If you’re wondering how you should treat Bitcoin, as an investment vehicle, allow me to share with you guys my non-expert opinion.
End of story, thanks a lot for reading.
See you next time.
–this article shouldn’t be taken as financial advisement as it represents my personal opinion and views. I have savings invested in cryptocurrency so take whatever I write with a grain of salt. Do not invest what you cannot afford to lose and always read as much as possible about a project before investing. Never forget: with great power, comes great responsibility. Being your own bank means you’re always responsible for your own money—
Cryptocurrency investment is one of the hottest topics we can discuss today, as there are many different opinions on what the future might hold for Bitcoin.
Due to the regulatory bodies world-wide having different approaches towards the subject, while at the same time Bitcoin being decentralized and not belonging to a single entity/organization, investors usually feel uncertain towards the future use of digital cryptocurrencies.
An important point, however, is that from a money-making perspective, which is what matters at the end to any investor, Bitcoin is undoubtedly one of the strongest profit vehicles since it came to existence – probably the best asset ever created: digital gold.
The Bitcoin Timeline
First we grab a price level, like when Bitcoin was around USD 8200. Now, if you want to understand if that price level is interesting, consider the following: the likelihood of having invested in Bitcoin at any given point in time since its inception while actually profiting from it, is about 97%.
Sounds too good to be true, right?
Except, it’s not.
By doing a rough estimate, we can quickly see Bitcoin has only been above USD 8200 for about 137 days. As it is traded for about 1917 days, there’s a ~ 97% chance you bought Bitcoin when its price was lower than USD 8200.
Of course this also means you only had a 3% chance of selling at the right time.
There’s always a dark-side to everything, right?
My point still stands: if we only take into account price and time, you’re actually way more likely to have made a bet at the right time, than the opposite.
I know these statistics are fun to play with, but they hardly bring you any real value. Knowing when you could have bought and sold it’s important from a learning perspective, although real investor education happens in a most peculiar way; usually, by making wrong bets and suffering through bearish seasons, that is.
What you desire to know is not how much money you could have made. What you, and everyone else, really want to find out is how much you can still make.
And today, that is what I’ll be discussing.
With a few twists, some side-track topics and the usual delightful shenanigans.
Before we go any further, please remember the below warning:
Anyone who tells you they’re not in it for the money are either lying or don’t need to care about money because they have so much of it, diversified over so many assets, their risk is quite low.
Back to what matters.
Is The Future Bright?
Depending on where your political and economic view-point stand, Bitcoin can either be the world’s savior or its demise.
In my humble opinion, as an economist, I think most of us are dead wrong on how we think money works . I won’t go into too much detail about the subject, as I really want to write an exploratory paper on how (I believe) money should be earned and accessed. The point worth extrapolating is that, much opposed to general belief, I do think there are many different ways to redistribute wealth properly and to create incentive systems for everyone being able to earn cryptocurrency.
Seems illogical that the biggest problem in cryptocurrency (adoption) could be easily fixed by creating ecosystems where users earn tokens for doing things.
Literally anything at all.
Part 1: The Bitcoin Market
When we look at how the market has been evolving, since its birth, I would expect this “bubble” like behaviour to continue, maybe indefinitely.
There are many factors which will balance into the behaviour of price, especially market manipulation, regulatory actions and, of course, both institutional money and other financial investment vehicles (like Bitcoin futures or ETFs).
Historically speaking, Bitcoin has been kind to long-term investors.
Short-term investors cannot complain too much, as Bitcoin is one of the most (if not the most?) volatile assets out there.
Plus, I believe smart-money is coming full force, as it usually happens after every Bitcoin bearish season.
Want an expert opinion on the real value of Bitcoin and possible triggers for mass adoption?
Check this beautiful piece from Hacked’s one and only, Mati Greenspan.
As with everything in life, there’s the good and the bad (sometimes the ugly too); and Bitcoin is not an exception.
If there are many factors that could trigger a price increase, like mass adoption, there are others that can have quite an opposite effect.
