Before we skydive into Bitcoin’s vastness, its blockchain technology, and the impacts of fiat money printing on crypto (which are all relevant to the question, Why Buy Bitcoin?)—we must also ask ourselves what has brought you to that very question.
Are you here because you wish to amass fortune? An investment for retirement? Or to secure a better future for your loved ones? Are you here out of curiosity due to the buzz around Bitcoin and cryptocurrency in general? Have you heard that it offers a new future for conducting business? Or have you heard that its world changing?
These questions are very important to ask oneself before making a decision to allocate money, time and effort into Bitcoin (or cryptocurrency in general). The focus here will be primarily on Bitcoin, as most of us who are gearing up to soar into the cryptoverse have been introduced to cryptocurrency through Bitcoin. It is also the primary technology behind all other cryptocurrencies through blockchain technology (the groundbreaking tech introduced in the Bitcoin white paper by Satoshi Nakamoto). Thus, by understanding Bitcoin, you will have discovered the foundation upon which the entire crypto sphere is built upon.
People that are answering the question: Why Buy Bitcoin? Must also ask themselves their intention for doing so. Is it for investment, retirement, freedom from fiat?… it is also important to weigh out your risk tolerance and investment time horizon. Personally, I am bias in this regard, as I am a believer in the long-term prospects of Bitcoin and cryptocurrency; yet this is not to say that I am unaware of the risk. The information here is not investment advice; rather, it is to help you make an informed decision.
To get a sense of the risk associated with investing in Bitcoin, let’s examine the Stock-to-Flow Model, one of the most highly referenced models by investors in Bitcoin. Of course, there is no guarantee that the Bitcoin price will follow the model’s future predictions, but the model does give insight into how Bitcoin performed in relationship to its supply over the years past.
The stock-to-flow model was created by another pseudonymous individual, Plan B. Note: Plan B explicitly disclaims that she too is not giving investment advice, nor does he consider himself an expert (gender intentionally alternated); however, since the model’s inception, the price of Bitcoin has followed the general pattern that the model predicts.
To understand the above chart, there are a couple of key factors to know about Bitcoin related to its supply and demand cycles. The Bitcoin protocol only allows for 21 million Bitcoin to ever be produced by Bitcoin miners. A Bitcoin miner uses computing power to solve a mathematical problem that increases in difficulty over time. This difficulty target was designed so that it will be solved by a random miner roughly every ten minutes, at which point the miner’s computer (or node) that solved the problem is rewarded in Bitcoin. The Bitcoin reward is a predetermined amount of Bitcoin that is allocated out of the 21 million Bitcoin pool.
Key points to know: Bitcoin has a fixed supply of 21 million. Currently about 18.5 million have already been issued and the distribution of the remaining supply is predictable, i.e., once every 10 minutes.
At the current time, the block reward for miners is 6.25 Bitcoin. Before the most recent halving on May 11, 2020 the block reward was 12.5. And before that, the block reward was for 25 Bitcoin prior to the halving that took place on July 9, 2016. The halving of the block reward is set to take place approximately every 4 years, and each time Bitcoin halves, the scarcity of Bitcoin increases in relationship to the total amount of Bitcoin available. For those who know about supply and demand, when you have a dwindling supply and an increasing demand, this leads to price appreciation of the asset.
Looking back at the Stock-to-Flow Model, you can see the price correlation between the time that Bitcoin halves and the increase in value of Bitcoin that follows halving. For example, after the July 9, 2016 halving, the price of Bitcoin increased from around $663, all the way up to $20,000, before settling back down to a lower price range. At the halving of November 8, 2012, the price of Bitcoin went from $12 to a peak of $964, and then settled back down to lower price range once again.
Based on this model, we can see that Bitcoin has a tendency to rise parabolically a few months after its halving event and then settle into a lower price range.
However, once the next halving event occurs, and the four-year cycle begins again, the trend resets. Based on the time of writing this article, when comparing the price of Bitcoin to the Stock-to-Flow chart, we have yet to reach the peak in the Bitcoin price after the last halving event. But again, the past is not necessarily a predictor of the future, and there is no guarantee that Bitcoin will follow the same pattern that the model forecasts; however, the model does give a certain expectation for the price action and should there be a distinctive break from the pattern presented, it could act as an indicator for an investor to make an informed decision.
The reason I present the stock-to-flow model also has another purpose. It is to demonstrate the volatility of Bitcoin. An investor who purchased Bitcoin at the peak of the Stock-to-flow model in December of 2017, had to wait until the latter half of 2020 before Bitcoin claimed a new high. Not only that, but Bitcoin also depreciated by roughly 80% to $3350 USD at its 2018 low. That is quite a dip to stomach.
So, Why buy Bitcoin?
For those who HODLed Bitcoin (not a typo, HODL means to hold Bitcoin for the long term) and weathered through the crypto winters of the past, were well rewarded financially if they held on long enough. But for many of these HODLers, Bitcoin is not just an investment… it’s an ideal.
There are those who are so passionate about Bitcoin, blockchain, and cryptocurrency’s ability to transform the world for the better, the day to day, month to month, and even year to year price action is not important to them. These “cypherpunks” look to crypto for advancing social change, human rights, and a freer monetary system through Bitcoin. Those who HODL Bitcoin and crypto currency as an ideal, often refer back to Satoshi Nakamoto’s intention for creating it.
In the white paper, Satoshi envisioned a peer-to-peer finance system. Digital currency up until the invention of Bitcoin, was always reliant upon third parties: such as a bank, broker, or other types of exchange services that conducted transactions on behalf of their clients. We needed such institution to clear our checks, wires, ACH transfer, credit card transactions, etc. By creating a distributed ledger technology on the blockchain, Satoshi eliminated the need for third parties when it comes to transacting.
