As Bitcoin continues to revolutionize the financial world and capture widespread attention, it remains a topic of debate among financial advisors. While some advisors caution against investing in Bitcoin, citing concerns about its volatility, perceived lack of intrinsic value, and associations with illicit activities, many of these criticisms stem from inaccuracies and misconceptions.
It's important to keep in mind that Bitcoin and other cryptocurrencies are still a risky investment, and they may not be suitable or appropriate for all investors.
Let's look at the primary issues raised by skeptical of Bitcoin, and shed light on the misunderstandings to provide a clearer picture of Bitcoin’s potential and stability. This examination of each concern with a balanced and factual approach will demonstrate why Bitcoin deserves consideration as a valuable and innovative asset in modern investment portfolios.
"It's not a currency."
A currency is a system of money in general use in a particular country or economic context. Currencies have three main functions:
- Medium of Exchange: A currency is used to facilitate the exchange of goods and services. It eliminates the inefficiencies of a barter system by providing a widely accepted medium that people can use to transact.
- Unit of Account: A currency provides a standard numerical unit of measurement for the market value of goods and services. This function allows consumers and businesses to compare prices and values easily.
- Store of Value: A currency must maintain its value over time, allowing individuals and businesses to save and retrieve their purchasing power in the future. This function is critical for long-term financial planning and investment.
No currency is perfect in all three functions. The US dollar lacks as a store of value because of inflation, just like any other fiat currency. Bitcoin lacks as a unit of account because of its volatility, but functions exceptionally as a store of value and medium of exchange, as will be demonstrated below. While it is not yet a perfect substitute for traditional currencies in all aspects, Bitcoin’s ongoing development and adoption suggest that it could play a more significant role in the global financial system in the future.
"It's only used by criminals for fraud, scams, and illicit activity."
This topic was previously covered in the Escient Financial Insights articles About Those Objections to Cryptocurrency You May Have Heard... and Is Crypto a Scam. Many cryptocurrency exchanges and businesses adhere to strict regulatory frameworks, including Know Your Customer (KYC) and Anti-Money Laundering (AML) laws, to prevent illicit activities. The bottom line here is that Bitcoin is a very poor choice for criminals to use for illicit activity. Bitcoin's blockchain is a public ledger, which can be scrutinized by anyone. This transparency actually makes it harder to use for illicit purposes compared to traditional cash, which is untraceable.
In fact, there is more fraud with the US dollar and the traditional financial system than there is with Bitcoin and blockchain cryptocurrencies. A Coinbase article highlighted research that showed in 2020 only 0.34% of cryptocurrency transaction volume was attributed to criminal activity, as opposed to 2.7% of global GDP for fiat currency. A recent Chainalysis report showed that with the growth in the value of the cryptocurrency market, the dollar amount has increased in recent years, but the percentage remained the same at 0.34%.
There certainly have been fraud cases and scams related to crypto, including the FTX fraud and subsequent collapse. However, the traditional financial system has seen its fair share of similar incidents, including Bernie Madoff's Ponzi scheme and Enron's fraud and subsequent collapse, among others.
There are many use cases for Bitcoin. Bitcoin is used by millions for legitimate purposes, such as international remittances, investment diversification, and as a store of value. Major companies like Microsoft and Overstock accept Bitcoin as a form of payment.
"It's a fad."
Also previously discussed in the Escient Financial Insights article About Those Objections to Cryptocurrency You May Have Heard..., Bitcoin has proven to be more than a passing fad.
The duration of fads can vary widely, but they typically last anywhere from a few months to a couple of years. A fad is generally characterized by a rapid rise in popularity, a peak period where it is widely adopted, and then a relatively swift decline as people move on to something new. Here are some examples of fads and their durations:
- Pet Rocks (1975-1976): This fad lasted about six months. Pet Rocks were smooth stones sold as pets, complete with a cardboard box "pet carrier" and breathing holes. They became a huge hit during the holiday season of 1975, but quickly faded out by mid-1976.
- Beanie Babies (Mid-1990s): Beanie Babies were a major fad in the mid-1990s, lasting about three to four years at their peak. These small stuffed animals became collectors' items, with some being resold for hundreds or even thousands of dollars.
