I’m a gold bull and a dollar bear. But I don’t agree with the notion popular among my fellow gold bugs that Bitcoin is a Ponzi scheme. Bitcoin may continue soaring or it may crash and burn, but there’s no Ponzi figure telling investors that their funds are being used to create returns.
I’m also a staunch advocate for free markets. I think there should be a separation of economy and state, for similar reasons to those that make the separation of church and state a good idea.
Ideologically, I love Robert Breedlove’s vision of a future in which the state is driven entirely out of the money business, as he outlined in our recent interview.
As a libertarian with an Austrian view of economics, it doesn’t matter to me if it’s gold, cigarettes, Bitcoin, or anything else we use as money. It matters only that it’s honest money. By that I mean that its value is beyond the reach of lying politicians and their bureaucratic henchmen, as well as private-sector counterfeiters.
I have to cheer the advent of cryptocurrencies as a market response to the state’s gross mismanagement of—and destructive interference with—economies in general and money specifically.
I support the development and adoption of any and all new forms of non-government money.
And I’m happy to let the market decide which forms—old and new alike—are best.
As a speculator, however, it’s not my problem to say what Bitcoin is, can, or should be worth; I need to decide whether I’m likely to make money buying now.
Nothing Robert told me convinced me that Bitcoin must go higher soon. Given his long-term vision, he doesn’t need to care. He’s not a speculator, like me. He’s advocating Bitcoin on the basis of free-market economics. He’s buying because he wants to see non-government money triumph. He sees it as long-term savings for a future in which he thinks Bitcoin will be the market’s top—if not only—choice for money.
That doesn’t mean he thinks Bitcoin can only go up, of course. I give Robert credit for agreeing that state hostility to Bitcoin and other cryptos could hammer their prices for some time. Given the increasing chatter among government officials about Bitcoin being used primarily by criminals, I see this as highly likely. And that suggests to me that even if Bitcoin does soar higher this year, prices will likely crash much lower before the dust settles.
Believing that the state will ultimately fail in its attempts to kill cryptos, long-term HODLers may not care that piling into Bitcoin now could result in massive capital losses for years—but I do.
As the market saying goes: Being in too early can be the same as being wrong.
Further, I’m a disciplined speculator, not a gambler. I’m not looking to add anything to my portfolio just because it might go through the roof. I have to consider risk as well.
Specifically, I’m looking for great speculations that offer high returns with a high probability of success—at least 50% or better.
As an individual, I don’t place too much priority on how speedy my returns are. The longer I have to wait for payday, the more certain I need to be of that payday, but I’m willing to wait.
As a newsletter writer whose guidance a lot of people depend upon, it’s different. I’m looking for great speculations that can deliver within a timeframe that works for most of my clients. That’s usually within a couple years—not decades.
So, does Bitcoin qualify?
Here are the pros and cons I see for near- to mid-term capital allocation to Bitcoin.
- BTC hitting new all-time-highs in USD doesn’t prove that it must go higher, but it does show that there’s substantial and growing global demand.
- Despite the headlines, relatively few people own Bitcoin. Any significant increase in acceptance can greatly increase demand, while supply remains constrained and ultimately finite. The new institutional acceptance of Bitcoin we see in the headlines is significant. This imbalance between new demand and limited supply could create high multiples in short order.
- The obvious debasement of fiat currencies around the world is bullish for all alternatives to them. Whether my fellow gold bugs think it should be so or not, participants in the global economy are starting to see Bitcoin as an alternative to the USD.
- Bitcoin has reached new all-time highs after each “halving” (reduction in the incentive paid to Bitcoin miners for doing the work of operating the network). The next halving is baked in the cake.
- The advent of fully regulated Bitcoin-based instruments, like the ETFs some organizations are working on, could legitimize Bitcoin in the eyes of many who are currently reluctant to get on board. This could open a floodgate of new demand while supply remains constrained.
- Bitcoin has reached new all-time-highs some months after each halving—but it has then fallen hard and stayed deep underwater until halving is again nigh. The next halving isn’t expected until mid-2024. That may work out well for patient HODLers, but the present could be a terrible time for anyone with less than a three-year time horizon for gains.
