By now, most people have heard of Bitcoin. You might view it as the speculative, highly volatile digital currency that occasionally makes headlines.
Yet, what you might not know is there are a growing number of serious investors that view Bitcoin as something worth spending time on and investing in. To understand why, it's helpful understand some of the reasons that investors find Bitcoin interesting in the first place.
Bitcoin has a fixed supply and low inflation
One of the core tenants of Bitcoin is that its total supply is capped at 21 million. At the time of writing, there are about 18.3 million bitcoins (BTC) already in circulation, or about 87% of the total that will ever exist. The remaining 2.7 million bitcoins will be released through a known, consistent schedule over time at a low inflation rate.
Due to the economic downturn from COVID-19 in 2020, governments and central banks are printing unprecedented amounts of their currencies to try and stabilize their economies. While these moves can be beneficial in the near term, large increases in the money supply have historically caused currencies to lose their value over time.
Investors see Bitcoin's total fixed supply and low supply increases each year to be a potential alternative to government-backed currency devaluation.
Bitcoin is not controlled by any government or entity
Bitcoin was created by an anonymous developer that voluntarily transitioned from the project in 2011. It is open source software that anyone with an internet connection can interact with.
Bitcoin offers us a truly alternative financial and monetary system; one that exists independent of governments, banks and traditional financial infrastructure. It was the pioneering project that created the technology that we now call blockchain.
The Bitcoin network, the original blockchain, is run by people all over the world and is operational every second of every day. Bitcoin provides an public ledger of property rights - who owns what bitcoin - without the need for any bank, government or authority to act as a trusted party.
These qualities allow anyone in the world to "opt out" of their local financial system and participate in something else. It also makes Bitcoin highly censorship and seizure resistant. While censorship and confiscation of wealth are not problems in many Western countries, it is relevant to billions of people elsewhere.
One interesting example is Venezuela, whose citizens have been large adopters of Bitcoin as a means of fighting crushing hyperinflation and monetary controls in the country.
As the infrastructure around accessing Bitcoin improves and more people globally come to understand its usefulness, many expect Bitcoin to continue to take market share in markets with weak currencies or oppressive monetary controls.
Bitcoin is an emerging, digital gold
Gold is the de facto store of value asset globally, with a total market value of around $9 trillion. Gold has value far beyond its commercial usefulness and has been a culturally important asset for thousands of years.
However, gold has some key drawbacks, including:
- It is difficult to transport and expensive to store
- It is difficult to verify its quality. As a result, much of the world's gold is held in centralized repositories that follow strict guidelines
- It is not easily divisible. Most gold is in the form of bars, coins or jewelry, which makes transferring exact amounts difficult
Bitcoin has most of the valuable properties of gold, including scarcity, limited supply increases each year and fungibility. But it also solves some of gold's drawbacks:
- Bitcoins are very easy to transport and store. Today you can transfer $100 million of Bitcoin for only a couple dollars over any internet connection. Storing bitcoins is virtually costless
- Bitcoins are easily verifiable. Information about every Bitcoin can be seen on the public Bitcoin blockchain, viewable by anyone connected to the network. Owners of bitcoins can easily prove they control them
- Bitcoin is easily divisible. The smallest unit of a Bitcoin, a Satoshi, is one hundred millionth of a single bitcoin (0.00000001 BTC)
What's important to remember is that Bitcoin is an emerging digital gold candidate. It will take time and a track record of performing through numerous market cycles for Bitcoin to be widely counted on as a store of value asset. By the end of 2020, we will will have a better idea of how Bitcoin behaves in the context of broader economic turmoil.