I admit I am not a fan of Bitcoin and other cryptocurrencies. As investment opportunities they lack true opportunity, in my opinion. Bitcoin doesn’t generate any real value by itself. If you buy commodities at least someone else will buy and consume them. 1 million bushels of corn are a tangible asset. They will go somewhere and be used. 1 Bitcoin is just a number in an electronic wallet. You can sell it but you cannot consume it. A few companies accept Bitcoin payment but it’s not widely used as money.
My only regret about Bitcoin is that I didn’t buy 100 of them for $1 when I had the chance. I could have easily found $100 to invest in something at the time. But as with so many other cool ideas, no one knew at the time where the price of Bitcoin would go. If you’re thinking that was a mistake, remember that the OTC exchanges are loaded with cheap stocks that might one day be worth thousands of dollars per share. Just pick one and prove you made the right choice.
No one is a fool for not having invested in Bitcoin in the early days. And the people who bought Bitcoin when it was peaking in late 2017 may feel like they were cheated, but wouldn’t you have wished you could buy a share of Berkshire Hathaway A for $20,000? BRK.B trades for a couple hundred dollars. BRK.A trades for over $100,000. I don’t think Bitcoin speculators were stupid to hope that its price would rise that high. But they were not lucky.
The Historical Trend for Bitcoin is Rather Stable
Just looking over Bitcoin’s prices on Coinbase for the last year, I feel like Bitcoin has been trapped in a trading range. This is the real value of Bitcoin.
It could be the real trading range settled in at the beginning of March. Bitcoin peaked above the current range in February, but I’m not convinced that the ceiling is really below $10,000. Bitcoin peaked at around $9600 in May, which is close to the $10,000 mark. I believe the trading range is moving between $6000 and $12000.
While that may seem too elastic for many people, I believe it’s reasonable. Bitcoin has weathered a lot of storms this year. There has been a lot of bad news for the cryptocurrency. And yet its trading value has not dropped below $6000. I think that is the true “hard floor” for this trading range.
Bitcoin Is Still Vulnerable to More Loss In Value
Here is what Bitcoin has going against it:
The mining industry is shrinking. The strength of the cryptocurrency has always been the value placed upon consensus among miners. It takes 50%+1 of miners to agree on a hash before a new block is accepted into the blockchain. Fewer people are operating as independent Bitcoin miners now. There is a very real and, I think, credible fear that future development of Bitcoin is controlled by too few people. Bitcoin has become an oligarchical commodity of exchange. Too few people control the means of production and verification of Bitcoin transactions.
The mining industry is too expensive. Miners have to build huge server farms in order to compete for the dwindling supply of new Bitcoin. These server farmers consume huge amounts of electricity. The electricity is expensive to produce and in some areas is subsidized by unwitting communities whose electric bills have soared.
As consumers become aware of just how much the Bitcoin server farms drive up their costs for energy, they are demanding laws that restrict miners and hold them accountable for the electricity they use. The miners, who depend on selling the Bitcoin they earn to cover their costs, are being squeezed by Bitcoin’s own limited value.
Bitcoin was designed to become more expensive. Unlike a fiat currency, such as the Venezuelan Bolivar, a government cannot simply issue more Bitcoin in order to cover its payments. Whereas a fiat currency can be devalued by pumping too much cash into an economy (risking runaway inflation as has happened in Venezuela and a few other countries), a cryptocurrency is designed to “run out” eventually. Once the last Bitcoin has been mined that is it. There are no more. And then Bitcoin transactions will be based on smaller and smaller denominations of Bitcoin as more people attempt to use it.
Hence, demand for Bitcoin is expected to increase gradually over time. But if Bitcoin remains trapped in a trading range for too long it becomes too expensive for miners to produce more Bitcoin. That, in turn, means that Bitcoin transactions take longer to complete because there are fewer miners who can afford to do the work.
The blockchain has become impossibly huge. Database engineers swear that blockchain is the slowest, most inefficient database system ever invented. It takes longer and longer to complete transactions and the blockchain – which must be available to everyone – becomes longer with each new block. This is true for all cryptocurrencies. It makes little sense to use blockchain for business applications. SQL databases are much faster and can store much more data than blockchains.
Any company that invests in blockchain technology is leaving itself vulnerable to being outperformed by competitors who rely on faster, smaller database technology. And that is ironic because SQL databases have been criticized for being slow and inefficient compared to other types of database infrastructures.
Blockchain is what future disappointment looks like, in my opinion.
My Final Word on Bitcoin
As an investor I want nothing to do with Bitcoin. If someone figures out a way for Bitcoin to pay dividends I may come back it as an investment opportunity. A dividend-producing Bitcoin is not so bad even if it’s trapped in a trading range. The miners will still have to approve new transactions but if the dividends are paid in something other than Bitcoin itself (not another cryptocurrency but real cash) then that would mean Bitcoin has some real value.
My dreamy-eyed friends who want to see the world move away from fiat currencies are hopeful that Bitcoin will one day free us all from the whims of governments and dictators. While that kind of wishful thinking makes them feel good, it’s not something on which I would base investment decisions. A good ETF that pays dividends every quarter is more likely to free you from the whims of governments and dictators because you don’t have to worry about whether the miners can afford to approve that last blockchain transaction before no one can store a full copy of the blockchain any more.