- Silly Bandz (2009-2011): These colorful silicone rubber bands shaped like animals, objects, and other fun shapes were a major trend among children and pre-teens. The fad lasted for about two years.
- Tamagotchi (1997-1998): These handheld digital pets were incredibly popular among children in the late 1990s. The initial fad lasted around two years before interest waned.
- Gangnam Style (2012): The song by South Korean artist Psy became a global hit and a cultural phenomenon in 2012. The fad around the song and its associated dance moves lasted about six months to a year.
Fads are often driven by social factors, media coverage, and the novelty of the product or trend. Once the novelty wears off or a new trend emerges, the previous fad tends to decline quickly. In contrast, a trend or phenomenon that sustains growth and maintains relevance over a long period is typically considered a long-term trend or a societal shift rather than a fad.
Characteristics Differentiating Long-Term Trends from Fads:
- Sustainability: Long-term trends demonstrate the ability to sustain and grow over many years, whereas fads peak quickly and decline just as rapidly.
- Impact: Long-term trends often lead to significant changes in behavior, industry standards, or societal norms. Fads typically have minimal lasting impact.
- Adaptability: Successful long-term trends adapt and evolve to remain relevant. Fads are often rigid, leading to their eventual decline when novelty wears off.
Bitcoin has been around for more than 15 years and has grown from a niche concept to a widely recognized asset class, with institutional investors and publicly traded companies adding it to their portfolios. The Bitcoin network has been upgraded to feature new capabilities, improve ease-of-use for users, and expand its scalability. Major financial institutions like Fidelity, JP Morgan, and Goldman Sachs are now involved in Bitcoin, offering custody services and trading options. Bitcoin's sustained growth and increasing adoption over more than 15 years suggest it is more than a passing trend.
"It's not a store of value."
There are multiple factors that enhance the value proposition of Bitcoin, including limited supply and outperformance of traditional stores of value like gold and many stock indices. Bitcoin is often referred to as "digital gold" due to its utility as a hedge against inflation, the debasement of fiat currency, and economic instability, further solidifying its role as a store of value. Here’s an in-depth look at why Bitcoin is considered a strong store of value:
Scarcity
Bitcoin's total supply is capped at 21 million coins, making it inherently scarce. This scarcity is akin to precious metals like gold, which have a limited supply and are valued for their rarity. The fixed supply of Bitcoin contrasts with fiat currencies, which can be printed in unlimited quantities by central banks, leading to potential devaluation through inflation.
Decentralization & Security
Bitcoin operates on a decentralized network of computers (nodes) that maintain the blockchain, a public ledger of all transactions. This decentralization ensures that no single entity controls Bitcoin, reducing the risk of manipulation or failure due to centralized points of control. Additionally, Bitcoin’s blockchain is secured through a process called proof-of-work, which requires significant computational effort to verify transactions, making it highly resistant to fraud and hacking.
Historical Performance
Since its inception in 2009, Bitcoin has seen tremendous price appreciation. For example, Bitcoin's price increased from less than $1 in 2010 to over $60,000 today, representing significant long-term growth. Compared to traditional stores of value like gold, Bitcoin has outperformed in terms of price appreciation over the past decade. According to data from CoinMarketCap and other financial databases, Bitcoin’s annualized returns have been significantly higher than those of gold and major stock indices like the S&P 500.
It is important to note here, that although Bitcoin has been the best performing asset over the past 15 years, that won't necessarily continue to be the case. Past performance is not a guarantee of future performance. Bitcoin is still a volatile and more risky asset than most other investments.
Hedge Against Inflation
Bitcoin is often referred to as "digital gold" because, like gold, it is seen as a hedge against inflation. In times of economic uncertainty and inflation, investors often seek assets that can preserve value. Bitcoin's limited supply and decentralized nature make it an attractive option for those looking to protect their wealth from currency devaluation. Here are some examples:
- During periods of economic instability, such as the COVID-19 pandemic, Bitcoin saw increased interest and investment as people sought safe-haven assets. Bitcoin's price surged from around $7,000 in early 2020 to over $60,000 by early 2021.
- Major companies and institutional investors, such as Tesla, MicroStrategy, and Square, have added Bitcoin to their balance sheets as a hedge against inflation and economic uncertainty. This institutional interest and adoption are strong indicators of Bitcoin's perceived value as a store of value.
