Cryptocurrency is here to stay.
There, now you have the short answer. Well, at least that’s my unprofessional opinion. Let me explain myself, though. I think you’ll definitely understand where I am coming from once you look at the bigger picture and have some of the facts.
Cryptocurrency: A Bubble at its Peak, or Still Gaining Steam?
Where do the fears of a “bubble” come from, then?
Well, many people love citing the “Crypto Bull Run of 2017,” where Bitcoin went from $900 up to nearly $20,000 in just one year, before plummeting back down over 60% in just weeks.
The thought process here in drawing comparisons is that the same exact thing is going to happen soon, and cryptocurrencies will once again drop 50-70% in the span of weeks, leaving many with huge losses.
I personally can relate to those concerns, and I empathize with those who are too worried about the past to make crypto-related investments.
I experienced the fallout of that bull run in early 2018, and lost as much as 60% on one of my investments. I know the feeling all too well, and I understand that those worries are warranted.
However, I am cognizant that sometimes fear can overshadow looking into circumstances logically.
On top of those concerns over volatility and the possibility of an impending “crash” of sorts, many critics cite a variety of detrimental factors that seem to cloud over Bitcoin.
One of those factors include the immense energy consumption of the computers used to run the Bitcoin network, which currently is comparable to the annual energy consumption of the Netherlands.
Let’s take some time to adequately address these concerns. It’s never good being a “cheerleader” and turning a blind eye to criticisms.
Being overly optimistic about investments without considering negative factors and associated risks is typically a recipe for irresponsible investing.
It’s good practice to always consider every factor, both good and bad, before making investments. We do it in the stock market when analyzing companies, so we should do it for crypto as well.
Cases Against Cryptocurrency (And Addressing These Points)
Let’s start with all of the “bad news.” It seems rather pessimistic to do that, but it’s important to address the downsides, because a lot of them have pretty valid counter-arguments once you dig into them.
Bitcoin is Digital, it Has No Real “Value.”
Addressing This: The US Dollar has no real/intrinsic value, other than our faith that the government will maintain its “value”.
In 1971, President Nixon removed the capability to convert US Dollars to gold.
Once the Gold Standard was gone, and currency was not backed by gold, we moved to the “fiat” system, meaning that the value of currency wasn’t backed by any commodity and could fluctuate in value based off other currencies in the foreign exchange market.
When you think about Bitcoin, it’s not much different. We value it based off our belief that it holds value as a monetary instrument, and can measure it compared to other currencies.
Additionally, Bitcoin has one huge advantage against the US dollar: it is deflationary, rather than inflationary.
I’m sure you have heard about fears of inflation recently, with 23.6% of all US dollars in existence being printed in the year 2020. The idea is that when there are more dollars being printed, they lose value as the prices of goods and services rise in response to a higher supply.
With Bitcoin, it is the opposite. There are only 21 million Bitcoin that will ever possibly exist, and as time goes on, new Bitcoin are created slower and slower.
Bitcoin Uses More Electricity Annually Than the Netherlands does.
Addressing this: Bitcoin uses a fraction of the energy (and dollar cost) per year than traditional banking systems and gold mining (since many compare Bitcoin as a “store of value” to rival gold).
On top of the differences in energy consumption, it’s important to look at what sort of energy Bitcoin miners (those who run the Bitcoin network to validate transactions on the blockchain) are using.
Many miners are strategically located where there is renewable energy, such as hydroelectric power, with CoinShares estimating that 74% of bitcoin mining to be powered by renewable energy sources.
Cryptocurrency is Used By Criminals for Illegal Activity.
Addressing this: One of the first use-cases of cryptocurrency years ago was to purchase goods and services illicitly on the “Silk Road” exchange.
However, that marketplace has been gone for years, and if it came back, I’m not sure people would use it knowing what we know now. Every Bitcoin transaction in history is visible on the blockchain.
Because of that transparency, it doesn’t even make sense to use it for these purposes.
Additionally, cash transactions are responsible for a much larger share of illicit activity than Bitcoin.
I picked Bitcoin for all of these examples because it is the largest cryptocurrency, so there is a plethora of highly-scrutinized research from experts in a variety of fields to address these points.
However, it’s important to note that a couple of these criticisms on Bitcoin aren’t necessarily valid for other cryptocurrencies.
For example, cryptocurrencies such as Cardano are estimated to be anywhere from 20,000-100,000 times more energy efficient than Bitcoin.
Although those claims are frightening to hear at first, it’s good to be fully-informed of the facts surrounding each situation.
Now that we’ve addressed each of these concerns and debunked a couple rumors, let’s take a look at why cryptocurrencies could be great investments.
The Case For Investing In Cryptocurrency
What’s different this time around? Why will the rise in cryptocurrency be sustained?
Cryptocurrency is a Great Hedge Against the Impending Inflation- Possibly Even Better Than Gold.
As I mentioned earlier, US dollars have been printed at an unprecedented rate as part of stimulus checks of the past year, which devalues the US dollar as many more slowly get into circulation.
This means that by holding US dollars in a savings account, or even in very-low return assets such as some long-term bonds, you will essentially be “losing” money, as inflation devalues your currency by a higher percent than you could gain with interest.
