At the time of writing this post, Bitcoin’s price is $16,877 (December 2022). I have been watching the crypto markets in general since early 2017 when everyone started to notice the new asset class. Back then I didn’t think much of it, put some money to work in the space in the main coins and some “alt” coins to see what all the hype was and lost practically all my money I invested back then buying high and selling low – the worst thing you could do as a value investor.

It was my first experience going through a bubble and being a part of the crash after. But I’m glad I went through it back in 2017 because I was introduced to a whole new asset class, an asset class that I have followed since and at one point in early 2021 had about 90% of my net worth invested.

Over the past 5 years I have never viewed bitcoin as any sort of real investment. When I say investment, I mean holding it for the long run regardless of where the price is. I always saw Bitcoin and crypto in general as a short to medium term trade – a trade on macro liquidity dynamics, not a trade on the story of what it could be in a decade or two in the future.

Markets Go Through Cycles

You see, markets generally go through cycles based on the actions of the Federal Reserve. When the Fed lower’s interest rates and prints money through quantitative easing after a downturn, growth usually starts to accelerate and risk-taking behaviors return.

The COVID pandemic was exactly this on steroids. COVID caused the economy to completely shut down, then the Federal Reserve dropped rates to zero and printed trillions of dollars out of thin air (what we call liquidity) to keep the economy afloat. Growth declined massively then the Fed implemented actions to turn that around, perfect time to bet on a rebound and invest in various risky asset classes.

Bitcoin crashed all the way to the ~$4K range in March 2020 and started recovering after the Fed announced all these actions. Macro liquidity dynamics matter a ton when it comes to asset prices, especially assets that are speculative in nature. It work both ways. Prices rise when liquidity and Fed policies are loose (just like the aftermath of the COVID pandemic) and prices fall when liquidity and fed policies are tight (just like what happened all throughout 2022).

So to me, bitcoin has always been a trade, a trade on liquidity dynamics in the market. I sold virtually all my Bitcoin/crypto in May 2021 and haven’t touched it since. Now just because I don’t hold any Bitcoin doesn’t mean that I don’t believe in the long-term potential of the asset. It just means as of now it is such a speculative asset class that I’d rather wait and invest when the macro conditions are in my favor and sell when they are not.

So the question is when is it going to be a good time to buy Bitcoin again?

Is Now A Good Time To Buy Bitcoin Or Other Cryptos?

The answer is who knows? What we do know for sure is that Bitcoin is not yet proven to be a “Store of Value” – an asset that holds value over time while paper currencies depreciate to zero. The price is so volatile still with 10%-20% moves in a matter of hours at times. It is still a venture / speculative investment and time will tell whether it will be what people say it will be.

Most deep value investors wouldn’t touch bitcoin with a ten-foot pole. To most of these investors, it is a speculative pile of shit that producers nothing and has no inherent underlying tangible value. However, so is any famous painting out there. A Picasso produces no value. It is priced based on what people are willing to pay for it.

Bitcoin should not be viewed in the lens of a typical investment. It should be viewed in the lens of a potential new monetary system or new “Store of Value” that is better than the current fiat (AKA paper) monetary standard. I’m not saying that one day Bitcoin will replace fiat currencies, I’m saying that an investment in Bitcoin is a bet against fiat currencies and a bet for a global Store of Value, not an investment in the traditional sense where a company is valuable based on its growth and cash flow potential.

It’s a bet that a new monetary system or new Store of Value is needed to replace the current.

Brief History Of The Current Monetary System

But why does the current monetary system even need to be replaced? And what role does Bitcoin have in all of us? To answer these questions, you need to understand the following:

1. What are the problems with the current monetary system?
2. How does Bitcoin fix these problems?

What Are The Problems With The Current Monetary System?

If you look back in history going back thousands of years, you will read that money didn’t start out as paper currencies that we have today. Below is a quick history on the evolution of money:

The Barter System

• First there was the barter system, where goods were exchanged with other goods. The problem though is different goods had different values depending on each person’s needs and most goods could not be easily divisible into many pieces.
• Second at around 1200 BCE, money replaced the barter system in the form of gold/silver coins; these coins were durable and could be made smaller or larger to exchange for goods of different values.