Market Liquidity & Acceptance
Bitcoin’s growing acceptance and market liquidity also contribute to its viability as a store of value. It is traded on numerous exchanges worldwide, with high daily trading volumes, allowing investors to buy and sell Bitcoin easily. Furthermore, the increasing number of merchants and service providers accepting Bitcoin as payment enhances its utility and stability.
Technological Advancements
Bitcoin’s underlying technology continues to evolve, with improvements in scalability, transaction speed, and security. Innovations like the Lightning Network aim to make Bitcoin transactions faster and cheaper, increasing its practicality for everyday use while reinforcing its store of value proposition.
Bitcoin's limited supply, decentralized and secure network, historical price appreciation, and increasing acceptance as a hedge against inflation make it a compelling store of value. Its performance during periods of economic uncertainty and its adoption by major institutional investors further validate its role as a modern, digital store of value. As Bitcoin continues to gain mainstream acceptance and technological advancements, its position as a reliable store of value is likely to strengthen.
"It's worthless."
The argument that Bitcoin is worthless fails to consider its substantial market valuation and widespread acceptance. Bitcoin's market capitalization is more than $1 trillion, reflecting the value the market attributes to it. Thousands of merchants and businesses accept Bitcoin, indicating its real-world utility. Institutions and Wall Street are now adopting and endorsing Bitcoin, which provides credibility for its long-term value. Additionally, Bitcoin’s underlying blockchain technology represents a significant technological breakthrough in decentralized, secure digital transactions, adding intrinsic value.
"It will go to zero."
Fears that Bitcoin will eventually go to zero are mitigated by significant investments from major corporations and financial institutions, which demonstrate confidence in Bitcoin’s long-term value. Bitcoin benefits from robust network effects, with a growing user base, miner network, and developer community, all supporting its continued existence and value. Historically, Bitcoin has shown resilience, recovering from numerous market downturns and regulatory challenges, consistently regaining and surpassing previous price levels.
Is it possible that Bitcoin could go to zero? Yes, just like many companies currently trading on the stock market can go bankrupt next year. The importance with Bitcoin, just as with any other investment, is to diversify and control the risk it may present to your investment portfolio. Don't invest so much in a single investment that it would put your portfolio and your ability to achieve your financial goals at risk if it were to lose its value.
"There are no use cases."
Contrary to the claim that Bitcoin has no use cases, it provides numerous valuable applications. It also offers financial services to the unbanked and underbanked populations worldwide. In the realm of decentralized finance (DeFi), Bitcoin can be used as collateral, providing access to lending, borrowing, and other financial services without traditional banks.
- Bitcoin provides an alternative store of value, particularly in regions with unstable currencies or economic systems. Bitcoin's limited supply of 21 million coins creates scarcity, which can contribute to its value. Bitcoin's blockchain technology offers a secure method for storing digital assets. The cryptographic principles underlying Bitcoin ensure that it is extremely difficult to counterfeit or double-spend, making it a reliable store of value.
- Bitcoin offers a low-cost, efficient way to send money across borders. Traditional remittance services often charge high fees and take several days to process. Bitcoin transactions can be faster and cheaper, providing a valuable service to millions of people who rely on remittances from family members abroad.
- Cryptocurrencies offer financial services to the unbanked and underbanked populations. In many parts of the world, traditional banking services are inaccessible, and cryptocurrencies provide a way to participate in the global economy, transfer value, and store wealth securely. Although we here in the United States and some other developed countries may not care about this, it does provide value to the technology and the asset.
- In countries experiencing hyperinflation or economic instability, Bitcoin serves as a hedge against currency devaluation. People in countries like Venezuela, Argentina, and Zimbabwe have turned to Bitcoin to preserve their wealth as their national currencies lose value rapidly.
- In some countries, Bitcoin is recognized as legal tender. El Salvador, for example, has adopted Bitcoin as an official currency, allowing its use for everyday transactions and as a reserve asset.
- Bitcoin provides faster settlement of the transfer of money than the traditional financial system and fiat currencies. A Bitcoin transaction can be settled in as little as less than 10 minutes, though it could take longer depending on network traffic. Most transaction settle within an hour. With the traditional financial system settlement typically takes a few days, but can take as long as several days for larger amounts.
