8. Bitcoin's "Intrinsic Value"
Happy holidays everyone! Some good BTFD (buy the F’in dip) opportunities out there huh??? Get after it! I am, that’s for sure. Might even go lower but don’t be scared, have that long-term mindset. Hope everyone got some time off to recharge and connect with family/friends. Unfortunately, our family had a GI bug and our beloved cat Ruca died on Xmas morning (ugh!)…but we powered through and made the best of it for our daughter. And speaking of friends, this post is dedicated to a childhood friend of mine and an incredible man who lost his life to cancer recently. As my buddy says, “cancer sucks.” Recognizing life is precious and old age is guaranteed to no one is part of the reason I write this newsletter. Do what inspires you, pursue your passions, minimize regrets, take calculated risks, maximize the time you have, inspire/help others - things I try to live by at least, and I know my friend did too.
Moving on…
“But but but but…what’s bitcoin’s intrinsic value??? It’s not backed by anything!! It’s not a physical thing/I can’t hold it or touch it!! It’s a Ponzi scheme!!”
If I had a Satoshi(sat) for every time I heard this…I truly would be a billionaire by now.
I get it though. You NEED to get over this hurdle in order to accept Bitcoin and believe it has any current or future value. We did too. It’s the red pill moment in the Matrix. It takes time, a lot of reading, critical thinking, and quite frankly, admitting you might be biased and wrong - which is really hard to do! Everyone dismisses Bitcoin at first, but after multiple touchpoints, it’ll click -
and then you’ll wonder why it took you so long and you’ll feel late to the game - trust us you’re not though. It’s still early, but the clock is ticking.
There are many well written articles/books/blogs out there that can help you on your journey to understanding bitcoin’s intrinsic value. THIS is one of my favorites. Here is another nice beginner article.
I will summarize the first one and add my own thoughts, but it’s a good one to keep and refer back to IMO.
Ultimately, as I see it, Bitcoin’s intrinsic value is based primarily on two things:
bitcoin the digital asset - it is the best form of money that has ever existed. Period. It’s backed by its superior monetary properties to all other forms of money ever, and you can TRUST that no one can mess with its monetary policy (unlike other cryptos or the US dollar inflating away or manipulated gold prices). It is the most supreme store of value asset protecting your most scarce resource - your time. That is profound intrinsic value.
Bitcoin the global network - it’s similar to the internet base layer upon which all other applications are built, but for money. The future potential for bitcoin as a base layer/settlement layer of money is limitless, and you can own some of that layer with the click of a button! However, you don’t need to own bitcoin the asset to use and benefit from Bitcoin the network if you don’t want to! This is not a pipe dream, it’s happening today, and soon you’ll be using it without evening knowing it.
Everything discussed below fits into these two categories, either representing intrinsic value in the asset itself or the network.
BITCOIN AS DIGITAL GOLD
I think this is a good starting point for new entrants into the space when thinking about Bitcoin. Do I think it’s so much more? Yes. See above. But this narrative should really resonate with you and begin to make sense.
Software is eating the world…EVERYTHING IS GOING DIGITAL.
Is it really too much of a leap to think that software (Bitcoin) can’t eat gold/money/finance next? Software ate books, maps, music, phones, communication, TV, etc. As annoying as it may be to you because it’s “different” or a “change”, money is next. Maybe you liked to write letters back in the day or enjoyed a good ol’ CD while you drove your car looking at a physical map to get out of town for the weekend. Yea…not going back to that are you? Technology made your life better/easier. In the future you’ll look back at bitcoin in the same way.
As Bitcoin the asset matures over time and realizes its true value as the best money that has ever existed, it will “eat” gold as a store of value first (10T market cap).
Bitcoin is natively digital. It’s in cyberspace. It’s an open monetary network that is secure and transparent. You can send it anywhere at any time. You can move with it and easily store it. It’s absolutely scarce, not just “pretty scarce” like gold. You can’t confiscate it, you can’t censor it, and it can be divided into the tiniest of decimals. You can sell it at a moment’s notice if you need to. Oh yea, and YOU can verify every transaction on the network ever, and it doesn’t require trusting a central authority to do so (physical gold stores are HIGHLY manipulated/centralized). Bitcoin is like gold…but digital…and on steroids. It’s the soundest money we have ever known and it was built for the digital era. It’s an evolution of money utilizing technology and its time has come.