Precious Metal Standard

Gold and Silver served as a very useful medium of exchange for a long time for the following reasons:

• Inflation protected to a degree as these metals are not man-made and cannot be produced out of thin air without spending the resources required to mine them from the ground
  • Today the amount of gold added to the system is ~2% each year, so high inflation is not possible on a purely gold standard
• Very durable, these metals have proven to last thousands of years
• Somewhat easily divisible – can make different coins based on weights to denote different values
• Somewhat easily transferable in small quantities – you can carry a set amount of these coins around at all times

After some time, problems started to arise from the use of these somewhat rare metals:

• Cities needed access to more fund, so they started producing more coins with a small, not noticeable mixture of other elements like Iron and Copper, which led to more and more coins in the system producing inflation
• To purchase items of high value, a large amount was needed which was hard to travel with across long distances
• Coins were easily stolen or confiscated by others
• Coins from one civilization were not accepted at other civilizations

Fiat Currencies Backed By Gold

Fast forward all the way to the 1870s, most of the world moved to the gold standard which meant that the value of money in the system was based on a fixed quantity of gold. Paper currencies that could be exchanged for a fixed amount of gold were used as they were easily divisible and transferable compared to carrying the physical metal everywhere.

Advantages of the gold standard

• Prevents high inflation as new money cannot be created unless the supply of gold increases, which only increases by a low single digit percent a year based on how much is mined from the ground
• Forces governments to keep their budgets in check as they cannot print money out of thin air
• Creates faith in the currency as any paper bills can be exchanged for a set amount of physical gold

Disadvantages of the gold standard

• Limits governments tools to respond to an economic crisis – during recessions, governments don’t have the ability to increase the money supply to facilitate growth as the money supply is tied to the stock of gold
• Limits government spending as budgets cannot exceed tax revenues
• Encourages people to save not spend, limiting economic growth
• Favors creditors over debtors – given little to no inflation, the debt taken on by a debtor will not gradually inflate away over time

Fiat Standard Today

The gold standard fully went away in 1971 when President Nixon announced that nobody in the US could convert their dollars to gold for a fixed value. Back then there was fear that there would be a “run on gold” with more and more people exchanging their dollars for a fixed amount of gold. The US realized it had reached a point where it could no longer fulfil its obligations to exchange all dollars for gold, resulting in the system we have today.

As a result, the price of gold went up 10-fold from $40 per oz in 1970 to over $400 per oz a decade later!

The system today is built so that any central bank/government can print unlimited amounts of fiat paper currencies whenever they wish.

Advantages of the Current Monetary System

• Stimulates growth – without a limit on spending, governments can print money and run budget deficits to accelerate economic growth
• Favors debtors over creditors – those that take on debt to purchase assets have an advantage as debt remains fixed while the asset value increases overtime with inflation
• Expands government’s tools during times of crisis – prime example is during the COVID pandemic the US government printed trillions of dollars to give to businesses and people to survive when the economic was shut down

Disadvantages of the Current Monetary System

• Creates periods of price instability – with the ability to print unlimited amounts of money, the value of paper currencies is guaranteed to go down over time and become worthless. $1 today was worth $2 30 years ago and $8 60 years ago (see chart below)
• Unable to purchase goods cross-borders without exchanging currencies
• Numerous middle-men and fees to go through just to wire money any around the world
• Leads to economic inequality and widens the wealth gap – those who own assets get richer while the middle class and below who don’t lag behind
• Leads to loss of faith in currencies overtime – look at most emerging market currencies like Venezuela, Argentina, Iran, Lebanon and you can see that their currencies are worthless after years of hyperinflation

It’s crazy to think that the current monetary system has really only been around for a few decades. Given the history of currencies and how they evolve over time, it is virtually guaranteed that the current fiat paper currency system will not exist at some point in the future.