"It's gambling."
While Bitcoin can be volatile, it is not merely gambling. Many investors incorporate Bitcoin into a diversified investment strategy, allocating a small percentage of their portfolio to it as a high-risk, high-reward asset. Investment decisions in Bitcoin can be based on thorough research, market trends, and analysis, similar to other asset classes, rather than pure speculation.
As with any other investment, it's important to diversify and not invest so much in any single asset that it poses a large risk to your overall portfolio, your financial plan, or your financial well-being.
"Nothing backs it."
As discussed in the Escient Financial Insights article About Those Objections to Cryptocurrency You May Have Heard..., you need to look no further than fiat currencies, like the US dollar. Fiat currencies are government-issued currencies that are not really backed by anything except the good faith, credit, and trust of the nation's government and economic strength of the nation itself. Some people today still think the U.S. dollar is backed by gold, but it actually hasn't been backed by gold since 1971.
The claim that Bitcoin is not backed by anything overlooks its intrinsic properties. Bitcoin is backed by its decentralized network, cryptographic security, and limited supply, which provide value. Its value is derived from the trust and consensus of its users and the robustness of its underlying technology.
"There's no investment case."
Despite claims to the contrary, Bitcoin has clear investment use cases. It offers diversification benefits due to its low correlation with traditional asset classes like stocks and bonds. Bitcoin can also serve as a hedge against inflation and the debasement of fiat currency, especially in times of monetary policy changes and economic uncertainty. Historical performance shows that Bitcoin has provided substantial returns over the long term, attracting both retail and institutional investors. Statistically, Bitcoin has a much greater performance measurement for the amount of risk or volatility of the asset.
Bitcoin miners are incentivized to secure the network by validating transactions and adding them to the blockchain. For their efforts, miners receive newly minted bitcoins as block rewards. Initially, the reward was 50 bitcoins per block, but it halves approximately every four years in an event known as the "halving." This makes bitcoin more scarce as user adoption increases.
In addition to block rewards, miners also earn transaction fees paid by users to have their transactions processed and confirmed. As block rewards decrease over time, transaction fees are expected to play a more significant role in incentivizing miners.
Many investors hold (or "HODL") bitcoins as a store of value, anticipating its price appreciation due to its fixed supply and increasing demand. This long-term holding strategy creates scarcity in the market, which can drive up the price and incentivize further investment.
Bitcoin's economic ecosystem also includes a market for buying, selling, and trading. This liquidity provides opportunities for traders and investors to profit from price fluctuations. Exchanges and trading platforms benefit from transaction fees, contributing to the overall economic activity surrounding Bitcoin.
Bitcoin's open-source nature encourages developers and entrepreneurs to innovate within its ecosystem. Projects like the Lightning Network aim to improve Bitcoin's scalability and transaction speed, enhancing its usability and attractiveness. Economic incentives drive continuous improvement and expansion of Bitcoin's capabilities, fostering a dynamic and evolving ecosystem.
"You're better off with a stablecoin."
Bitcoin and stablecoins serve two different purposes. Stablecoins are designed for stability and are useful for transactions, while Bitcoin is intended as a store of value and an investment. Bitcoin’s volatility allows for growth and appreciation in value, unlike stablecoins, which are pegged to fiat currencies and do not grow in value. In fact, due to inflation, stablecoins actually lose value over time. Moreover, Bitcoin’s decentralized nature and robust security features make it unique and valuable as a digital asset, whereas many stablecoins depend on centralized entities.
Typically, a person would not use Bitcoin to make small purchases, such as buying a coffee at Starbucks, because of the transaction cost and UTXOs. UTXO stands for Unspent Transaction Output, and the topic may deserve its own article. We'll avoid going into too much detail here, except to say that the way Bitcoin handles addresses, transaction sizes, and transactions with change (the unspent part of Bitcoin in a single address), could cause exorbitant transaction fees in the future when Bitcoin balances and transactions are not managed carefully and properly. For these situations, stablecoins do provide a better solution, but they fail at providing an effective store of value.
"It's speculation."