GOLD IS OLD. It’s 5000 years old and truly just a shiny rock that does look nice when worn and has some uses. You can hold it in your hand. That’s nice. But would you still travel the country by horse and buggy after the automobile was invented? Would you sail across the Atlantic on a wooden ship instead of taking a nice cruise? I ask you, how much gold do you have in your safe at home? What if you needed some cash? Going to go down to the local jeweler and sell some first thing Monday morning? Going to buy some Starbucks with that fleck of gold in your wallet?
YOU DON’T NEED TO PHYSICALLY HOLD SOMETHING TO MAKE IT REAL/VALUABLE IN THE DIGITAL ERA WE LIVE IN! GOLD IS VALUABLE BECAUSE OF ITS MONETARY PROPERTIES - BITCOIN IS SIMPLY SUPERIOR.
BITCOIN AS A STORE OF VALUE / SAVINGS ACCOUNT / INFLATION HEDGE
We’ve been through this a lot already in various ways. You can think of Bitcoin as a cyberspace secure bank account that you store your hard-earned wealth in. The time you spend earning money at work, providing value to society, can now be stored away without fear of debasement (money printing).
It already is, and will soon be recognized by all, as the greatest store of value that exists. That includes beating bonds, stocks, real estate, cash, gold, wine, art, baseball cards, a vintage car, etc. All of these assets assume risks/have limitations, just like Bitcoin. There is no free lunch. Let’s discuss them.
Bonds - the riskiest of them all. Huh?? What’s supposed to be THE SAFEST asset is the riskiest? Am I insane??? I would argue no. Bonds have a real yield of somewhere between -3 and -15% depending on what you believe inflation rates are. Thus, if you own a bond, you are guaranteed to lose money. No questions, you’re losing money every day/month/year. You give a loan to the government, they say “thank you”, and give you back the money in 5, 10, or 30 years with some interest all while laughing behind your back.
That money printer ain’t stopping, and not only did you pay them taxes, but they inflated away your bond returns and with it the most precious and scarce thing - your time. You don’t get that back.
Stocks - they’re great. I own a lot. Probably too many since I own zero bonds. And no one wants to save cash in a savings account because you’re getting 0.2% interest per year and that’s not keeping up now is it? Thus, you put all your money into a low-cost ETF or individual stocks to “keep up” with inflation. These companies for the most part are insanely overvalued. Crazy high PE ratios. Some are legit, but most are artificially inflated because we all keep piling into the stock market because T.I.N.A. (There Is No Alternative). Money comes in, prices go up. Government prints money - it goes into the stock market - prices go up. It’s not that hard. This will continue to be the play until it isn’t. No one can say when that day will be, and I don’t know if it will ever come. Pensions and people’s lives are at stake in the stock market. The government will not let it crash…they can’t. There’s too much at stake now. They got hooked on money printing like getting hooked on opioids. The problem is there is no simple or safe detox. The system is levered up to its eyeballs and at some point, the music will stop and the crash might be epic. My theory is to always protect myself, my family, and my time. Diversification is necessary. Stocks are great and will do well and keep up with inflation, but diversification into Bitcoin as an insurance policy for protection is a no-brainer to me. Plus, what’s the best performing asset over the past 10 years? Apple? Amazon? Real estate? No, it’s Bitcoin, and it’s not even close. And yes, it’s still early.
Choosing an allocation percentage to bitcoin is just a personal choice. For some, it’s 1-5% net worth. Others are all in. You have to decide for yourself. No risk no reward.
Real estate - also a great investment. Owning property or land is really smart. The prices are only going up. But remember the 2008 housing bubble and prices? Everything was waaay overpriced prior to the crash.
Housing prices blowing by prior 08’ all-time highs! I actually don’t think this is the same housing bubble like the last time given new work from home secular trends due to Covid and better bank lending practices, but I do believe money printing has dramatically contributed to higher home prices. Thus, if you don’t own property you’re getting left behind. Quickly.
Although rising property values are great, owning property comes with downside too. Every homeowner reading this just nodded and said,
There are lots of taxes, insurance, maintenance costs, landlord issues if you rent it out, etc. It’s not easy. You also can’t sell it 24/7/365 immediately and take it with you if you decide to move. It’s a great asset to own, but it’s no longer the best.
Not only can you think of Bitcoin like digital gold, treat it like digital property, because it is.