How Does Bitcoin Fix These Problems?

We need to first understand what Bitcoin is before understanding how it could fix any of the problems with the current system

What is Bitcoin?

If you Google around, there are many other well written articles out there on the web that describe what Bitcoin is. But simply put, Bitcoin is a virtual asset that has the following properties:

1. Supply capped at 21 million coins forever – can’t “print” more of it so the value is retained overtime
2. No centralized entity is needed for the network to function – tens of thousands of “nodes” or computers across the globe run the network so can never be shut down
3. Transferable to anyone around the world in a few minutes – if I wanted to send any amount of Bitcoin to anyone in the world, can do so in a matter of minutes with no intermediaries
4. Fungible asset – one Bitcoin is the exact same as another Bitcoin
5. Divisible to as little as one millionth of a coin
6. Unconfiscatable – nobody can take the Bitcoin away from you as you can hold the private keys in your virtual wallet yourself which nobody except you has control over

What Problems Does Bitcoin Solve?

The current monetary system of fiat currencies has a lot of issues that make it an unenviable system longer-term. The biggest issue of them all is how paper currencies are guaranteed to lose their value overtime. The lower and middle class have been left behind in the current system because they have been taught that saving is important.

In reality, you are guaranteed to lose money saved in the bank that is held in cash over long periods of time. Inflation will slowly eat away at that pile of money. In some third world/emerging market countries, inflation runs as high as 50%+ per year. That means in one year, that $1 you had saved is now worth 50 cents after just one year! Your purchasing power will go down overtime if you hold money in cash.

It’s just a matter of time until inflationary pressures accelerate in developed countries as they face issues with more and more debt. Take the United States for example:

• Debt to GDP has reached 140%, up from 100% just over a decade ago
• Government deficit is running ~$3 trillion per year (meaning the amount of money the government brings in tax revenue is $3 trillion less than it spends)
• Social Security/Medicare obligations, which are very big government liabilities, are guaranteed to increase in the future substantially as people get older

That is why it is so important to start saving as much as you can early on and invest in assets that go up in value over time. Anyone in 10 years can save $1 million if they focus and take the right steps.

What Makes Bitcoin Valuable?

All the properties of Bitcoin can easily be copied by another cryptocurrency. The only thing that makes Bitcoin valuable is brand recognition. It is the original blockchain network that started in 2009 and has been up and running basically 100% of the time since then with no issues.

That’s why most people can’t wrap their heads on what makes Bitcoin so valuable. It’s only valuable because people say it’s valuable. For any value investor, there needs to be a tangible reason that makes an asset value. The asset needs to produce cash flow or some utility to be valuable. Bitcoin doesn’t have any of the typical qualities of a value investment.

“Bitcoin is rat-poisoned squared” – Warren Buffet

The main argument for Bitcoin is that people believe it will be a universally accepted store of value, just like other asset classes like gold or real estate. Bitcoin was just invented a little over a decade ago, so it is so early on in the adoption cycle that who knows whether it will become what the main Bitcoin believers say it will become.

What Will Bitcoin Be Worth In The Future?

Only time will tell. Right now, Bitcoin should still be viewed as a speculative venture capital investment where you could lose a large portion of what you invest. That said, if Bitcoin becomes an accepted store of value in a decade or two, the upside is virtually unlimited as countries will continue to print money and inflate their currencies away.

Every time central banks step in and print money to combat an economic crisis, people will turn to Bitcoin as it proves the thesis behind it.

Take that as you will. Not investment advice so make your own judgement.

Where Should You Invest Your Money?

Don’t be dumb and keep your money in cash sitting in the bank. There are plenty of riskless ways to make some level of return on your cash if you are more of a risk adverse person. Even if you invest in short term US treasury bonds (where there is zero chance you lose any money), you can make 3-5% risk free every year depending on where the federal funds rate is set.

If you are fortunate to have a lot of excess cash just sitting around, then make sure to also read How to Invest Your Money: Understand When to Take More or Less Risks.