Let’s check which triggers can potentially call for bear and bull markets.
Market price manipulation
To me this is definitely the grand-master behind the major price run we’ve seen in late December 2017 and January 2018. It did take me some time to truly understand why, but due to the amazing work of so many different people, we now have a better, clearer picture of what really happened.
Tether manipulated the markets by manipulating the price of Bitcoin. It wasn’t any technology advancement in neither Bitcoin, nor the large quantities of dumb money entering the market.
The key argument pointed out by Prof. Griffin on the research paper “Bit “, was that “When Bitcoin’s price fell, purchases with Tether tended to increase, helping to reverse the decline. But during times when Bitcoin rose, Griffin said he didn’t see the reverse occur.” Seems Tether was protecting the price of Bitcoin from crashing.
To accomplish this, large quantities of Tether were issued and used to buy Bitcoin on Bitfinex. Of course this wouldn’t be such a big deal if Bitfinex wasn’t owned by the same people who own and mint Tether. But that’s not even the worse. Consider this: wouldn’t you expect a company that claims they own reserves on a 1:1 ratio between Tether and USD, to be fully externally audited and show proof of those USD reserves?
Another huge red flag if you ask me.
To those who now claim “oh but some lawyer dudes just came out and said Tether bank accounts are fully backed so it’s all good”, please, I beg you to actually do some digging.
The only thing Freeh, Sporkin & Sullivan LLP (FSS) said about Tether was: “FSS is confident that Tether’s unencumbered assets exceed the balance of fully-backed USD Tethers in circulation as of June 1st, 2018.”
That doesn’t sound like a real assurance to me.
Especially when you consider the “official” news-source, that appeared unsigned by the FSS board on Tether’s website, also stated “procedures performed are not for the purpose of providing assurance”.
Bitcoin Futures
My view on futures is a bit blurry. I understand their purpose and I also recognize their effectiveness in taming markets, especially during the short-term. Does it work in the long-term?
In 1974 the first gold futures contract was traded on the COMEX exchange in New York. Trading started on December 31.
Fast-forward three years and gold was back rising to new highs.
That’s right. No one can tame the ambition of human beings to exponentially increase their wealth, time after time; there is no futures market that can ever stop speculation. Money talks louder and that means there will always be new smart-money coming into the actual asset, making its price go higher. What will happen is that those same people will have an extra incentive.
Smart-money
As we’ve seen in the past the usual trigger for adoption is smart-money coming into any market. Bitcoin, of course, is no different.
The logic is quite simple.
Smart-Money -> Media Hype -> Adoption
You might think this is oversimplifying how things work, but the logic is dictated by public perception of Bitcoin.
Is it a good investment vehicle? Should I store money in Bitcoin? Do other people actually accept it?
The answer to world-wide adoption is acceptance; but acceptance only comes with adoption.
It’s the chicken-egg dilemma. The most beautiful redundancy.
What this means is that both adoption and acceptance walk hand-to-had; one leads to the other and none can exist alone.
That is why market manipulation or Bitcoin’s futures, although being the bad are not that bad. Manipulation usually means high volatility, which in turns bring massive profits.
Sure, I get this isn’t helpful to the ultimate goal of cryptocurrencies – which to me is the ability to shift wealth redistribution.
I also can’t make exclude the hypothesis this feature of cryptocurrency won’t be the catalyst for its destruction; however, if we apply logic and reasoning taking into account the recent Bitcoin price history, we can clearly expect volatility to bring more and more people into the market.
Price Volatility
Ups and downs are usually a nice and easy way to help bubbles growing.
And, as you might know, bubbles have a certain tendency to pop.
History has taught us it usually isn’t a question of if, but when.
When downwards price movement dominates a market the only thing you can usually do is sit and wait. Cryptocurrencies, especially bitcoin, are prone to huge downfalls, yes; but we can also expect massive rebounds at some point.
There are always some unbreakable rules successful investors follow, in order to being able to succeed.
Again, please remember this is not financial advise
To me those are:
- Invest only what you can afford to lose;
- Buy when there’s fear, sell when there’s hype;
- The market behaves in waves. Be patient and wait.
