The Bull Case for Bitcoin




When Mike Tyson and Paris Hilton are tweeting praises about Bitcoin… you know you’re in a bubble. When you see this headline on the front page of CNBC: “Iced tea company says its pivoting to blockchain, stock jumps ups 200%...” you know you’re in a bubble.[1] When nineteen year old anarchists are hailed as investing geniuses… you know you’re in a bubble.[2] When your skydiving instructor says he’s quitting his job to pursue “crypto-trading” full-time… you know you’re in a bubble. Investors often miss the signs of a speculative bubble amidst the exuberance.
Today, Bitcoin has reached the opposite end of the spectrum. The price crashed by over 70% and many caught in the rising tide of a speculative mania are licking their wounds. This provides an opportunity for the enterprising investor. After seeing the price action and several YouTube commenters referring to it as “shitcoin,” I knew the time had come to investigate. Upon my research, here are several reasons why I believe the price of Bitcoin will recover, and potentially surpass the December 2017 level of $19,000 per coin.

1. Not All Bubbles are without Reason
Just because an asset class enters bubble territory and subsequently crashes does not mean that it will fade away into obscurity. Bitcoin’s parabolic rise shares more likeness with Railway Mania of 19th century Britain or the internet bubble of the late 2000s than with high yield junk bonds in the 1980s or tulips in 17th century Netherlands. Despite the price action, railways fundamentally altered global transportation and the internet fundamentally altered the transfer of information. The high yield craze revolved around a false narrative of financial alchemy and tulips are just flowers. Bitcoin has the potential to revolutionize, or at least disrupt, money.

2. What is money?
Economists and anthropologists agree that all money, whether gold coins, US dollars, or cowry shells in ancient China, contains six qualities: it is scarce, durable, divisible, transportable, recognizable, and fungible. Bitcoin contains all of these qualities to an equal to or greater extent than gold and dollars with the exception of recognizability.

1.      Scarcity – while gold can be mined and dollars printed, Bitcoin contains perfect scarcity at 21 million.
2.       Durability – a computer code does not decay.
3.       Divisibility –1 Bitcoin is made of 1 million bits. One could more easily buy fractions of coins.
4.       Transportable – superior to both gold and money as one can send it instantaneously.
5.       Recognizable – while gold has a 5,000 year track record as a store of value and dollars recognized by governments, Bitcoin is still relatively new and still has to gain acceptance as a medium of exchange. This serves as a fundamental catalyst for greater price increase.
6.       Fungible – all coins are the same.

Money also serves two important functions: 1) store of value. 2) medium of exchange. Gold is a great store of value but a poor medium of exchange as your local grocery store probably won’t accept gold coins. Meanwhile, fiat currencies serve as a great medium of exchange but a poor store of value, as inflation constantly eats away at the value of your money (think of the 1950s when a can of soup was ten cents). As an asset that can do both, Bitcoin has the potential to steal market cap from both gold and forex markets.

3. Bitcoin as a digital commodity
 Investors run to gold during times of hyperinflation, capital controls, and bank closures, hence Bitcoin’s popularity in countries with currency crises such as Argentina, Venezuela, and Zimbabwe. Investors in developed nations run to gold in the fear that such events might happen. For this reason, investors consider gold as a hedge against inflation or political risk. Now consider gold with a market capitalization of $7.8 trillion and Bitcoin with a market capitalization of $120 billion. It Bitcoin took only 5% of the gold market, one coin would be worth $25,000. Today, one coin is worth just above $7,000. 

Buying a digital currency through a smart phone is much safer than buying a physical brick of gold and more convenient than buying a gold etf that requires a brokerage account and is subject to fees. Bitcoin may continue to exist as a niche in the developing world to protect one’s wealth; however, if only a small fraction of investors in the developed world understood its fundamental superiority to gold, the price would skyrocket.

4. Bitcoin as a medium of exchange
The evolution of Bitcoin as a medium of exchange will likely occur well into the future, after its widespread adoption as a store of value. Strides have already taken place in this area with Shopify, Expedia, Microsoft, and other large companies beginning to accept Bitcoin.[3] It also has immense potential for the 3 billion people in the world that do not have a bank. Here, banks are too expensive and cumbersome to allow for micropayments in the developing world. In the same manner that rural Africa leapfrogged landlines and adopted mobile phones, many have leapfrogged banking and went straight to crypto.[4] As more companies accept crypto-currencies as a medium of exchange and more bankless people adopt the technology, expect the value of each coin to rise.

5. Endgame
Aside from large companies accepting Bitcoin, the currency has had several promising developments. Andreessen-Horowitz created a $300 million crypto-fund this year.[5] 2018 venture capital investments in Bitcoin have already surpassed 2017, despite 2018 being a terrible year for the price per coin.[6] Here are potential endgames for Bitcoin: 1) It could exist as a niche in the developing world—in which case expect the price to fall significantly. 2) It could gain slight traction as a store of value, in which case expect at least 3x returns. 3) It could become a new asset class, with central banks holding a portion of their reserves in Bitcoin, ETFs and mutual funds dedicated to it, and hedge funds trading around it. If this happens, expect the price of a coin to reach and stay well above $100,000. 4) It could become the new global reserve currency (highly unlikely). 5) It could go to zero in the face of government intervention or the advent of a superior crypto-currency.  Google Eric Townsend’s argument for the “Orwell” coin if you would like to learn more about the former possibility. In terms of the latter, network effects will likely prevent this but I would not rule the possibility out.

Based on a theoretical examination of the qualities of Bitcoin, the traction it’s held despite the crash in price, and its meager market cap, Bitcoin is a trade with an asymmetric risk/reward ratio. Placing 1% of one’s investable capital into Bitcoin or a basket of crypto-currencies seems a reasonable course of action for taking advantage of this opportunity with minimal risk.

[1] https://www.cnbc.com/2017/12/21/long-island-iced-tea-micro-cap-adds-blockchain-to-name-and-stock-soars.html
[2] https://www.cnbc.com/2018/01/24/19-year-old-bitcoin-millionaire-offers-crucial-investing-advice.html
[3] https://www.nasdaq.com/article/7-major-companies-that-accept-cryptocurrency-cm913745
[4] https://www.ccn.com/bitcoin-africa-insights-continents-biggest/
[5] https://www.cnbc.com/2018/06/25/leading-venture-capital-firm-andreessen-horowitz-raises-its-first-dedi.html
[6] https://techcrunch.com/2018/03/03/2018-vc-investment-into-crypto-startups-set-to-surpass-2017-tally/

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