While Bitcoin can be used for speculative trading, it is also viewed as a long-term investment. Holding Bitcoin over several years has historically yielded significant returns. The increasing adoption of Bitcoin by major financial institutions and companies lends credibility and reduces its speculative nature. The development of regulatory frameworks for Bitcoin and other cryptocurrencies is helping to stabilize the market and legitimize it as an investment.
Additional, it's important to consider that anyone who invests in anything hopes to at some point sell what they bought to someone else at a higher price. Some people may try to argue that if there's no intrinsic value then the investment is not an investment and is instead speculation. First, Bitcoin has intrinsic value, as explained above. Second, an investment that has intrinsic value can still be speculative. It could be argued that any investment is speculation because there's no guarantee the investment will go up in value. Even investing in the stock market could be considered speculative, especially once the price exceeds the intrinsic value. This article shows how far above its intrinsic value (2531.15) the S&P 500 is priced (5280.33) today.
"There's no way to value it."
The claim that "there's no way to value Bitcoin" is a common criticism, but it overlooks several established methods and frameworks used to assess its value. While valuing Bitcoin can be more complex than valuing traditional assets, it is by no means impossible. Here's are some of the ways to measure Bitcoin's value:
Fundamental Analysis
Supply and Demand Dynamics
Bitcoin's value can be assessed by understanding its supply and demand dynamics. Bitcoin has a fixed supply of 21 million coins, which creates scarcity, similar to precious metals like gold. The demand side is driven by various factors such as increased adoption by both retail and institutional investors, acceptance by merchants, and recognition as a digital store of value. As demand increases and supply remains fixed, the value of Bitcoin can rise accordingly.
Network Activity
Metrics such as the number of active addresses, transaction volumes, and the hash rate (the computational power securing the network) provide insights into the health and usage of the Bitcoin network. High network activity often correlates with higher value, as it indicates robust participation and utilization of the Bitcoin ecosystem.
Adoption Rates
The level of adoption by various entities significantly impacts Bitcoin's value. This includes the number of wallet addresses, the extent of merchant acceptance, and the integration of Bitcoin into financial products and services. Higher adoption rates generally signal a growing acceptance and utility, contributing to increased value.
Technical Analysis
Price Charts and Patterns
Technical analysts study historical price charts and patterns to predict future price movements. Common tools include support and resistance levels, moving averages, trend lines, ratios, and more. These methods, while not unique to Bitcoin, provide a framework for understanding its price dynamics and potential future trends.
Market Sentiment Indicators
Tools like the Fear & Greed Index, which measures market sentiment, can help gauge investor emotions and potential price movements. High levels of greed may indicate a market top, while extreme fear can suggest a buying opportunity. These indicators help in assessing short-term value fluctuations.
Volume Analysis
Trading volume provides insight into the strength of a price move. High volume on an upward trend suggests strong buying interest, while high volume on a downward trend indicates strong selling pressure. This analysis helps in understanding the market's conviction behind price movements.
On-Chain Metrics
There are many metrics used to evaluate Bitcoin. Here are are few common ones:
Market Value to Realized Value (MVRV) Ratio
The MVRV ratio compares Bitcoin's market capitalization (current price) to its realized capitalization (the average price of coins based on their last movement). An MVRV ratio above 1 indicates that Bitcoin is trading above its historical average cost basis, potentially signaling overvaluation. Conversely, a lower ratio may indicate undervaluation.
HODL Waves
This metric tracks the age distribution of Bitcoin held in wallets, showing the percentage of Bitcoin that has not moved for various periods. Long-term holding trends and accumulation phases can provide insights into market sentiment and potential future price movements.
NVT Ratio (Network Value to Transactions)
The NVT ratio is akin to a price-to-earnings ratio for Bitcoin. It compares Bitcoin's market capitalization to the transaction volume on its network. A high NVT ratio may suggest that Bitcoin is overvalued relative to its transaction volume, while a low ratio could indicate undervaluation.
Macroeconomic Factors
Monetary Policy and Inflation
Bitcoin is often viewed as a hedge against inflation and monetary debasement. The policies of central banks, such as quantitative easing and interest rate adjustments, can influence Bitcoin's attractiveness as an alternative store of value. In times of expansive monetary policy and rising inflation, Bitcoin's value may increase as investors seek refuge from devaluing fiat currencies.
