We Never See Nothing

I’ve recently changed my opinion on Bitcoin from being super bullish to thinking that it’s an incredibly risky asset that is completely unpredictable. First, a quick backstory. I first bought into Bitcoin in December 2017 at literally the absolute top. I bought in at around $19,000. I shortly sold after for a small loss and I never touched Bitcoin for over a year. Starting in 2019, I started to get kind of interested in Bitcoin again. I was interested in the actual technology though and not simply the price. I bought in in July 2019 at around $11,000. I had in making purchases here and there and I even bought in at around $5,000 at around March 2020. I was buying more aggressively towards the end of the year and I think my average cost was in the low $20,000’s. I’ve recently sold almost all of my bitcoin for around $46,000. I only have a very small amount now as pure speculation. I want to list all the points made by those in favor of Bitcoin that even I used to make myself. I then want to list my new perspective on them and why I don’t think they are valid. Here goes.

Medium of Exchange

This was supposed to be the original purpose of Bitcoin. It was supposed to be a peer to peer payment system that didn’t need a central authority to function. Maybe Bitcoin was a decent payment system back in the days when it was used on places like the silk road, places where it is not reliable to use a centralized payment system, but it fails as a payment system in the real world for multiple reasons.

1. Bitcoin has exorbitantly high fees. If you want your transaction to occur within the next block, you’re gonna be paying over $10 in fees minimum. If you pay a fee of $1, you’re still gonna be waiting at least a few hours for it to confirm. This is completely impractical for being used in the real economy.
2. Bitcoin cannot scale. Bitcoin can only do about 4 transactions per second whereas Visa can do over 65,000. There is no way for Bitcoin to settle transactions on a global scale with how slow it is. And if more people did start to use Bitcoin, the fees would become even more expensive which relates to my first point.
3. Bitcoin offers no benefit as a medium of exchange to the average person than something like credit cards or apps like PayPal, Cash App, or Venmo. In fact Bitcoin is worse than these apps for the average person. These apps allow you to send money instantly and for free while with Bitcoin you’ll be waiting possibly hours to send money and you’ll pay at least a few dollars. Nobody wants to pay a few dollars to send $20 to a friend to pay them for something.
4. Bitcoin is way too volatile to be used as a medium of exchange. In order for something to successfully work as money in the economy, it needs to be stable. If money does not have a stable price, it will result in all kinds of misallocations of capital in the economy. Borrowing and lending both get screwed up and companies cannot reliably make long term plans if the value of the currency drops by 50% in a year. I actually favor the privatization of money and I want people to be able to use whatever money that they want. I just don’t think Bitcoin works. Personally, I think David Friedman’s idea is best. That is that money should be backed by a basket of commodities in the economy to ensure stable prices. Backing money by a single commodity like gold runs into issues because if that commodity becomes high in demand, it will increase the value of the money without any sort of productivity increase. Backing it by a bunch of commodities is basically the same as diversifying your stock portfolio. It would make it more stable. Anyways that’s a whole different discussion so I don’t wanna get deep into it.

Store of Value

Because Bitcoin obviously fails as a medium of exchange, its proponents have changed to calling it a store of value. I don’t see Bitcoin as being an effective store of value for a few reasons.

1. Bitcoin has had 3 drawdowns of over 80% in its lifetime. Something that drops 80% because of no real catalyst is not an effective store of value.
2. Proponents will say “But in all its 12 years it has always gone higher so that proves it’s a good store of value.” That doesn’t make it a store of value though as it has clearly lost a lot of its value 3 times. Store of values are places where people put their money when they know it’ll be there if some event happens. If someone bought Bitcoin and it drops 50%, you can’t just tell them to hold till it goes back up because that’s not what a store of value asset is supposed to be.
3. Bitcoiners themselves don’t even believe that it is an effective store of value. Why would they say “don’t invest more than you can afford to lose” if it was an effective store of value?
4. If Bitcoin was an actual store of value asset, nobody would want it. If Bitcoin simply went up 2-3% to account for inflation, nobody would want to buy it. Everyone is in Bitcoin because they wanna become rich. Nobody actually cares about any of technology or use.
5. Bitcoin has no value.

• Bitcoin is backed by nothing. People will say that the dollar is backed by nothing but that’s simply not true. The dollar is backed by the power of the US government and it’s also backed by the productivity of the US economy.
• Gold and other commodities have value because they are used in the real world for real uses. We can actually create a demand curve for gold. It’s impossible to create a demand curve for Bitcoin because most Bitcoin believers are willing to buy at any price. The demand curve for Bitcoin is vertical.
• Bitcoin is worth what 2 people believe it’s worth. Now you can say that about anything but because its only utility is being able to transact, it’s relevant in how you value it. The value of Bitcoin is the same whether it’s worth $1 or $1,000,000 because it doesn’t produce anything. So why should it ever be worth $1,000,000?
• The fact that Bitcoin is scarce doesn’t actually mean anything because since there is no way to effectively measure the demand of Bitcoin, its supply doesn’t matter either. Nobody is looking to buy a certain number of Bitcoin. People are buying a certain dollar amount. So the actual units that exist of Bitcoin is irrelevant because nobody is trying to accumulate a certain number of Bitcoin.
• What is the difference between 1 Bitcoin and 0.1 Bitcoin? In absence of the price, 1 Bitcoin is no more valuable than 0.1 Bitcoin. 0.1 Bitcoin is more valuable than 1 Bitcoin was back in March. 100 oz of gold is 10 times more stuff than 10 oz of gold. 100 oz of gold took more effort to create than 10 oz of gold. There is no actual utility in Bitcoin besides the ability to send it to someone. How much should that be worth? It should probably be worth at least something but it’s impossible to know. Is Bitcoin undervalued at $50,000? Is it undervalued at $100,000? $1,000,000? It’s impossible to know because it has no fundamental value.

Bitcoin is only worth $50,000 a coin because someone bought it thinking they could sell it to someone else for more. It is the Greater Fool Theory. Nobody actually wants Bitcoin. People want dollars to buy stuff and they think Bitcoin will allow them to get more dollars. Other people believe the same thing so they are willing to buy it for higher because they think they can sell it for higher. I’m not even saying that Bitcoin will go down. I think in 10 years it is likely that Bitcoin could 10x from here. That doesn’t mean that Bitcoin will actually be anymore valuable than it is today. It will be worth $500,000 because someone believed that they could sell it to someone else for more than $500,000. If Apple increases net income by 5% in a quarter, it would be justified for their stock to be valued higher because they have created more value. What value has Bitcoin ever created or will ever create that can ever justify its price? I’d be curious to hear a rebuttal to my arguments besides just “you don’t understand it” because I’ve held Bitcoin for almost 2 years through the ups and the downs. I’ve only now changed my opinion on it. Hopefully we can have a civil discussion about it.