With Bitcoin, investors don’t need to worry about more being created and devaluing what they own. There will always be a fixed number of Bitcoin; it will always have scarcity.
Historically, investors turn to commodities, such as gold, as a hedge against inflation. However, at the time of writing (March 2021) the price of gold has risen less than 20% in the past year, whereas Bitcoin has risen 800% in value.
Although gold has scarcity as well, the supply can vary drastically to match the demand.
If the price of gold were to theoretically triple tomorrow, I could almost assure you that every miner in the world would be putting maximal effort into mining and processing as much gold as possible, flooding the market to rake in as much profit as possible.
In fact, they may even invent new extraction technologies to capitalize on this new high price. As a result, there would be a supply flood of gold into the market, reducing its scarcity, and bringing the price back down.
Bitcoin’s supply rate is fixed, and actually gets cut in half about every 4 years.
Institutional Adoption is Still at an Early Stage, With More Companies and Large Investors Joining Every Week.
Previously, cryptocurrency was widely held by the “retail market,” meaning people like you and me. It was primarily individuals using their personal savings to invest.
While this was enough force to warrant a great rise in cryptocurrency prices, there wasn’t as much confidence in the crypto space given there wasn’t the social proof of respected firms and companies choosing to invest.
Many saw this as a lack of validity, and without the support from the greater investing world, it caused bubble fears and a massive sell-off.
The story is quite different now, as we see large fund managers deciding to invest, companies adding it to their balance sheets, and fintech companies embracing usage of the technology.
I’m not just talking small, niche companies with no track record, either. I’m talking about industry giants such as Tesla, PayPal, Square, and MicroStrategy.
As of March 13, 2021, MicroStrategy alone holds 92,326 Bitcoin, which is worth over $5.5B.
BlackRock, the largest asset manager in the world with $8.7T in assets under management, has started to “dabble” in cryptocurrency as of February 2021.
Tesla and MicroStrategy have both profited over $1B dollars from their Bitcoin purchases already.
That is more income than Tesla made as a company in the entirety of 2020 alone. These successes may signal to other companies that converting even a small portion of their balance sheet to Bitcoin could be incredibly lucrative.
Just imagine what may happen to the value of Bitcoin if other large companies, such as Microsoft, Apple, Amazon, or Alibaba, decided to convert even 1% of their current cash holdings to Bitcoin.
It’s Easier and Simpler Than Ever to Invest in Crypto.
In the past, purchasing cryptocurrency required going to exchanges that were designed solely for the purposes of buying, trading, and sending cryptocurrencies, such as Coinbase, Gemini, Kraken, and Binance.
Now, a huge portion of the population has increased accessibility to the crypto market as one can buy crypto in seconds through apps such as Cash App and PayPal.
Cash App has 30 million active monthly users, and PayPal has over 340 million active accounts.
It’s easier than ever for the average person to invest in cryptocurrency, and this is helping drive demand up.
The (Almost) Perfect Storm
Bitcoin was the best performing asset of the last decade. This was before hedge funds, endowments, and pension funds started investing.
This was before large companies bought billions of dollars’ worth of it to add to their balance sheet.
This was before the almighty power of Elon Musk’s tweets.
This was before you were able to buy it in seconds with ease on popular apps.
The cryptocurrency market seems to gain more and more support every single day. Yes, the market is very volatile; it isn’t an asset class that you should put a larger portion of your savings in than other investments.
The prices will generally move back and forth very sharply, and if you look at your account balances every day, this might be stressful.
However, the growth potential is huge, as it disrupts industries ranging from finance and supply chain, to music and art.
Bitcoin and the rest of the cryptocurrency market isn’t perfect. It’s not uncommon to find the words “scam,” “pyramid scheme,” and even “rat poison” (that last term was actually from Warren Buffet) used to talk about it.
However, some of these points are overblown, as I explained above. There are still definitely some valid criticisms, but that doesn’t mean we should entirely write off crypto as a valid asset class.
I would challenge you to name me a well-performing investment of the last year that doesn’t have sharp criticism. Innovation and new ideas rarely go over without facing strong headwinds.
It’s almost impossible to innovate and create something new and revolutionary, without receiving a hefty load of skepticism.
This isn’t a bad thing, necessarily. Some criticism is healthy, as it forces us to analyze our investment thoroughly and form conviction in our thesis before going in.
The combination of widespread institutional adoption and greater exposure to the public in the retail market is the perfect storm for cryptocurrencies to keep appreciating in value.
With inflation scares looming, many individual investors and institutions are turning to crypto not only to preserve their wealth, but to grow it.
Cryptocurrencies have gone from being an entirely speculative, highly-condemned investment held only by individuals, to its own officially-recognized asset class, supported by large-cap companies, banks, and even some governments.
Although there will always be some criticism, I personally find it hard to entirely disregard the current momentum behind cryptocurrency and anticipate failure.
All investments have risk, and everyone has a different risk-tolerance. Nothing is guaranteed. However, for me, the opportunity cost of completely writing off cryptocurrencies is just too high.
The potential for growth is unbelievable, and in our constantly-innovating world, I can’t find it in me to bet against technology.