Global Economic Stability
Economic instability and geopolitical events can drive demand for Bitcoin as a safe-haven asset. Events such as financial crises, currency devaluations, and political turmoil can increase Bitcoin's appeal, contributing to its value appreciation.
Institutional Investment Trends
The level of institutional interest and investment in Bitcoin provides significant insights into its valuation. Publicly traded companies adding Bitcoin to their balance sheets, the launch of Bitcoin ETFs, and the involvement of major financial institutions signal growing mainstream acceptance and can drive up the value.
Peer Comparisons
Comparison with Traditional Assets
Comparing Bitcoin to traditional assets like gold, equities, and bonds provides a perspective on its relative value. For example, Bitcoin's market capitalization compared to gold's market capitalization can highlight its potential growth.
Comparison with Other Cryptocurrencies
Evaluating Bitcoin against other cryptocurrencies in terms of market share, use cases, and technological advancements helps assess its competitive position and potential value.
Even More Ways and Examples
There are even more ways to measure the value of Bitcoin, though those above may be the most widely used. A research paper by the CFA Institute shows more ways and provides detailed examples and analysis.
"Transaction costs are too high."
While Bitcoin transaction fees can be high during periods of network congestion, several technological advancements and scaling solutions are actively addressing this issue. The Lightning Network and SegWit are already making significant progress in reducing fees and improving transaction efficiency, making it possible to transfer Bitcoin at a cost as low as fractions of a penny. Moreover, even with current fee levels, Bitcoin offers competitive advantages for high-value and cross-border transactions. As the ecosystem continues to mature, Bitcoin transaction fees are expected to become more manageable, making it a viable option for a wide range of use cases.
"It's not liquid enough."
The concern that Bitcoin is not liquid enough is increasingly outdated, especially given the rapid development and growing maturity of the cryptocurrency market. Bitcoin is listed on virtually all cryptocurrency exchanges globally, making it highly accessible. The presence of Bitcoin on numerous platforms ensures that it can be traded 24/7/365 across different time zones, enhancing its liquidity.
Bitcoin is one of the most traded assets in the world. Major cryptocurrency exchanges such as Binance, Coinbase, and Kraken handle billions of dollars in Bitcoin trades daily. For example, recent daily trading volume for Bitcoin often exceeded $20 billion, indicating a high level of liquidity.
s Bitcoin becomes more widely accepted for everyday transactions and as a payment method by merchants, its liquidity improves. Services like PayPal, Square’s Cash App, and other payment processors facilitating Bitcoin transactions increase its liquidity in real-world commerce.
"No one wants to work with small fractions or decimals of Bitcoin."
This completely overlooks the practical design and usability of Bitcoin's smallest unit, the satoshi. Each Bitcoin is divisible into 100 million smaller units called satoshis. This high level of divisibility means that even small transactions can be conducted easily using fractions of a Bitcoin, or more precisely, satoshis. For example, instead of dealing with 0.000001 BTC, you would use 100 satoshis, making transactions more straightforward and intuitive. Satoshis make small transactions feasible and user-friendly. Just as people are comfortable using cents, satoshis can become a standard unit for small transactions in the Bitcoin ecosystem. Through technological solutions and public education, the usability of satoshis can further enhance Bitcoin’s practicality for everyday use.
Bitcoin Continues to Evolve
Many of the arguments against Bitcoin stem from misconceptions or outdated views. Bitcoin’s legitimate uses, growing adoption, store of value characteristics, intrinsic properties, and investment potential all challenge the notion that it is merely a speculative, worthless, or illicit asset. As Bitcoin continues to evolve, its role in the financial landscape becomes increasingly significant, offering unique benefits that distinguish it from traditional assets and currencies.
Do you have more questions about Bitcoin or other investments? Go ahead and...
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Digital assets and cryptocurrencies are highly volatile and could present an increased risk to an investors portfolio. The future of digital assets and cryptocurrencies is uncertain and highly speculative and should be considered only by investors willing and able to take on the risk and potentially endure substantial loss. Nothing in this content is to be considered advice to purchase or invest in digital assets or cryptocurrencies.
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