Because I follow those rules I’m not afraid of bear-markets. Heck, just remember 2012-2013.
Whatever goes around comes around, so being passive is sometimes a better decision that getting ahead of everyone.
Just think: what are the chances you actually figured out how to beat the entire market?
That’s why I personally do not trade – yet envy those who successfully do it.
You need cunning, agility and balls of steel; otherwise emotion will most likely triumph over reason.
Anyhow, the chances you’ll get stuck at a really bad price-level (ie, if you bought bitcoin near USD 20,00.00) during an extensive amount of time, are not that great.
Yet, as time is a relative thing, our ability to be patient is also relative. Meaning what I consider to be an acceptable amount of time, you could see it as unbearable.
- Would you wait 1 year to increase your portfolio in 100%?
- What if you could increase it 500% over a space of 2 years?
- Better yet, what if it grew 5000% over the course of 3 years?
Are you thinking “I’m sure could do it”?
Alright, then do a quick exercise:
Have you ever done anything long-term, during at least the amount of time you’re considering investing, which costs you time, money and doesn’t pay-off anything?
If so, then I would argue you can definitely succeed at hodling.
If not, maybe you should consider a different approach.
Patience isn’t an easy skill to learn when we live in an inflationary world: money of tomorrow will be worth less, meaning you need to keep getting more and more present value, instead of focusing on future value.
Faster Payments, fewer fees
Since the introduction of the Blockstream Store in January, the Lightning Network has grown tremendously. Around the announcement, the Lightning Network had a total of 46 open channels and 0.682 BTC in capacity. Nowadays, there are roughly 7,800 open channels with 26 BTC of capacity. That is a 16,856% increase in channels and a 4,084% increase in channel capacity in 6 months!
As the Lightning Network grows, additional integration options will become available that could provide exchanges and users with security and ease-of-use benefits beyond the two basic integration strategies described above.
- Exchange-specific, Lightning-driven apps
With Lightning, it can become possible to allow exchange users to make trades from within dedicated local apps, making deposits and withdrawals transparent to users. These apps can run on desktops, smartphones, or on more secure hardware devices such as the Ledger Blue. With exchange functionality integrated with a Lightning wallet, funds can be moved into an exchange’s control for the minimum time required for a trade to execute. Immediately after an order is filled or expires, the funds would be returned to the control of the user’s wallet/exchange app via Lightning. This could potentially create a simpler experience for users as well as reduce risk for exchanges in case of security breaches, as the amount of funds stored in hot wallets could be much lower.
- Deposits and withdrawals via the public Lightning Network
With the two integration strategies described above, it’s assumed that users will be opening channels directly with exchanges. This will be economical for larger-scale traders who move money in and out of exchanges often. However, as the Lightning network develops, it will be possible for users to have open channels into the public Lightning network and for those users to be able to route deposits and withdrawals via intermediary nodes. It will likely take some time before there is enough connectivity within the Lightning Network for this to work, but when this becomes possible, it will allow a user’s channels to be used for a variety of different kinds of payments as well as multiple exchanges. With channel setup costs spread across multiple applications and counter-parties, Lightning transactions will become cheaper and more convenient.
There are many ways to improve scalability and off-chains are a great way to accomplish that.
Why should increasing the block-size be a better solution, if it will put more stress onto small transaction due to increasing fees?
Scalability will happen, just a bit differently than you might expect.
We already have the unique piece that allows for scalability to happen: an underlying asset people can use a store of value.
Whatever is built on top doesn’t really matter if the underlying layer, bitcoin’s blockchain, is still used as the settlement layer.
From batching and Shnorr signatures, to the Lightning Network and atomic swaps, there are as many ways to improve transaction throughput, as far as our imaginations reach out. You could potentially have digital fiat-currencies redeemable for Bitcoin. You can have other side-chains that interface with a single wallet app, meaning if it’s easy to exchange your tokens and other cryptocurrencies for Bitcoin, you will still use it as a base-layer to store your “gains”.
