Why Do We Need Bitcoin in the Modern Economy?

I thought this might be a better title than “Why are Millenials Investing in Turds?”

Why do we need Bitcoin in today’s economy and what does tomorrow’s economy look like?

What is Bitcoin and why do we need it?

Warren Buffet is known as the Oracle of Ohama. He is one of the Godfathers of stock investing known around the globe.

At a packed conference of shareholders, 87 year old Warren Buffet took to the stage to talk about digital assets.

“Cryptocurrencies will come to bad endings,” said Buffett, 87. He then turned to his long standing business partner, Charlie Munger.

“I like cryptocurrencies a lot less than you do,” replied Munger, 94. “To me, it’s just dementia. It’s like somebody else is trading turds and you decide you can’t be left out.”

charlie-munger-quote

 

In the investment world, Warren is a hero, who knows value investing inside out. His company, Berkeshire Hathaway, has managed to beat the S&P 500, an index of the top 500 companies in the USA, over three decades and it owns over $700 billion of assets.

So, you can’t just discredit comments from these savvy heavyweights.

In the last 10 years, Berkeshire has struggled to keep pace with the S&P500.

The main reason it has been hard for Berkeshire Hathaway to beat the S&P500 over the last decade is that it is now so big, it practically is the S&P500.

However, as Bob Dylan says, “times are a changing”.

The S&P500 has been beaten comfortably by tech stocks over the last 10 years and Warren missed out on many of them, notably Amazon.

A revolution is coming…

I think Warren & Charlie would be foolish at 85+ years old, in their twilight years, not to stick to what they know best.

As Warren Buffet says, “Never invest in a business you can’t understand.”

If you don’t understand cryptocurrency, you shouldn’t be investing at all.

I think a 20 year old Buffet would have sat down and tried to understand Bitcoin by reading the whitepapers, just as he did reading all the spreadsheets in 1951.

The world is changing and digital assets are going to be huge business. Many of these digital companies will want to be paid with digital currency.

In the new world, there is space for real assets and digital assets. In a world rapidly involving with the cloud, AR and VR now real commercial realities, the economy as a whole will change.

Online gaming is a massive industry. In 2015, the online gaming market had a volume of 37.91 billion U.S. dollars, this figure was forecasted to increase to 59.79 billion U.S. dollars in 2020.

In 2017, the global eSports market was valued at nearly 493 million U.S. dollars. According to the source’s estimates, global eSports market revenue will reach 1.65 billion U.S. dollars in 2020.

In 2018, the consumer virtual reality market is estimated to reach a value of 4.5 billion U.S. dollars.

The forecasted augmented (AR) and virtual reality (VR) market size worldwide is 215 billion by 2021.

The next generation data storage market will be worth 144.76 Billion USD by 2022.

These are just a fraction of the markets cryptocurrencies will tap into.

Bitcoin is currently the currency of the internet: it is the gateway to investing in cryptocurrencies.

Going back to Charlie’s comments, the turd analogy isn’t even a good one. Sewage is a big business. The top 10 sewage treatment companies collected nearly $10 bn in revenue last year.

I can understand why Charlie would say this about Bitcoin to his shareholders in such a vehement way though. The world is changing and Bekeshire want to keep their shareholders’ money. That is their heirs’ wealth.

I wouldn’t be surprised if his kids or grandchildren privately held some positions in cryptocurrency though.

Why would they do this? It all comes down to one word….. “trust”.

Let’s go back to when Bitcoin was created. Bitcoin was created in 2009 after the Global Financial Crisis by Satoshi Nakamoto, an anonymous person, still to this day and I can imagine many reasons why he/she would want to remain so. Bitcoin cuts out the middle men, the government and the banks.

Many people lost their savings and their houses in the aftermath of the 2008 crisis. RealtyTrac data indicates 7.3 million consumers lost their homes between 2007 and 2014. The vast majority of which, 5.4 million, experienced foreclosure.

On one single day in 2008, $1.2 trillion USD was wiped off the markets and the S&P500 went down to around 50% from its 2007 highs. Many gambling on the stock market lost money as they panicked and sold at the bottom or had margin calls.

These events in 2000 and 2008 left a mark on the public pysche, namely distrust of financial institutions.

It was back in 2008, when Wall Street banks miscalculated their gambling on leveraged instruments based on mortgages that led to the Global Financial Crisis.

It was these mortgage products, leveraged versions of Credit Default Swaps (CDS) that led to the beginning of the fast collapse of both the housing market and the stock market.

It is amazing Charlie Munger never mentioned investing in these “turds” at the time.

bernie madoff quote

 

Enter Bitcoin…

Bitcoin Vs Fiat Money

Bitcoin uses [computing powered] miners to solve complex equations and to then “mint” Bitcoins into existence through something known as “Proof of Work”. This takes up computing power and electricity, but the largest benefit are that Bitcoins are stored on a digital ledger on the Blockchain and any transactions cannot be altered over time, they are immutable.

So, these digital assets are mined by computers and Bitcoins are created into existence.

Let’s compare this to how paper money comes into existence.

Banks in the modern world create money out of thin air. Yes, you heard that correctly.

Private banks and not the Federal Reserve (Central Bank) which is what some people believe.

Your mortgage is simply registered on your local bank’s ledger and “magically”, credit is created for your house, usually in the form of a 30 year debt you spend the rest of your life working off.