You get the benefits of owning real (not physical) property with the added perk of it being digital. A win-win. You may not be able to live in it, so there will always be the desire for physical property, but the monetary premium real estate carries will drop significantly at some point given digital property ownership benefits (Podcast). AKA your house may be worth less in the future - a potential problem for a lot of people banking on selling higher.
Gold/wine/cars/art/etc. - all okay, just not great. They’re just not very practical for everyone and illiquid. Meaning you can’t sell it easily and quickly. They’re also dependent on someone else to assign the value which can be subjective. Reasonable to own for sure, but I’d rather bitcoin.
Overall, all these hard assets are solid stores of value. Some are just better than others. I think like everything in life, it’s a balance. I don’t want to be homeless but own a ton of bitcoin. Stocks are good, and I like investing in companies that make our lives better. I like nice art on the walls and good wine. I also like owning bitcoin as the best store of value/inflation hedge that exists. It is my new life’s savings account.
Thus, I don’t really invest in Bitcoin per se, I save in Bitcoin.
BITCOIN THE GLOBAL NETWORK / SCALING BITCOIN (LIGHTNING NETWORK)
I can’t emphasize this enough. There’s a difference between Bitcoin the network and bitcoin the asset. You even capitalize the words differently (but I don’t focus on that too much). Bitcoin the asset has intrinsic value for all the reasons discussed above, but Bitcoin the network is about to change finance regardless of whether Bitcoin the asset is adopted as the world reserve currency someday or not. Bitcoin the network is the base layer + scaling solutions (Lightning network), and more to come. It’s critical to understand this. Think of it like credit cards built on top of the ACH system for scaling fiat. Same thing.
Bitcoin the network is an open, digital, 24/7/365, transparent payment rail upon which significant monetary transactions of the future will take place on. You truly can’t begin to fairly value that IMO - it’s immense. Have you ever tried to wire money? Basically everything today settles in T+2 (trade date + 2 days). That’s so archaic. Tapping into the most secure and open digital network (Bitcoin), old systems become obsolete. Closed systems charging fees are obliterated in the blink of an eye. Everything will be able to interoperate.
Here’s a good video discussing it (you need a Twitter account which I highly recommend anyway). And yes, the new world order is being built by 20-something year olds, get over it, they’re smarter than all of us.
Here’s another article explaining what he’s talking about to help.
This is all happening right now - not 10 years from now. Try it out. Send me a tip on Twitter. I’ll send you a tip back. It uses the bitcoin network payment rails! HOW CRAZY IS THAT?
What about buying that cup of delicious coffee? You can do that too now with Bitcoin using the Lightning network. In El Salvador where bitcoin is legal tender (recently announced) all stores (Starbucks, McDonalds) must now accept bitcoin as payment, and it’s easy. Watch.
The lightning network is still in its early days but there are innumerable people working hard to scale bitcoin and tap into its enormous potential. Don’t be short-sighted and think it won’t scale to be used in your everyday life at some point - it’s inevitable. More on Lightning in a newsletter to come.
All this means banks and legacy financial institutions/companies (Wells Fargo, Visa, etc.) are in trouble, and they know it. The days of collecting exorbitant fees and paying out no interest are almost over. They are quickly trying to find a niche within the bitcoin ecosystem to stay relevant. Some will, some will be Blockbuster. Time will tell.
In summary:
The perfect form of money needs to be exactly that — 100% pure monetary energy. Nothing else.
Even while bitcoin seems like nothing to some, it’s something to others, and that’s what really matters.
To me, bitcoin is:
The best (hardest/most sound) money ever. AKA digital gold
The separation of money and state
The supreme store of value asset and a hedge against fiat debasement
Digital property
Digital energy (Podcast to help with this concept)
Time (protected and valued)
Trust, truth, and transparency
Freedom and equality
A revolution that is apolitical and peaceful (opt-in system)
Hope - for a way out of this current mess we got ourselves in
I don’t know about you, but that’s plenty of intrinsic value for me, and it’s backed by it’s superior monetary properties that are second to none.
And remember, the US dollar is only backed by the faith and trust of the US government (not gold anymore) - and with rampant and persistent money printing devaluing it, that trust is gone. Fiat always has been and always will be terrible “money”, but it was a necessary evil for convenience. It just never had a viable competitor, until now. Checkmate. Thank you, Satoshi.
Until next time…we’ll talk about FUD (Fear, Uncertainty, Doubt) and the challenges Bitcoin faces in its quest for mass adoption.
Be humble, stay hungry, stay foolish
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