A Frugal Investor

Bitcoin/Cryptocurrency Potential Growth

Overview of Bitcoin from Kahn academy:

https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-what-is-it

The Arguments For and Against The Future Success Of Bitcoin

Bullish Bitcoin

  1. 12 year history, still solid and increasing value year after year, still no clear superior replacement. Etherium is a distant second, with its own growing pains. There may be a future with Bitcoin as “gold” and Etherium as “currency” or crypto platform for processes such as NFTs.
  2. Inflationary Moves By the U.S. pushes investors to look for alternate stores of value as inflationary hedge.
    • Bitcoin can be a hedge against inflation and against declines in other financial assets, such as stocks, bonds and the especially, the dollar.
    • However, some analysts also question bitcoin’s value as a hedge. This year, bitcoin has largely risen in lock step with stocks and bonds at a time when inflation is measured as low. No major inflation has broken out since bitcoin was created 12 years ago, so it is difficult to know whether it truly guards against price increases.
  3. The Supply of Bitcoin Is Limited to 21 Million
    • Related to a hedge against inflation is Bitcoin’s programmed set limits to create scarcity
    • There will be only 21 million bitcoin.*
      *One argument against the scarcity of bitcoin is there’s no hard cap on the number of tokens that are in circulation and instead it’s computer code and community consensus that determine this cap. The counterpoint is that in order to change the 21 million limit 51% of stakeholders would have to agree to propogate the new code. The old code could fork for those that do not want to increase the limit and still stay at 21 million. Additionally it would have to be in the economic interest of the stakeholders to increase the limit, which they presumably wouldn’t do unless it would increase bitcoin value.
  4. Large Institutional Investment
    • Fidelity, Morgan Stanely and others have been moving funds and resources towards bitcoin. There have been large purchases in bitcoin addresses associated with “buy and hold” trends as opposed to short term speculation.
  5. Some Large Companies Accepting Bitcoin
    • The companies accepting as still a tiny percentage of the market, but this is a large lead over other cryptocurrencies, and may indicate large potential growth.
    • PayPal plans to allow bitcoin to be used as a payment method starting early this year.
  6. Large Companies Are Buying Bitcoin
    • Square, also has shown interest in bitcoin commerce, and announced it bought $50 million of the asset.
  7. Coinbase IPO
    • Coinbase trading on the stock exchange is a positive sign about the solvency of bitcoin and allows investors to trade in a bitcoin asset.

Further arguments in favor of Bitcoin:

Bearish Bitcoin*

*Some of these can also be found here: https://www.casebitcoin.com/critiques

  1. Government Shutdown Or Overly Restrictive Regulations
    1. The U.S. has yet to really address the legal status of bitcoin and there is no authorized bitcoin ETF on any U.S. stock exchange.
    2. China has also yet to fully restrict bitcoin, but may do so more agressively in the future.
    3. India banned bitcoin initially, but may walk back that ban.
  2. There is no inherent value of bitcoinBitcoin depends on the faith of investors. Gates as called its valuation reliant upon speculation and the greater fool theory.
  3. Reliance on bitcoin “exchanges” and technical hurdles
    • To be a savy bitcoin user (cold storage wallets and actual mining) requires a fair amount of technical understanding. Bitcoin can be purchased and held on a coin excha one can buy and hold bitcoin at exchanges such as coinbase, this goes against the fundamental
  4. Miners are concentrated in a few countries
    • I See this come up as an argument that Bitcoin isn’t really decentralized and that because it is concentrated in a few countries it may be vulnerable.
  5. Bitcoin is computer code, therefore is susceptible to hacking and/or undiscovered bugs
    • https://en.bitcoin.it/wiki/Weaknesses
    • Node/DoS flood type attack: Sending lots of data to a node may make it so busy it cannot process normal Bitcoin transactions. Bitcoin has some denial-of-service prevention built-in, but is likely still vulnerable to more sophisticated denial-of-service attacks.
    • One should expect the Bitcoin Blockchain sovereignty to come under attack from more and more resourceful bad actors, coalitions of bad actors or even from nation states eventually. Only time will tell if Bitcoin is truly sovereign or not.
    • Most individuals are probably unlikely to setup cold storage protection, but even cold storage can result in bitcoin being lost.
  6. A relatively small amount of people/entities “control” the majority of bitcoin.
    • Estimates are that it would take about 5.5 billion dollars to create a mining system to exploit a 51% attack, but this would be far less if the largest miners would combine their equipment. However, these are also economic stakeholders, so they would also lose more than they would gain. Therefore it would take an non-economic entity to carry out a truly destruptive attack. And then, perhaps it might be possible to fork or roll back the system and blockchain?
    • Possibility of a 51% attack: A 51attack refers to an attack on a Proof-of-Work (PoW) blockchain where an attacker or a group of attackers gain control of 51% or more of the computing power or hash rate. PoW is a system of consensus used by blockchains to validate transactions.
    • Further discussion article on glassnode here A look at the distribution of bitcoin across addresses.
  7. Extremely volitile
    1. However, as a counterpoint some analysts also see an upside to bitcoin’s volatility. Its erratic trading keeps bitcoin’s correlation with stocks and bonds low, creating potential diversification. 
  8. Bitcoin Energy Usage from Proof of Work (PoW)
    1. Climate change is a real problem. However, one can also stay hopeful that alternative clean energy can be used to maintain a Bitcoin network. If alternative energy infrastructure can be built out, it is likely that Bitcoin can adapt to take advantage of that network.
    2. Alternative cryptocurrency based on Proof of Space (Chia Network PoS) or Proof of Stake (Etherium 2.0 PoS) may gain popularity if energy usage of bitcoin becomes more problematic.
  9. Bitcoin Criminal Use
    • Actual criminal use seems minimal, and the few cases (silk road) have seemingly been taken care of as they come up (i.e. the legal framework for tracking and prosecuting seems to be working). Compared to the U.S. dollar, current illicit bitcoin use is a relatively small problem, however tracking cash transfers cannot accurately be determined, wheras it may be possible to more easily track bitcoin transfers via the publick blockchain. Some argue the percentage of illegal use is higher for bitcoin than for cash, but how this could be factually proven seems uncertain.
    • Also, with the public blockchain there is some argument it is easier to track illicit funds than the illicit cash transfers.
    • The counterpoint is that so is the Internet, Cash, Electricity, The Automobile, etc.
  10. Other?

What To Look For Re: Bitcoin Growth

  1. New Government Regulation
    • The U.S. hasn’t created a clear regulatory framework, however coinbase IPO and regulatory treatment thus far is promising. A U.S. bitcoin ETF would be a very bullish sign for bitcoin adoption.
    • How China and India will regulate bitcoin will be important in global adoption of bitcoin.
  2. More Company Purchases
    • So far just a few large companies have a large stake in Bitcoin on their balance sheets (Tesla and MicroStrategy to name two).
  3. More Company Acceptance As Payment
    • Acceptance by major retail would be a strong signal of legitimacy, e.g., Amazon and Walmart accepting bitcoin. However, if bitcoin is a gold equivalent, I don’t believe it is as necessary for retail to accept bitcoin as if the companies start holding bitcoin in finance reserve.
  4. Other?

More Resources:

Interesting discussion on Tim Ferris’ podcast:

For up to date news related to cryptocurrencies, the unchained podcast has been a great source.

News and statistics: https://www.casebitcoin.com/

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