Bitcoin, too big to fail?

Bitcoin is approaching $60 000 and predictions are that it will go to $100 000 soon. We have mentioned Bitcoin before and we have also said that JWR cannot give advice about Bitcoin, but it does seem that Bitcoin is here to stay. And so, it seems, are crypto currencies in general. In our writings about Bitcoin in March 2018 and October 2019, and even before that, we mentioned that Bitcoin was something that old-school investors like Warren Buffett could not value; governments did not like; and universities did not teach.

This does not mean, however, that it is not a reality. There are very bright people out there who see Bitcoin as the new decentralized digital platform for payment of goods and services; just like Amazon has become the new digital platform for retail trade; or Google the digital platform for obtaining and storing information. If this is indeed the case and if Bitcoin achieves broad-based acceptance, especially from institutions, then the value of Bitcoin is still in its infancy.

It must be said that not everybody has to be an investor in Bitcoin. If it does become the dominant payment system or replaces gold as the new store of value, then you can simply be a user of the product. Much like when cars replaced horses as the main mode of transport and people bought cars, but not car manufacturers. Bitcoin is definitely not a safe investment. You can bet your bottom dollar that governments will try to regulate it out of existence and that hackers will steal as many as they can from trading platforms lacking the necessary protection. But it has been a fantastic investment for those who have believed in it for the past decade (see returns graph).

The biggest hurdle for Bitcoin and other crypto currencies was being accepted by institutional investors. That hurdle has now been removed and companies like Paypal, Tesla, Microsoft, AT&T, Burger King, KFC and many others accept it in some of their stores or for some items. Coinbase, the largest crypto currency exchange in the US, will be going public on April 14, 2021. This will give everyone access to buying fractions of a crypto they like, without having to commit huge amounts of money.

With this broad-based acceptance of Bitcoin, the fundamental rule of supply and demand will be taking over. There is a limited amount of Bitcoins that can be mined (21 million). Currently there are 18,6 million in circulation. Once the remaining 2,4 million has been mined, the supply will dry up and demand will determine the value – or a replacement will become mainstream.

If you want to listen to some clever people talk about Bitcoin, listen to the podcasts of Michael Saylor or Chamath Palihapitiya. Personally, I believe that crypto currencies are here to stay. A lot of corporates such as Apple and Facebook are developing their own crypto and even countries like Japan are in the process. My main concern is that creating a crypto currency is not difficult, so who can guarantee that Bitcoin will be the ultimate winner? This whole thing can go horribly wrong, but who knows?

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