Foreword: This article is suitable for beginners to read, mainly explains what properties of Bitcoin are suitable for value storage. This paper considers Bitcoin to be an investment in +EV, although the risk is high, but the probability is positive. However, this article cannot be used as an investment recommendation because each person's risk tolerance and risk appetite are different. Everyone should make decisions based on their own specific circumstances, do research well, and be responsible for their actions in order to grow their true investment experience. The writer is Brian Rast, translated by "Lu" from "Blue Fox Notes."
Although I compare Bitcoin with other investment methods, I have never publicly expressed my opinion. Because of the significance of Bitcoin, the value of Bitcoin, or the investability of Bitcoin, it is bound to be controversial. Nowadays, there is a discussion about Bitcoin on the Internet. I hope to communicate with those who care about me. This article is mainly for people who don’t know Bitcoin or who have invested but don’t know much. A new perspective.
But I am not going to delve into the problems of Bitcoin technology – because I don't have a deep understanding of them. I have a rough understanding of how it works. But I believe that for most people, investing in bitcoin is more of an economic activity than a technical analysis activity. Often, you can make an investment decision only if you understand what you are investing in, and Bitcoin is no exception.
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Although I personally like Bitcoin, this article does not constitute investment advice. First of all, including myself, no one knows what will happen in the future, especially the complex things like Bitcoin and the complex economic environment like the world today, making it harder to predict future trends. Second, each person's financial situation and risk preferences are different, and the suitability of one person may not be suitable for others.
Do your own research and draw your own conclusions. I am not sure who is an expert in the field of bitcoin investment, but if there is an expert, it is not me. I am just a person with my own ideas, just want to share my thoughts, I hope I can help some people.
First of all, I want to discuss why bitcoin is valuable. For those who don't know Bitcoin, there are a lot of good tutorials on the web that can tell you how Bitcoin works. I will not discuss this issue in depth here.
Through learning, you can have a basic understanding of how Bitcoin works. The essence of Bitcoin is just a book. It allows individuals to trade digital currencies on the books (Bitcoin and Cong – the smallest divisible unit in Bitcoin) without the need for any trusted third parties (such as banks, paypals, credit cards, etc.) to guarantee the transaction and Implement the operation.
This is very important because now that we have Bitcoin, we don't have to pay for third parties (costs include structured business costs, bank wire transfer fees, credit card fees and interest, etc.). Nor will it be subject to potential control or review by third parties. Bitcoin itself is very secure. Theft occurs mainly because of the owner’s negligence and the inaction of the companies they use (such as exchanges) and the deception of users.
Bitcoin transactions are irreversible. If there is an error in the transaction, there is no remedy. This reduces people's trust in Bitcoin, especially for new users. But thinking from another angle, this also ensures the security of the transaction.
The transaction will not be reversed, so when Bitcoin is sent out, Bitcoin cannot be returned if there is no other transaction. The image below shows an overview of the growth between Bitcoin and the full-scale outbreak of Bitcoin tweets from Murad Mahmudov.
Therefore, Bitcoin is an attempt in decentralization, digitization, and internet currency. But Bitcoin has not yet realized its true use, it is still on the road. The main reason for the popularity of Bitcoin is that Bitcoin is currently trading at a much slower pace than VISA.
However, the value of Bitcoin is not in today's, it is not a substitute for money, it will not be used to buy goods, even if one day it can be used for daily shopping by people around the world. Today, conventional legal currencies such as the US dollar and the euro are used in conjunction with credit cards and other financial instruments to provide great convenience for purchases. These methods are already very efficient.
So I can understand that some people have questions about why they need another internet currency to buy things. People living in rich countries have a successful legal currency system and do not need bitcoin payments. (But in some countries people are completely different, their countries have weak economic capabilities and no bank deposits).
I believe that one of the future uses of Bitcoin is that it can be a better currency for people without banking services in the world. They can connect to their own Bitcoin bank via their mobile phones, computers and other devices, and have their own bitcoin credit cards. This is especially important in countries with weak economics and inflation. But the value of Bitcoin can't just be a substitute for legal currency.