Banks can simply “create money out of thin air” by creating a bank ledger: it creates a mortgage liability on your side and your loan backed by your house becomes an asset to the bank.

Here is the Bank of England’s white paper on money creation in the modern economy.

The Federal Reserve (the Central Bank) then controls interest rates which decides how much the bank can lend to the housing market. The stock market & the housing market is all manipulated and set by private banks and the central bank.

Bitcoin on the other hand, is decentralised. There is no central governance. It is all created by miners around the world.

It is this decentralisation & immutability that invokes trust. The Blockchain cannot be altered. The Blockchain is transparent. Everything is logged and stored.

It is this trust or faith in the mathematics of Bitcoin that has led to its surging popularity.

damai lama quote

 

The revolution is the Blockchain. Bitcoin is its first currency. There will be more iterations and improvements. Bitcoin’s code itself has already been improved many times since launch.

An investment in Bitcoin is a global investment. It doesn’t support corrupt governments or financial institutions. There are no borders.

Bitcoin is the first true WORLD CURRENCY: the currency of the internet. The currency of the digital world. The new Lightening network means Bitcoin is now even faster. Bitcoin isn’t political, it doesn’t choose sides, it doesn’t choose races, it doesn’t choose religion, it doesn’t choose countries.

An investment in the US Dollar, for example, funds the US machine. This can be good or bad depending on your political persuasion and where you live in the world. The US Dollar funds defence & war spending around the globe. The US Dollar’s strength is still strongly tied to the fact it is the global petrodollar: the greenback is basically backed by oil and taxes. That is what gives it value.

An investment in Bitcoin is an investment in a digital currency which is backed by no government.

“It is international. It is a permissionless, borderless currency. The currency of the global digital economy.”

“It is the currency of the internet. It is not censored. It is backed by nobody and no-one.”

That is why naysayers see it as having no value. It is just a digital transfer between different fiat currencies.

The fact that bitcoin is peer-2-peer and censorship resistant means governments can’t freeze accounts, halt transactions, or arbitrarily steal money.

That doesn’t mean governments can’t order you to give up your Bitcoin assets, but technically they don’t have the ability to freeze your account like they do with paper money like US Dollars.

In fact, the US seized Bitcoin assets from Ross Ulbricht, the 31-year-old American who created Silk Road, a Bitcoin market facilitating the sale of $1 billion in illegal drugs and who was sentenced to life in prison in February 2015.

Note, Bitcoin is NOT anonymous, so it would be a stupid criminal who uses it. Your IP address and transactions can be tracked.

You can read another post here on the top 20 privacy coins.

Early on, the fact that Bitcoin was used by criminals put many investors off using Bitcoin, as this unknown asset was publicly slated in the press.

But, US Dollars have been the major currency of drug overlords and money launderers for decades.

It is the mathematical model of Bitcoin and its perceived value as a trustless asset that gives it a value.

This isn’t an intrinsic value, it is a perceived value, much the way a painting by an Old Master, such as Fransisco Goya is perceived as being higher value.

painting goya

Bitcoin isn’t a dividend or yield producing asset like real world assets such as Coca-Cola. It has no intrinsic vale in this sense and shouldn’t be compared as such. It is a digital asset not a real world asset.

Bitcoin isn’t trying to produce an income, it is trying to be a store of value. It is digital gold.

Physical gold is also mined and shouldn’t hold any more value than its use, but it seems to have a high value related to the mining costs. People like holding gold as they can easily sell on their gold chains in the real world.

But, gold cannot be divided up easily. You have to sell the whole lot, whether that is a bar or a chain or a gram. If you hold gold as an ETF or bullion in a vault, you need to trust these assets really exist.

It is not built for the 21st century. You can’t give someone gold online… yet.

You don’t need this trust with Bitcoin. It has a mathematical purity.

You are paying for a borderless, permissionless asset and there will only ever be 21 million Bitcoins. That compares to 60 trillion USD in fiat money around the world.

In the corrupt world we live in today, this trust seems to carry a high value. You are paying for that trust and its scarcity.

..and if you are still not convinced, you can read this article on Why Bitcoin isn’t a Ponzi.

Anyone investing in cryptocurrencies must realise this is a fledgling industry with many issues including wallet hacking, exchange hacking, cybersecurity, ICO scams, as well as new competitors and coins that won’t be around in a few years.

But, if you believe the future of currency is on a trusted digital ledger, it is worth exploring Bitcoin.

In fact, here is the CEO of Goldman Sachs poking fun at the London Metals Exchange for futures trading and commenting on whether he would invest in Bitcoin. This video is from six months ago.

More recently, Goldman Sachs have set up a specialised Bitcoin trading desk. They also own Circle which has bought a large cryptocurrency exchange in the US called Poloniex. Circle paid $400 m for the acquisition. In years to come, this is going to look like a bargain.

Interview with Lord Blankfein from Goldman Sachs on Bitcoin & Gold

“1 in 5 financial institutions are looking to invest in cryptocurrencies this year according to Reuters.”

I haven’t even mentioned network effects yet or how to value Bitcoin. You can read more in our Advanced Guide to Cryptocurrencies coming soon.

Please never invest more than you can afford to lose and do your own research.

Most of your assets should be in income / dividend producing assets such as stocks, ETFs, mutual funds, property & bonds.

Time will tell if Bitcoin will rise in value and become part of the global economy or if this will be its last supper.

bitcoin last supper