average your purchase by spreading it out into smaller purchases over time.” (Source: CNBC2)
1 Speaking to Yahoo Finance, Ric Edelman, founder of one of the largest financial advisory firms in the U.S., Edelman Financial Engines, called Bitcoin and crypto “the first genuinely new asset class in about 150 years.” According to Edelman, "not since the gold market has there been an innovative asset class like cryptocurrencies."