The most valuable place for Bitcoin is the scarcity of its programming, which is programmatic. Bitcoin is a planned deflation. The miners generate a block every 10 minutes or so, and the miners receive the corresponding bitcoin as a reward, which completes a “mining”.
The number of rewards miners receive will be reduced by half every four years. This means that bitcoin inflation pressure will be halved every four years. In mathematics, bitcoin will be dug up. There are currently about 18 million bitcoins, and the final total is 21 million. (Blue Fox notes: It’s not about strictly following 10 minutes, it’s only about this time. In addition, if the token rewards are reduced or not, how to encourage the miners to continue to provide security is also a problem to consider.)
Therefore, in the future, only more than 3 million bitcoins will be generated, which is about one-sixth of the current circulation. After that, new bitcoins will never be generated again. This is significant compared to the legal currency controlled by the National Central Bank.
Now everyone is beginning to pay attention to the impact of currency inflation and money supply. I believe that banks will increase their money supply on a large scale (such as quantitative easing), and even if they have not caused obvious inflation, the final currency will continue to depreciate. Below is a graph of changes in global currency supply over the past 30 years, and the second is a graph of changes in bitcoin supply.
The first chart shows that the legal supply of money worldwide has grown exponentially. This situation may or may not continue. But the supply of bitcoin is declining. This is programmatic scarcity. According to the supply curve, which of the two currencies do you think is more valuable?
Today's monetary solution seems to continue to lower interest rates and continue to print money. In the past 10 years, with the loose monetary and credit policies, real estate and stock markets have seen significant growth. Bank deposit interest is basically zero, bond yields are generally negative, and dollar purchasing power is declining.
Of course, for the ever-increasing technology of goods – the purchasing power of the dollar has improved a lot (such as TV becomes better and cheaper). But when you exclude technological advancement factors, I believe that you will still feel inflation (such as gasoline prices, insulin prices, etc.). This is why ordinary Americans are struggling. (Blue Fox notes: This also shows that productivity gains from technological advances are one of the best ways to fight inflation.)
In such an environment, those assets with stored value and scarcity will be more able to highlight their intrinsic value. The most important use of Bitcoin is as a way of storing value because of its defined, small-scale inflation policy—programmed scarcity.
In this respect, Bitcoin is very similar to gold. Gold is a valuable and scarce asset that is generally accepted. Gold has existed for thousands of years, and bitcoin was born only 10 years ago. There is no such history. Gold can be used as a variety of industrial raw materials and jewelry, but bitcoin does not come in handy in real life.
However, on the other hand, gold is not a practical form of currency because it is difficult to send, transport, segment and use. Bitcoin does a good job in all of these areas. This is the key. Therefore, in a very real sense, Bitcoin requires people to discover and accept its value. This is a programmable rare asset that is like gold, but its utility as a currency is higher.
Bitcoin requires people to recognize its powerful properties, its use cases, and buy it. If this actually happens, then in the end, Bitcoin will become a store of value, account units and digital currency. This is what current Bitcoin holders and investors think. From this perspective, Bitcoin should show some network characteristics.
As with other forms of currency, you must believe that Bitcoin is valuable because it is believed to make Bitcoin truly valuable. In the US, we accept the US dollar because the government prints and supports the US dollar, even though it is just a piece of paper or a number on a bank account. Bitcoin is not supported by any government, but is a trading book with an account unit backed by proof of the workload of all miners.
In the end, all the money needs to be valuable, only people can recognize it in the transaction. Money itself has no value. It is only a carrier of value. Everyone accepts it to conduct efficient transactions in society. This allows us to go beyond basic bartering and trade, professionalize the workforce, and so on.
The legal currency itself has no value, because it has the support of the government, so it has value. It does provide a greater perceived security for the currency. But in history, many governments have no ability to support the value of their own currency. There have been many hyperinflation events, such as the Weimar Republic, Venezuela, etc. These countries have been very bad in all aspects before the collapse.
The key here is… Bitcoin has many incredible features that, in my opinion, make it the best currency ever created by humans. It is the safest asset. (As long as the private key does not leak) your bitcoin will not be hacked and will not be stolen. As long as no one points your gun at your head, you don't have to give Bitcoin to them. Of course, if you don't want to give it, they can't take it.
