I've been following Bitcoin since late 2013 when someone I was working with at the time made a comment that he wanted to be paid in the new form of digital currency. This was when it was making a run up to $1K and I just brushed it off. Boy that was a mistake!
Since then, I've been following the space and made my first small purchase at the end of 2019 and then again in March 2020 during the COVID market shakeout. I only put in what I was willing to lose which was about 1% of my investable funds. In hindsight, I could have risked more. Maybe 5%.
What I've learned about Bitcoin has been through listening to my favorite investing mentors. Some have been very pro-Bitcoin and others have been very anti-Bitcoin. My feeling is they likely are both right. In the short term, the pro-Bitcoin people will be right. This is a fantastic innovation that will change the concept of money and store of value. It will only gain in popularity as a safe haven from central banks and governments trying to prop up markets using deficit spending and asset purchases. And as more people learn about it and get comfortable with it as an investment, demand will continue to outstrip supply and push the price higher.
In the long run, I see a few issues and challenges that could reverse Bitcoin's fortunes. They are:
- Bitcoin is only 10 years old. Proponents argue because it's made it that long, it is here to stay. I still think our world is far too fickle to make that argument.
- It's highly likely that something will be invented that is technologically better. Transaction speed alone is a major issue. A platform that can only process 5 transactions per second is not one that can work in the long run in my opinion.
- It is not an environmentally friendly investment. Proof of Work is an elegant concept but is why Bitcoin mining consumes a massive amount of energy needed to keep the network alive. I find it odd that the same investors that say we need to ban coal and oil are the same investors buying Bitcoin that is being mined using energy from coal and natural gas power plants.
- The transaction costs (which become a form of storage costs) are hefty. We just don't see them because the cost is hidden in going from 18mil Bitcoin to 21mil.
- The platform has been rock solid against hacks or major threats so far but that's not to say it still can't happen. Proof of Work is again elegant in this regard because if someone got majority control of the network, it would render all Bitcoin worthless. But that doesn't keep some vengeful entity from doing that anyway nor keep thieves from hacking wallets and exchanges.
- If the miners stop mining, Bitcoin becomes worthless since miners are needed to keep the network running. This is different than the precious metals where if those miners stop mining, the value of precious metals actually increases because it means more limited supply.
- As Bitcoin succeeds, it is becoming more and more financialized (lending, margin, futures, options, derivatives, etc.) which bring a new set of risks. Just because there will only be 21 million coins, that does not prevent financiers from creating a game of musical chairs where there are too many players and not enough chairs.
- Majority of Bitcoin is concentrated in a few people's hands just like the rest of our global economy, so as the price of Bitcoin goes up, it is only exacerbating our wealth inequality issues. We as humanity need to concentrate our focus on solutions that solve this issue, not make it worse.
- Central banks and governments will take notice and try to influence it. Proponents argue this will only boost its appeal, but if the government say taxed my Bitcoin gains at 100%, it would keep me from owning it.
- I know this seems doubtful now but central banks and politicians may start to realize the destruction they are causing by not having sound money. What happens then to Bitcoin if the USD became a decent store of value? Bitcoin will have served it's purpose but will also cause its own demise.