The breadth of the transformative nature of this technology is mind-boggling. It is such an increase in productivity that this system of transaction eliminates the need for traditional money service providers. Think of all the skyscrapers holding such corporations, with departments upon departments dedicated to money transfer, accounting, financial investigative services, etc., etc. It changes our monetary system from a system of trust to system protected by un-hackable code—a code of cryptography that is of the same caliber protecting our nuclear weapons from unauthorized access.
This new system is often called trustless as blockchain technology solved the problem of needing a third party to settle transactions.
Also, by removing the third party, the middleman, the means of surveillance capitalism is greatly hindered. As it stands in our current system of exchange, the US government mandates that banks provide a report identifying anyone who has received a payment of over $10,000. They also require banks or similar service providers to keep a record of any transaction over $3,000. Because Bitcoin transactions are peer-to-peer, there are no banks acting as agents of the Federal government to monitor our banking activity.
Of course, if you transact over an exchange like Coinbase or Binance, these crypto companies are required to implement the regulations as described above. But to send Bitcoin from one crypto wallet to another in a peer-to-peer fashion as intended, such transactions cannot be monitored.
Bitcoin also allows us to enter into a new world of programmable money.
Money in the form of Bitcoin or other cryptocurrencies can be distributed in a predetermined way as programmed. And the cryptocurrencies being distributed in such a manner do not even have to be owned by a person. A charity, for example, could be the designated holder of a crypto asset, which can receive and send Bitcoin out of a crypto wallet as it is programmed to do. Imagine that this charity will on the first day of every month be able to automatically distribute a portion of its treasury to a list of qualified recipients.
This alone creates a level of automation and efficiency in accounting that has never been seen before. The same methods of distribution can be used by corporations that wish to pay their employees in Bitcoin or other cryptocurrencies. Once programmed into the code, a company can eliminate the need for elaborate payroll services or departments.
These potentialities have not yet come into fruition on a macro scale, but they are small sampling of the excitement surrounding Bitcoin and blockchain technology and the use cases the technology allows for.
When it comes to HODLing Bitcoin, enthusiasts also refer to the inflationary nature of money printing by central banks. To combat economic crises, the Federal Reserve and other central banks around the world are able to “print money” through a number of monetary tools central banks and government have available to them.
Interest rates can be reduced to 0%, or even a negative rate, in an effort to induce people and companies to borrow money… thus adding liquidity into an economy. They are also able to increase the money supply by buying bonds (such as mortgage-backed securities) on the open market, which in turn gives additional liquidity to the overall economy. Governments add to the money supply through fiscal stimulus packages as well.
All of these activities by fiat regimes have the effect of devaluing the currency over time and in doing so, our fiat currency loses its purchasing power for the goods and services we need in our daily lives.
Through the aforementioned methods of “money printing”, there is no ceiling as to the amount of money that can be pumped into an economy by the central banks and the governments they support, and by the same token… there is no set floor that a fiat currency can depreciate to. Contrarily, Bitcoin, because of its fixed supply, will not be able to be manipulated by a fiat regime through “money printing”. The only way the Bitcoin supply changes is through the predetermined block reward that is issued to the miners.
As previously mentioned, this reward is distributed in a predictable fashion and at predictable rate until all of the 21 million Bitcoin are fully disseminated.
By adopting Bitcoin on a mass scale, we thus are changing the dynamic of the entire economic model currently in existence. Instead of a model where money can be “printed” by the existing hegemonic powers in place, i.e., governments, we move to a model where there is a fixed supply, and the currency cannot be manipulated to satisfy the agenda of the fiat backed government. Simultaneously, by adopting Bitcoin, we are forcing our leaders to have fiscal responsibility, giving ourselves freedom from surveillance capitalism, a more efficient medium of exchange and lastly a currency that is non-inflationary.
From an investment standpoint there are certainly risks.
The stock-to-flow model exemplifies the volatility that has been inherent in Bitcoin thus far. There are other factors as well: Because of its volatility, Bitcoin has yet to be adopted as a medium of exchange on a mass scale. Based on Bitcoin’s current volatility, a cup of coffee’s price could potentially move by 20% in any given week depending on if it were measured in Bitcoin. There is also the scalability issue of Bitcoin. As the number of transactions that can be completed on the Bitcoin network is currently around 5 per second, this pales in comparison to Visa, which is capable of handling 65,000 transactions per second.
These risks surrounding the use cases of Bitcoin as a medium of exchange may be solved by technology.
The lightning network, for example, continues to build around Bitcoin’s ecosystem allowing for faster transactions and greater network efficiency. Also, as Bitcoin increases in market cap, the law of large numbers suggests that the rapidly increasing price of Bitcoin will steady over time. In fact, we can imagine a future where Bitcoin is an even more stable currency than a fiat backed currency—since the price of Bitcoin will not be able to be manipulated through the “money printing” as described above. Lastly, Bitcoin has already been widely adopted as a store of value because of its fixed supply.
In this regard, it has already found a use case that resonates with people. Bitcoin may not ever have to develop into medium of exchange for broader adoption.
Circling back to our original question—Why Buy Bitcoin?
There are many answers. Ultimately the answer will depend on yourself, your motivations, how you see the future of economics, and the amount of risk that you are willing to take on. There are many more benefits and risks to adopting Bitcoin than the ones described here. Many believe it will change the world in the same manner that the internet did. For some, investing is in Bitcoin is like voting for the change they wish the world will adopt. There is no said guarantee that your vote will translate into future you want, but it is a way to rally behind a future we need.
To further help answer the Question: Why Buy Bitcoin: Check out: Energy Revolution Through Bitcoin
Disclosure: Long Bitcoin