The point is: let’s not focus too much on something that will eventually happen. Everyone (myself included, full disclosure) has been focused on technology and price so much, we forgot to take a couple of steps back and re-visit some core debates, crucial for the overall Bitcoin acceptance.
Part 2: Tokenomics, The Key To Adoption
If you wonder how tokenomics can foster user adoption, think of the best way you know to redistribute value. In Bitcoin, that is done through mining and selling the actual currency.
Right now most projects we see, spawning here and there, which actually try to implement a successful business models based in tokens, are forgetting some key aspects of the most important metric of all: purpose.
Andreas usually says: what can your business gain from decentralization?
I say: what can your business give to decentralization?
The reason is simple, if you create a system where you need to “subscribe” or spend money for tokens in order to participate, then the system is not inclusive.
If you build a system where participants are rewarded for participating, like Bitcoin rewards miners for securing the blokchain, then you can build any incentive system which users may see as actual value.
By combining the power of fast payments with tokenomics, I can easily see a world where value is simply traded and earned through mostly everything we do.
Decentralization doesn’t mean “screw the middleman”.
Actually, decentralization depends much on the middle-man. Except we all can become that middle-man because as we spend time in a certain network, doing certain things, we get rewarded.
Decentralization means implementing systems which properly balance reward payouts, to all participants, in as many different ways possible.
The middleman is always welcomed, I highly doubt the world would survive without platforms and distributors and companies linking networks of producers and consumers, investors and start-ups, even creditors and debtors.
And all work must be paid in kind, isn’t that right?
If cryptocurrency uses its underlying technology properly, then there is no reason atomic swaps won’t allow for the emergence of many different middle-men, charging very low fees, competing to hold the power to convert some crypto into another.
If cryptocurrency is easy to convert into other forms of monies, why wouldn’t we solely use cryptocurrency? Trust is backed by both the number of users in a network, as well as its internal ledger security.
As currently Bitcoin seems to be the most technological secure system out there, to store money, it’s just a matter of time until it also becomes the most secure and cheap way to transfer and use money.
However, do not expect the path to the bottom of the rainbow to be clear of perils.
No technological advancement, which promoted checks and balances to avoid power and decision-making centralization, has ever been received in kind.
So why would the world be different towards cryptocurrencies?
When we hear countries banning cryptocurrencies, exchanges being blocked by the rule of man (like India), attacks to promote hype and fear across small-time investors, that is the time we know they are afraid.
Decentralization means breaking concepts and views of the world as we never thought possible.
Companies building crypto-payments or savings apps, crypto-messaging apps, decentralized storage and infrastructure sharing crypto-tokens, or any other crypto-enabled system, will soon realize the easiest way to bring value is by giving value.
Yes, go ahead, create your own money.
It has no value, they say?
It’s of no use, they say?
Terrific! Then nobody will mind if you just give it all away. Like bitcoin did.
The More You Give To People, The Better
If a company has a product which holds value and then decides to distribute a token with a clear purpose within that product’s or organization ecosystem, why wouldn’t people consider that token valuable?
If everything holds value just because we believe it holds value, I see no reason for Bitcoin to have a limited growth.
As long as the network of users continues to grow, price will eventually grow.
Because of its deflationary properties, if people continue to say bitcoin has value (by purchasing it), then I see no reason for a price ceiling.
*Maybe we really are going to the moon!
My opinion could be wrong, Bitcoin might disappear into oblivion someday and we keep stuck with fiduciary currency.
If that is not the case, then the likelihood of Bitcoin’s pricing skyrocketing someday should be incredibly high, simply because it has happened a gazillion times in the past – and history has a tendency to go around in cycles.
I know: past performance does not indicate future performance. However, I haven’t heard of any network which grew in numbers and not in price.
If you were to gamble on the success of cryptocurrency, would you bet in a system no single nation or group of people controls, or in a fiduciary system based on a pyramid logic?
Hope you’ve enjoyed the article!
Give it a like down below and leave a comment. Tweet me @febrocas
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