Asking the Right Questions About Bitcoin

Others might disagree, but I rate myself as a competent and experienced investor. In my equity career, I have leaned towards a “growth at a reasonable price” approach, double-checked against balance sheets, business models, management and common sense. Several spectacular successes, with occasional disasters, steered me towards the upper end of the pile.

Now that I find myself in crypto, I frequently find people muttering something about being late for a meeting as soon as I reveal the fact. Given crypto’s toxic branding and treatment by the mainstream media, that is no surprise. But it also means I am constantly reviewing whether I have made the right decision. For my own sanity. It means that, similar to any sort of investing, there are important questions to keep asking. Shut out the noise and repeatedly test the hypothesis.

Before I go on, I should mention that my conclusion is not that everybody should sell everything and buy bitcoin, just that it is here to stay, and it makes sense to have a small allocation. It is a view that, despite being neither contentious nor dangerous in my view, has many reaching for the smelling salts.

So what questions should one ask? I have formulated the following:

1. How has bitcoin survived 14 years and repeated boom/busts if it is a worthless Ponzi scheme?
2. What other asset in history has ever behaved like this?
3. What persuades people to invest in or adopt bitcoin?
4. What can kill bitcoin?
5. Why should I care?
6. Where is the value in other cryptos?

How has bitcoin survived 14 years and repeated boom/busts if it is a worthless Ponzi scheme?

1. It has never gone wrong. It has worked seamlessly. A new block has been verified and agreed every 10 minutes since the start. It has proved itself supremely secure.
2. It learns from its mistakes. It is important to note that those mistakes are in the ecosystem around it and not the Bitcoin Network itself, including disappearing exchanges, scams, frauds and so on. But because there is no bail-out culture, crypto is forced to constantly improve itself for its own survival. It is antifragile, and if history is any guide, everything around it will continue to improve.
3. It has risen in value. I’m talking over the long term here - volatility is for traders (and you’d expect high volatility at the start of an asset’s life anyway). There’s nothing like price strength in the face of fiat currency debasement to attract new investors.
4. There is no alternative. Bitcoin has won the battle of Proof of Work money; nothing else comes close.
5. The macro predictions made by its progenitors have been right. It gains credibility every time currencies debase, or governments socialise financial ineptitude.
6. Er…it’s not a Ponzi scheme. Claiming it is demonstrates ignorance of both Ponzi schemes and bitcoin. I know someone is regurgitating second hand vitriol when they say this.

What other asset in history has ever behaved like Bitcoin?

1. None.
2. Literally none. It is a freak. It has had three surges and corrections already since appearing in 2009. Bitcoin’s own price history is a reason to take it very seriously indeed. This is an asset that has no tangible value yet claims to have a monetary purpose, which has come from zero to be capitalised at US$550bn. No thoughtful investor should be dismissing it, because its behaviour tells you that something remarkable must be going on.

What persuades people to adopt bitcoin?

I ask this question to try and rationalise the scope for future adoption of bitcoin. I have divided it up into “push” and “pull” factors.

PUSH factors: disillusionment with the status quo

1. State/government over-reach. In the democratised West, this can be seen in growing distrust of central banks, growing state surveillance, and institutional capture by politicians (banks/media). In the developing world, by the growth of dictatorships and failed states. 70% of the world’s population now live in dictatorships (or autocratic democracies), according to the University of Gothenburg report on democracy.
2. Custodial uncertainty. Linked to the above, but increased concern about the safety of assets and trustworthiness of institutions. Notable institutional compromises of late include the confiscation of Russian state assets, gold storage concerns, recent bank failures, cancellation of nickel trades at the LME, and pension fund mismanagement (LDI).
3. Fiat money debasement. Younger generations can’t afford houses.
4. Rise in inequality. How come these people who keep screwing things up get bailed out all the time? Why do people who don’t even seem to do a proper job keep getting richer?

PULL factors: a belief that Bitcoin is a better alternative

1. It can’t be confiscated. Unlike gold, it doesn’t have to sit in a vault; you can custody it yourself. It is a bearer asset and no one else’s liability.
2. It is verifiably scarce. Important: a limited supply of anything is not in and of itself a source of value. But in bitcoin’s case, it is because it contrasts it with the alternatives. Fiat can be printed. Now you have an alternative form of liquid money whose supply cannot be adjusted.
3. Limitless potential appreciation. Fair enough, it might also halve. But we know that…and we also know that at some stage, the value of cash will definitely halve! But bitcoin is at the start of its life and might appreciate many times over. How much more interesting than having all your cash in a bank.
4. Politically and morally agnostic. For all that I or anyone else says or writes about it, bitcoin doesn’t give a shit. What a relief.
5. Peer to peer. Supremely easy to transfer value between two entities, wherever they are on the planet. No middlemen skimming off fees in between. Just like cash.

What can kill bitcoin?

It would be idiotic to hold this thing if there’s an obvious point of failure (I can assure you that many people, a lot smarter than me, think about this all the time). Is there one?