- The Powers That Be (TPTB) don’t like Bitcoin. It’s a near certainty, in my view, that governments will do everything they can to hinder and/or co-opt cryptos. From Lagarde to Yellen, the anti-crypto chorus is already warming up. Major state moves against cryptos and those who own or use them are highly likely to send prices dramatically lower. We’ve seen this with the SEC smacking Ripple (XRP) down just last month. Some believe that increasing institutional adoption of Bitcoin will protect it from hostile state action. I think this is optimistic, given the existential threat to any state if it loses control of its money supply. Others argue that Bitcoin is too small to matter to TPTB. I don’t agree at all; they’re well aware of things that threaten the basis of their power. I think state hostility to cryptos is likely to persist until the collapse of fiat money systems. That could take decades.
- Assuming Bitcoin is as government-proof as claimed, people are not. If regulation turns into criminalization, Bitcoin will be driven to the black market. This would make it a lot less fun/useful for a lot of people. The difficulty of turning illegal Bitcoin into legal tender would almost certainly make the price of Bitcoin crash in fiat currencies.
- Fedcoin, Eurocoin, or some sort of government-issued digital currency is clearly on the way. Libertarians and the like may not want to use them, but I think most people will go along or be pushed to do so by new legal tender laws. I don’t agree with the view that this would legitimize or increase interest in Bitcoin—not until government cryptos blow up, at least—and it could drain a great deal of demand away.
- The data visible in public Bitcoin ledgers suggest that very large amounts of Bitcoin are held by a few early adopters. Robert made a good case in our conversation that it’s not as bad as it seems. But still, Bitcoin is such a tiny market that one or more whales having a sudden need to cash out could easily hammer prices. This could happen with no warning and have long-enduring effects. (Bitcoin whales promoting the story does not make it a Ponzi scheme, by the way. If so, every CEO who owns stock in his or her company and promotes it is guilty of the same thing.)
- Bad or incompetent actors among intermediaries (the “Tether” problem of companies that make it easier for people to trade in Bitcoin and other cryptos) could cause Bitcoin prices to collapse with no warning. Robert again made a good case for why this fear may be overblown. But we’ve seen this happen before (e.g., the famous Mt. Gox hack), and a major blowup could have a severe and lasting negative impact on Bitcoin prices. If I was a true believer, I could see buying after such an event… but I’d hate to buy before one and then have it blow up in my face.
- Bitcoin prices in USD don’t seem to move in response to any of the usual financial suspects—not even the USD itself. That tells me that this “uncorrelated asset” is set primarily by its own, independent demand (just demand, not supply, since that’s pre-determined). It’s not driven by monetary factors, but by spreading popular interest. That’s great as long as it continues. But popular interest is fickle. There’s no floor if it goes into reverse. And that could happen at any time. Long-term HODLers may not care, but anyone trying to make money on Bitcoin in the next year or two could be very badly burned.
- I’m neither a programmer nor a mathematician. I cannot verify and vouch for the soundness of any crypto. I just have to take the word of experts on it. I get that it’s open source. It stands to reason that if there were flaws in the distributed ledger system itself or its implementation in code, they would have been exposed by now… unless those who found them kept their discoveries to themselves and are milking the market quietly. This doesn’t sit well with me. Makes it hard for me to have confidence in Bitcoin. Makes me worry that the whole thing could blow up suddenly if a killer vulnerability is made public.
Where does this leave me?
Well, I see the upside in the pros, but there’s huge downside in the cons—which range from utterly unpredictable to highly likely.
In my view, this makes buying Bitcoin now a high-risk gamble, not a rational speculation.
I have to say that I’m not convinced of Robert’s argument that Mises’ regression theorem applies to Bitcoin. Commodity money has much more than a historical use case; the metals are still in use and consumed today.
Bitcoin doesn’t have a solid use case that I can see, other than the circular argument of it being good for use as money because it’s good for use as money. I grant, however, that this may change. As we progress further into the Information Age, I can see things developing in such a way that one must have Bitcoin (or something like it) to pay for certain goods and services that have widespread demand.
When our civilization becomes interplanetary, for instance, transporting commodity money between planets would be very expensive. I can well imagine a time when no sane Mars colonist would accept payment in the form of notes for metals stored on Earth.
I can imagine this… but such a distant future doesn’t make me want to rush online and buy Bitcoin today.
