Bitcoin….Not if But When

I am sure many of you have seen my tweets promoting bitcoin.

And I am sure many of you are rolling your eyes already.

Bare with me.

Many gloss over bitcoin as a Ponzi scheme-tulip mania bubble.

And while I agree there are bubble phases in Bitcoin’s price action….this asset should not be overlooked as a Ponzi.

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Bitcoin is a protocol.

“Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet. Bitcoin can also be seen as the most prominent triple entry bookkeeping system in existence. (Source: Bitcoin.org).

Again, Bitcoin is a protocol.

It’s not a stock.

It’s not a bond.

It’s not Monopoly money.

It’s a Protocol.

Think HTTP/HTML:

“HTTP is the foundation of data communication for the World Wide Web, where hypertext documents include hyperlinks to other resources that the user can easily access” (wikipedia)

HTTP is the protocol that allows you to read this blog.

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Protocols are not valued like traditional financial assets.

Bitcoin is the protocol that will allow you to transact on the internet without permission.

No censorship

No giving away personal information

No central banks printing money, inflating away your purchasing power.

A new monetary system native to the worldwide web.

“When designed, a protocol is not intended only for some range of purposes; it is also designed to be used on a particular scale.”

“A wildly successful protocol is one that solves more problems or that addresses more scenarios or devices than originally intended or envisioned.”

“Unlike a major motion picture, which can be dubbed a failure at the box office within a week or two of theatrical release, the failure of a protocol can be determined only after a sufficient amount of time has passed – generally 5 to 10 years for an average protocol.”

Bitcoin, being created in 2009, has already passed this sniff test.

-Dollar parity has been reached (1 BTC=$1)

-Gold parity has been reached (1 BTC=1 oz of gold)

The lindy effect is in full force.

“Lindy Effect: is a theory that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.” (wikipedia)

Basically…each day that bitcoin exist without dropping to $0….the more likely it achieves success as a monetary protocol.

“A protocol is incrementally deployable if early adopters gain some benefit even if the rest of the Internet does not support the protocol. It also appears that protocols that can be deployed by a single group or team have a greater chance of success than do those that require cooperation across organisations (or, worse, those that require a flag day where everyone has to change simultaneously).”

And that is the beauty of a protocol like Bitcoin.

It requires no cooperation.

A decentralized network of miners, hodlers, nodes….

there is no stopping it.

“But won’t governments just ban bitcoin…..”

Read this: https://unchained-capital.com/blog/bitcoin-cannot-be-banned/

As it pertain to early adopters….

If you hold bitcoin now….you are in fact an early adopter. And as price goes up and and as more merchants accept bitcoin….it is my belief that you will be rewarded handsomely.

“Ok…we get it. Bitcoin is a protocol. Bitcoin is at $9,323 as I’m reading this article. Can it really go up that much higher.” 

Yes.

How High Can Bitcoin Go?

Very high.

Especially if we start to see inflation caused by quantitative easing and reduced economic production (more dollars chasing fewer goods).

But, first I will add this caveat.

Bitcoin is a volatile asset (these are still the early days)….swings in price should be prepared for in both directions. 

First let’s compare Bitcoin’s market cap to the traditional safe haven asset…gold.

As of writing this article,

The market cap for Bitcoin is approximately $171 billion.

The market cap for gold is floating around $9 trillion (this value could easily double as central banks around the world continue to devalue their currencies).

That means that the total value of all the Bitcoin in existence is valued at less than 2% of the entire market for gold.

BTC assets
An outdated picture, but this gives you an idea of roughly how bitcoin is valued relative to other asset classes.

Suppose Bitcoin captured even 30% of that market.

There will only ever be 21 million bitcoin that exist.

$3 trillion/21 Million Bitcoins = $142, 857 per Bitcoin

And that is just one asset class that bitcoin can disrupt.

In 2017, the World Money Project estimated that the market cap for all the world’s wealth was $36.3 trillion. (this is outdated).

You do the math.

The potential of bitcoin cannot be underestimated.

Next, let’s take a look at Plan B’s Stock to flow model which seeks to value Bitcoin on the basis of scarcity.

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The potential effect of stock-to-flow on bitcoin’s price

The concept of stock-to-flow:

Bitcoin mined and available for use–>Stock

Bitcoin yet to be mined–>Flow

Gold’s SF ratio (scarcity):

“While the entire amount of gold ever mined totals approximately 190,000 tonnes (the stock), annual production is about 2,900 tonnes (the flow). If you divide the stock by the flow you get a stock-to-flow ratio of 66 years.”

In the passage above the word gold can easily be swapped out for bitcoin.

After each Bitcoin halving (every four years) the SF ratio (scarcity) increases.

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Bitcoin will almost double Gold’s stock to flow ratio by 2025

As you can see….the scarcity of bitcoin will exceed gold’s in the not too distant future.

“Gold isn’t as valuable because it is so rare, but quite the opposite: Gold is valued so highly because annual production relative to the existing stock is so small.”

The bitcoin halving is less than a week away.

You can follow the countdown here: https://coinmarketcap.com/halving/bitcoin/

This is an event that will cut the flow of bitcoin awarded to miners from 12.5 BTC to just 6.25 bitcoins per block.

This will increase the scarcity of bitcoin (SF ratio) while demand continues to rise.

Scarcity + Demand =?

Economics 101.

It is my opinion that Bitcoin is a Veblen good, meaning that as price goes up…..so does demand.

I encourage you to check out Plan B’s article which explains the stock to flow model in detail: https://medium.com/@100trillionUSD/bitcoin-stock-to-flow-cross-asset-model-50d260feed12

Spoiler: His most updated model projects a BTC price of $288k some time between 2020-2024.

And one more thing….I encourage those who buy bitcoin to hold it with a long-term time horzion.

Mine is 10+ years….I do not encourage you to trade on leverage for quick gains. That is a quick way to go broke.

Disclaimer: I own bitcoin, this is NOT financial advice….you should always do your own research before investing.

I know….I know…..the disclaimer is always annoying.

I do own bitcoin and heavily believe in it’s future role as a financial asset class. However, there is always a chance that my thesis could be wrong….risk management and prudence are always things to consider when investing. 

 

If you would like to buy your first fraction of a bitcoin: Use Cash App to send money and spend using the Cash Card. Try it using my code and we’ll each get $5. XWVRNLL

https://cash.app/app/XWVRNLL

If you would like to securely store your bitcoin on a hardware wallet: https://shop.ledger.com/?r=81869412c080

Above is a link to the ledger nano x….a wallet I use. (This is an affiliate link, commissions will support the blog).

It is much safer to keep on a hardware wallet as exchanges are more exposed to hackers.

Sources:

(1) https://www.ietfjournal.org/what-makes-for-a-successful-protocol/

(2) https://bitcoin.org/en/faq#how-does-bitcoin-mining-work

(3) https://www.investopedia.com/tech/how-much-worlds-money-bitcoin/

(4) https://goldstandardinstitute.net/2011/07/16/stock-to-flow-ratio-a-primer/

(5) https://medium.com/@100trillionUSD

 

 

One comment

  1. I’m really interested in BTC and holding for a long time Not into daily trading. I have Cash app and waiting on my ID verification to be completed. Will probably just go with cash app to Ledger Live/Nano X.

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