The price of Bitcoin, along with the entire market for digital assets, has taken a heavy blow during the last couple of weeks. As of the time of writing, Bitcoin is down at around $35.000. Roughly a 50% price decline since its all-time high of $68,790 last November.
There is blood in the streets of crypto-land, but the stock market has also suffered recently after a long period with steady green numbers.
The difference between investing in stocks and digital assets is strikingly clear. Although price-performance correlates at this point, the latter asset class is extremely volatile compared to the former. Bitcoin is a completely different animal than the world is used to. While people in the “crypto space” are cheering and clapping their hands for a new buying opportunity right now, banks and parents alike are raising an eyebrow.
I will here provide you with four golden tips to defend your investment thesis against friends or relatives who are skeptical about Bitcoin.
#Tip 1: Ditch the Term “Cryptocurrency”
First of all, I recommend we stop using the term “cryptocurrency”. The term makes assets like Bitcoin, Ethereum, Cardano, Polkadot, Solana, and countless other strong holdings sound like they are jokes or scams. The silly term may even withhold potential investors from entering the market. “Cryptocurrencies” would be a befitting name for a bit in a standup comedy routine, but it is too cartoonish and meme-like to describe an asset class that works towards changing the world for the better.
After all, Bitcoin and similar assets have the potential to decentralize finance, while bringing wealth, prosperity, and provable ownership rights in the hands of poor people in corrupt or broken countries. The mission is serious and pragmatic, and the name should reflect that. Therefore, “cryptocurrencies” should be replaced with another term such as “digital assets”.
# Tip 2: Bitcoin is not suitable as a payment system
Extending the previous point, it’s debatable if “cryptocurrencies” should in all cases be considered as “currencies” to begin with. Evidently, Bitcoin is not suited to be an everyday payment system like VISA. Besides Bitcoin’s pronounced volatility, the network can only process up to seven transactions per second, network fees are unproportionally high for small transactions, and typically transactions are not settled before an hour or longer. That is a long waiting time for a vendor to know if a transaction is valid or not.
For me, and I believe for the majority of the world’s more than 100 million bitcoin owners, Bitcoin is viewed as a long-term investment scheme rather than a means of payment. The limited supply of Bitcoin makes it a potentially great hedge against inflation. Therefore, Bitcoin is commonly and accurately described as “digital gold” or as “digital real estate”.
#Tip 3: Explain Bitcoin’s 4 Year Cycle
From an investor’s viewpoint, the most important concept to be familiar with is Bitcoin’s 4-year cycle. Despite Bitcoin’s dramatic ups and downs, there are clear patterns to be deducted from historical price data. These patterns are strongly related to the 4-year cycle.
Every fourth year the mining rewards (I have written about Bitcoin’s mining system here) are cut in half. In the spring of 2012, the rewards for mining a block went from 50 BTC to 25 BTC, in 2016 to 12.5 BTC, in 2020 to 6.75 BTC, and in the spring of 2024, the rewards will be reduced to 3.125 BTC. The halving events will occur until 2140 when the last bitcoin is estimated to be mined.
For each halving event, bitcoins become scarcer which theoretically should make them more valuable. Unlike fiat, which national banks could keep on printing out onto eternity, there is a hard cap on the supply of bitcoins, so only 21 million can ever exist.
I recommend watching Bob Loukas‘ videos on YouTube for further insights on Bitcoin’s 4-year cycle.
#Tip 4: Ask: What is the real value of Fiat?
A common argument you hear against investing in Bitcoin is that it has no real-world value or no “intrinsic value”. The legendary stock investor Warren Buffet has made this exact claim. But is it true?
According to economic theory, Bitcoin possesses the two essential proponents for something to have value: scarcity and utility.
The scarcity part, I have covered under #Tip 3.
The utility part is simple to understand and explain. You can use bitcoins to make international value transfers without relying on banks. No banking fees apply, fast processing time, and no money changing hands behind closed doors. The system works in the exact same manner, whether you are transferring value corresponding to $10 or $1 Billion. Or whether you are transferring money to your neighbor or someone from the other side of the globe.
I would also argue that Bitcoin’s proof-of-work mechanism, considering the huge amount of computational power that goes into mining, must underpin the asset with some intrinsic value.
Now, let’s turn the question around. What is the real value of fiat money?
There are plenty of arguments against investing in Bitcoin. Common worries are that Bitcoin may be hacked or is just used for tax evasion, fraud, whitewashing, etc. These rumors have been debunked so many times over the years that they are not even fun to discuss. A more valid concern in my opinion is how volatile the prices of digital assets are. The wild “crypto-ride” is not meant for everyone, and of course, there are always risks implied when investing. Regarding the environmental concerns around Bitcoin see here and here.
Another argument I can see when comparing Bitcoin to other digital assets is Bitcoin’s lack of decentralization. Because a few large mining stations control almost all of the computational power that sustains and secures the Bitcoin network, it can be questioned if other proof-of-stake blockchains may be more open and decentralized. However, when getting into these deeper talks, it seems like the conversational counterpart has already bought into the basic premise of Bitcoin.