There’s also the question of what happens if desperate governments faced with an existential threat pull the plug on the internet to try to stop Bitcoin. I don’t think this is realistic. Destroying e-commerce seems likely to be just as suicidal for them. It seems more likely to me that governments will mandate state-built internets that help them monitor people’s financial activity. Robert points out that as long as just one copy of the massively distributed ledger system survives, Bitcoin is back as soon as the world starts connecting again. But for Bitcoin to be used as money in such a scenario, a lot of people would have to be willing to break the law and risk getting caught.
To me, this highlights a negative for Bitcoin or any other cryptocurrency as money. Call it… systemic risk.
I like owning gold because it’s a physical store of value I can hold in my hand. There’s no counterparty risk. It’s a long for which there is no short. It’s an asset I could exchange for other values even if civilization collapsed and reverted to a Dark Age (as has happened before).
Bitcoin may have no counterparty risk, but it does expose me to systemic risks, ranging from the code I use to transact in it to the internet itself.
And that’s just today. In the future, the possibility of quantum computing or even more advanced technologies could break the currently stipulated invulnerability of cryptocurrencies.
I don’t expect this to be a real concern for many years. But it does seem relevant for those who dismiss the ups and downs in the years ahead because they expect Bitcoin to prevail at the end of the day. If Bitcoin is no longer secure when that end day comes, all the years of HODLing will be for nothing.
I don’t want to spend too much time on fanciful or philosophical debates, but I do want to share these thoughts, as I’m aware that many readers are concerned with more than the near-term potential of Bitcoin.
Here’s my bottom line for the big picture…
I don’t feel a need to guess, assume, or gamble on what form of money will be used in the future because I expect to be able to earn whatever is used for money in the future.
In contrast, I have no problem understanding the value of gold and believing in its longevity, so I’m willing to realize long-term savings in physical gold bullion.
This does not mean that I’m anti-Bitcoin.
I think it’s incorrect to call Bitcoin a scam. That would imply that it was created for the purpose of defrauding people, which I don’t think is true.
And, as above, I can imagine use cases developing that give Bitcoin a more concrete connection to people’s needs. I have no problem at all with a future in which Bitcoin and gold both serve as money.
We’re witnessing a fascinating battle between decentralized market forces and the coercive power of the state over the future of money. I’m rooting for free-market money. May the world’s pathetic, dishonest fiat currencies return to the hell from which they came.
But, as a disciplined speculator, I choose to watch this historic struggle from a safe distance.
- I don’t consider Bitcoin an investment—though I could see a blockchain company that meets an important need people have being one.
- If I could believe that governments won’t start a War On Bitcoin soon, I might consider speculating on it during the next major pullback between halvings. That wouldn’t be betting on a random market movement or a guess as to what the momentum-chasing public will fancy next. It would be betting on a measurable trend that has been documented since Bitcoin’s inception. Sadly, I do think OECD countries will try to stamp Bitcoin out. But if I’m wrong and governments make it clear they won’t criminalize Bitcoin, I’ll consider it at that time (in a year or two, perhaps).
- I fully understand that Bitcoin’s next big move might be to $50,000, $100,000, or higher. Since supply is limited and interest (potential demand) is growing, this is possible. But so is the opposite. It could well be that Bitcoin has peaked and it will be a long, painful downhill ride from here until the next halving. I sincerely don’t care if I miss out on the potential upside in order to sidestep the potential landmine.
- I have plenty of other speculations in the resource sector with the potential to double, triple, or bring me even higher multiples on my money. These are speculations I understand. Given my experience in the field, I’m confident I can tip the odds in my favor. Since Bitcoin is not my only choice for serious wealth creation, I feel no pressure to gamble on it.
- I don’t believe that Bitcoin’s success has to come at gold’s expense. I think the crypto community has done an admirable job educating an entire generation about the dangers inherent in fiat currencies. This is good for other forms of money. I’m perfectly happy to let the market decide which form dominates. And even if Bitcoin does become the world’s main form of money in the future, gold remains a metal that has many uses as a commodity. I’m not worried about it going to zero.
In short, I’m not confident enough in Bitcoin’s success to put a significant amount of my wealth into it today. But I can foresee circumstances under which I would.
That’s my take,
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