1. Regulation? It can slow down adoption, but without some unifying edict across the planet encompassing all people, governments, land and space (and even then, it would have to be enforced), it won’t stop it. This is a global technology, and confronting crypto rather than embracing it is not working out well (the Chinese have now banned it three times, I think*). One of the problems is the lack of a regulatory framework because it is something new. Note also that since the US SEC’s adversarial regulatory campaign began at the start of the year, crypto has risen sharply in value. The SEC’s behaviour simply confirms concerns about state overreach and weaponising the courts without due process. It has been completely counter-productive.
2. Quantum Computing. Highly unlikely, nihilistic waste of money, counter-measures will evolve, and frankly, if it comes to this, we will have more serious things to worry about.
3. Something better comes along. Has been tried and failed (Bitcoin SV, Bitcoin Cash, Litecoin, Monero). All have failed or are marginal. Network effects mean that Bitcoin’s category dominance is greater than ever.
4. Energy concerns? This shouldn’t be the issue that it’s portrayed as. Bitcoin mining uses 0.06% of the planet’s energy consumption, which, let’s face it, is a rounding error. And of that 0.06%, 74% is renewable. See this research piece for detail.
5. Economic competence. This is probably Bitcoin’s most dangerous adversary, but one that hasn’t been sighted for some time. Rumours are that it is extinct. Still, if it does come lolloping back from whence it has disappeared, I for one will be delighted, and I’m sure the rest of the portfolio will more than compensate for crypto weakness. That said, even if economic competence returns, I expect a form of global money for the internet will still prevail.

Should I care?

Well, that largely depends on your reactions to the above. If you think there aren’t justifiable reasons to take it seriously, fine.

But here are some examples of people who do:

1. Lots of people in failing states (e.g. Nigeria).
2. Lots of people in the 70% of the global population who live in dictatorships (as above)
3. Some of the world’s smartest programmers, people who know a thing or two about the internet, including Elon Musk, Jack Dorsey, Marc Andreessen.
4. A few small-time investors, including Ray Dalio, Paul Tudor Jones, Stanley Druckenmiller, and Bill Miller (by the way, they all emphasise the importance of sizing it appropriately).
5. Your kids.
6. People who’ve had a bad experience with banks (it’s going to get worse for humans and small businesses as they consolidate into even bigger banks)
7. People who have a problem with authority (and don’t like the amount of tax they have to pay). Yes, OK, a handful of criminals, although crypto doesn’t work nearly as well as Central London property for laundering purposes.
8. Internet natives/gamers who understand the power of digital ownership.

Other reasons for caring:

1. The prospects of de-dollarisation. Along with gold, bitcoin is a non-partisan alternative to the dollar (or yuan/euro/basket). Undeniably a slow process, but look at what’s happening between China/Iran/Saudi/Brazil/Russia for a flavour of the direction in which trade settlements are headed.
2. Massively under-owned. From an institutional perspective, pretty much everyone is standing in the same place. They own zero. It will be mayhem when the flock executes a U-turn. Bitcoin’s market cap is now US$550bn; gold’s is US$13 trillion.
3. One day central banks may add it to their reserves. While it sounds fanciful now, it’s started already – bitcoin is legal tender in El Salvador and the Central African Republic. We also know that 2022 was the year that Central Banks cranked up their accumulation of gold, so maybe the wheel is turning towards “sound money”. Any central bank worth its salt should be thinking about this. My view is that this is a long-term inevitability, so it would be sensible to get started while no one’s looking.

Where is the value in other cryptos?

Big subject. The short answer is that there is probably plenty, but it is a lot less certain and a lot harder to identify.

Past technology revolutions transformed lives in ways that were impossible to envisage before they happened but were obvious once they had. There will be some wonderful rides and some devastating falls in this iteration, but from the work I’ve done over the last three years, it is very hard to discern the reward structures of many projects. For this reason, much of crypto will remain highly speculative in nature for some time to come. The best advice is to research as hard as possible and stay liquid, or get someone who knows what they’re talking about to do it for you.

At its core, crypto is about ownership - and ease of transfer -of digital assets. Theoretically, it can be applied to all walks of life, whether commerce, games, entertainment, health or finance. It’s going to be huge.

Am I mad or right?

I’ve answered the questions to my own satisfaction, and it persuades me that bitcoin and a sprinkling of crypto should form a small part of a wealth portfolio, in an amount that, if it halves, makes no difference to the way you live your life.

The more I examine it, the happier I am with the conclusion, and it is only helped by the fact that those on the other side generally resort to contempt rather than providing good reasoning.

I am quite happy to accept I might be wrong about bitcoin. But for that to happen, the world economy will have to sit on a much sounder footing than it does now. If that is the case, defeat will be an easy pill to swallow.

*China issued bans for Bitcoin and crypto across several stages, making it difficult to calculate how many times they’ve officially banned digital assets. In 2021 alone, China first banned institutional crypto investing in May, then bitcoin mining in June, and finally banned crypto altogether in September. This CoinDesk article gives a comprehensive timeline of the various bans.