From a literal point of view, everything you have can be taken away by force, even if you are willing to do anything to stop it. You will encounter robbery or be confiscated. But bitcoin is not something you physically possess. Your bitcoin cannot be taken without your consent. (Of course, if someone points a gun at your head, it doesn't mean that you won't give up Bitcoin, but that you want to get Bitcoin, whether you want it or not, you have to go through your consent.) You can access the account. Your Bitcoin is essentially a consensus number that exists on computers around the world and exists in the blockchain of Bitcoin.
You can manage your account alone, and in a relatively simple way, you can do it easily, so no one can enter your account unless you want them to enter. In theory, in today's world, no asset is as safe as bitcoin. (Blue Fox notes: But Bitcoin's key management is still somewhat difficult for the average user. There are two sides here. So the value of Bitcoin is more prominent in an economically unstable society, in countries where the monetary system works well. The urgency of demand is not that high.)
Bitcoin is also very easy to store. There are already some wallets that are very secure – like Trezor – you can take it with you and access Bitcoin via the USB port (if you don't have it, you can't access it). It is easy to take it anywhere you want to go.
What other assets are as useful and convenient as Bitcoin? You can also send as many Bitcoins as you want. It trades relatively quickly (although it is not as fast as real-time transactions such as credit cards, but much faster than bank wire transfers). Moreover, the handling fee of Bitcoin is relatively low, and the handling fee is not based on the amount sent. Therefore, Bitcoin is very suitable for large-value transfer.
Bitcoin is also the best way to store your net worth. I think one of the main uses of Bitcoin is to store the net worth of current assets. If you want to maintain the liquidity of your net assets. Rather than holding a legal currency that depreciates over time due to inflation, someone may store their net worth in the form of bitcoin. (Blue Fox Note: This is not appropriate during times when Bitcoin is highly volatile, unless the future value is relatively stable.)
When you consider all of these factors, logically, you will truly understand that Bitcoin is the greatest asset we have created. The only thing that hinders it is the advancement of technology and the acceptance of it around the world. I believe that more and more people will hold and use Bitcoin. If this growth is sustained, Bitcoin will eventually succeed.
The world is not necessarily completely rational—people are not completely rational—but I bet that the urgent decisions we make on the economy are often logical and rational. As time goes by, Bitcoin as an asset, its price growth will be very similar to the way the network grows.
(The growth of Bitcoin is very similar to the logarithmic growth curve of the network growth model)
If everyone recognizes the value of Bitcoin, then the next step is to think about how to estimate the value of Bitcoin. Pfeffer believes that the value of Bitcoin is reflected in the following aspects: 1) can replace gold 2) can become an international reserve currency 3) can be used as an international trade account unit 4) can be used as an international payment and domestic payment method for countries without stable sovereign currency . If Bitcoin can be the main form of value storage for encrypted assets and achieve some or all of its value, then the total market value of Bitcoin is almost 4.7 – 14.6 trillion US dollars, which means that each bitcoin is worth 2.6-800,000 US dollars. I would like to add that Bitcoin has the opportunity to replace or at least take a share of the offshore banking market, which is estimated to be worth more than $21 trillion.
PlanB quantifies the scarcity of Bitcoin as the ratio of inventory to traffic and gives a prediction of the value of Bitcoin in the study. The scarcity of Bitcoin will increase by half every four years and the value will increase.
People can't help but ask, if Bitcoin really grows from the current price level to our forecasted valuation, then where does the capital come from? “Where does the $1 trillion bitcoin market value come from?” My answer: Silver, Gold, negative interest rates countries (Europe, Japan, and the United States will soon join the ranks), economically unstable countries, hedge QE billionaires and millionaires, and institutional investors looking for the best assets.
I believe that in the next year or two, trading companies like TD will allow individuals or institutions with accounts to buy and sell Bitcoin. Whether through the ETF or the storage solution developed by the agency, I believe that this will happen soon and will facilitate the holding of individual investors.
Since Bitcoin has been born, it will continue to evolve as a decentralized, digital value store, accounting unit and currency. As the saying goes, if the cat out of the bag, it will not be able to go back again (Blue Fox notes: meaning Pandora's box has been opened). Bitcoin is the best choice at the moment, but why not choose other currencies? Other cryptocurrencies have more features, such as Ethereum. And these features are very meaningful, but different features have different values.
First, distinguish the value of the cryptocurrency that runs other projects from the value of the cryptocurrency that is stored as a digital value. The main value of Bitcoin is becoming the dominant digital value store. This is a somewhat complicated argument, especially for readers who already hold or are considering holding altcoin.
I personally think that the altcoin does not add value like Bitcoin, because the blockchain of the altcoin tries to achieve some unique functions (dApp platform), even if their chain is useful, there is no reason why their generation The currency will add value.
Tokens are not like company stocks, nor are they part of the total value passed by blockchain users. It is actually equivalent to the lubricant inside the machine and is necessary to handle the transaction, which may converge its value to the value of the processing power required to run the network. (Blue Fox Note: It means that although the network itself is very successful, the value of its capture is limited to the processing power required to run the network. But this is a qualitative change with the development of DeFi.) The form of value storage is different and it accumulates the value of investing in the network. (Blue Fox notes: With the development of open finance, this argument is debatable.)
Why isn't there one of these coins that can replace Bitcoin? I think Bitcoin has a large first-mover advantage and its name is more widely known. These two points are very important for network growth. Similarly, in terms of currency payments, the security of Bitcoin has been proven. In the past 10 years, the network valuation of Bitcoin has reached 200 billion US dollars or even higher (Blue Fox notes: recently dropped to 150 billion US dollars, volatility) Too big).
There are no other blockchains with Bitcoin stability, security and provable records. Bitcoin's blockchain is open and secure in the face of malicious attacks. The safety of many projects has not been fully substantiated and not centralized enough. Bitcoin shows its reliability and robustness, which are extremely important for the currency.
Bitcoin will not be replaced by a new cryptocurrency, because nothing new will be more valuable than Bitcoin's reliability, security, and robustness, because it is just a form of value storage, unit of account, and currency. And if some features prove to be valuable, they may eventually be added to Bitcoin if necessary.
Therefore, in my opinion, the Sharpe Ratio of each altcoin, that is, the return rate of a given risk, is significantly lower than that of Bitcoin. I think the best configuration for investors who buy cryptocurrencies is 100% bitcoin. It is possible that one of today's 1,000 kinds of altcoins will exceed Bitcoin in five years, but it is not easy to choose such a cottage currency. The income from investing in altcoin may be lower than the investment in bitcoin.
When considering bitcoin as an investment, investors should make long-term investments in bitcoin if it can implement its use cases and attributes. If it does happen, the valuation of Bitcoin is likely to reach a much higher level than it is now. We have two to three years to complete this round of bull-bear conversion. Bitcoin prices can range between $50,000 and $120,000.
If Bitcoin is unsuccessful, or because of some systemic problem, then the entire Bitcoin market is likely to collapse, not knowing how much damage will be caused in this case. For the sake of simplicity, it can be assumed that Bitcoin will move from $10,000 to $0 in 2-3 years, or to $100,000. Therefore, this is a positive EV bet (refer to "The Mathematics of the Rich: Expectation (1)" and "The Mathematics of the Rich: Expectation (2)" published before Blue Fox Notes. According to this view, this is a very asymmetric bet, and the potential upside is much larger than the downside. High risk, high return, of course, even +EV should be cautious.
In other words, I believe that the possibility of Bitcoin achieving these potentials is much higher than the probability of 10%, so it is considered that the purchase of BTC is a long-term investment of +EV. (Bitcoin shorts clearly disagree with this probability allocation). If you buy Bitcoin, you will hold half of it for 2-3 years, sell profit at the end of the current bull market, and hold it for a longer period of time (and if you can hold it all the time), this should be a reasonable Portfolio.
Despite the high risk of bitcoin, it is not related to other assets such as the S&P 500 index and stocks, so consider including Bitcoin in your portfolio to achieve higher returns without causing a portfolio breakdown. It is expected that there will be no associated assets added to the portfolio.