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Monday, September 26, 2022

The Case for Investing At Least 1% Of Your Net Worth in Bitcoin Now

Once in a decade, a 10X return investment opportunity becomes a widespread phenomenon which most people look at from the sidelines.   Later, in hindsight, they kick themselves for not being part of it.  Amazon, Apple, and Tesla have all been examples of this over the last few decades.

The problem is always three-fold:  1) Investors think they have missed out on most of the upside opportunity, 2) They worry about the downside risk of losing some of their investment, and much of the time, if they do invest, 3) They trade the investment rather than hold it for the long term.

When potential investments are truly game changers (Amazon in e-commerce, Apple in phones, Tesla in EVs), the hindsight miss becomes painful.  “How could I have not seen this?”, “Why did I not invest?”, “Why did I not hold the investment after my initial gain or when it went down?”  We all have had these moments.

Luckily, right now you have one of these game-changing investment opportunities, and you have heard of it before.  Yes, that’s right – Bitcoin.  I will lay out for you why Bitcoin is here to stay, why it has inherent value, and why I strongly believe that it will increase in value at least 10X over the next ten years.

I also realize that nothing in life is 100% guaranteed, so rather than hype Bitcoin, or tell you that it is the greatest investment you have ever seen in your life, I am recommending instead that you invest at least 1% of your net worth and leave it there for 10 years.  If you have significant, diversified net worth, and follow that up with your own detailed research on Bitcoin after you read this article, then by all means invest more.

But I would never recommend you have more than 10% of your net worth in any specific stock or asset (other than your house or your business).  Even though I have total conviction that Bitcoin will rise 10X over the next ten years, the ride will be volatile and bumpy.  You must be completely happy with your allocation as part of your total portfolio so you can sleep well at night.

Let’s go through why Bitcoin is so unique and why it will go up significantly in value over time.

Bitcoin is the “currency of the internet” and cannot be hacked, manipulated or stopped by third parties, including governments

Bitcoin technology allows two users to transfer value anywhere in the world instantaneously without an intermediary.  This is something which makes Bitcoin completely unique versus other currencies and assets.  No bank or government or third party needs to be involved.  The underlying blockchain technology and “consensus verification” rules (open source decentralized protocol) allow the Bitcoin system to function in this way.

Transactions occur instantaneously.  They are inherently accurate since a consensus of the multiple nodes in the network are needed to verify it.  No Bitcoin transaction can be represented inaccurately (resulting in two parties owning the same bitcoin or the wrong amount being recorded, for instance).  This part of the basic use of Bitcoin has been operating flawlessly for more than ten years.  It is a very efficient, secure and elegant way to store and transfer wealth.

There has been a considerable amount of work done on trying to figure out how the Bitcoin blockchain protocol and consensus system could be hacked or infiltrated with inaccurate data.  Most experts agree that mathematically it’s not possible and the only way to stop Bitcoin is to turn off the internet forever.  Single governments can make Bitcoin illegal, but they cannot stop it on the internet.

This is an absolutely critical attribute of Bitcoin.  The underlying blockchain technology and consensus internet driven ecosystem make it one of the safest and most secure storage of value you can own.  You must take care of the fundamental information related to your Bitcoin if you choose to store it in your own wallet, or you can use a trusted and professional exchange to hold it (as you would a trusted and professional bank – more on that later) if you go that route.

Bitcoin has the same properties as currencies and gold, but is even better

For something to be a good store of value it must have the following properties (this list is borrowed from some other good articles and research done on what makes a good currency or store of value).

  • Durable – the good must not be perishable or easily destroyed.
  • Portable – the good must be able to store value securely and facilitate long distance trades.
  • Fungible – the good should show a consistent property. Each one should be of equal value to another one.
  • Verifiable – the good should be easily identified as authentic.
  • Divisible – the good must be easy to subdivide, so that differently valued goods can be exchanged.
  • Scarce – the good cannot be too easily obtained or too abundant or it becomes worth less or worthless.
  • Established history – the longer the history that people experience the good to have value, the more trust that is attributed to the good’s value.
  • Censorship resistant – the good should not be able to be manipulated or changed by governments or other third parties.

When you look at Bitcoin versus gold and other currencies, it does well across all these attributes except for Established history (because it is relatively new at just over a decade – this is mitigated by its broad awareness and acceptance discussed in the other sections of this article).  In fact, it outscores gold and most currencies significantly across the Portable, Verifiable, Durable, Scarce and Censorship resistant categories.

Bitcoin has very strong inherent properties which make it an excellent currency or store of value as it becomes more widely accepted.  There are no other cryptocurrencies which have the same properties, and many traditional currencies fall well short.

Bitcoin is the first mover cryptocurrency that everyone knows as the currency of the internet (it has the brand name).  It also has established “networks of scale” which make it impossible to replicate

Bitcoin was one of the first cryptocurrencies to have all these great properties but also experience widespread use and therefore validation as a solid technology and ecosystem.  As a result, its global awareness has become widespread.  Even though very few people understand its full properties and how it works, they are aware of its existence and that it has been around for more than a decade.

Moreover, Bitcoin has become synonymous with cryptocurrency and is the cryptocurrency brand name that everyone recognizes.   As copycat cryptocurrencies are developed with some of the attributes of Bitcoin, new users and institutions and governments must ask, “How is this different than Bitcoin?”, “Why should we pay attention to it if there is nothing additional that it can add to the Bitcoin attributes?”

Another way to think about it is when we say “money” or “cash” or “dollars” in a global context, we typically think of the US dollar currency.  When we say, “internet money”, “internet currency” or “cryptocurrency”, we will typically think of Bitcoin.  Bitcoin has first mover advantage in our minds, and as it gains even more scale, it will be almost impossible to replace.

In addition, because of Bitcoin’s established open-source protocol network, adoption rate and scale, it is very unlikely to be replicated successfully.  A great example is Wikipedia – you could copy the source code of Wikipedia, set up a parallel network and try and gain users, but it would not function successfully and compete with the original Wikipedia.  The original open-source network is established and already has too much scale.

Bitcoin is scarce, which will drive its value up over time

The Bitcoin ecosystem will produce a maximum of 21 million Bitcoins by the year 2140.  To date, roughly 19 million Bitcoins have been produced, which leaves approximately 2 million Bitcoins left to be mined.  The key here is there will ever only be a maximum of 21 million Bitcoins in existence.  Unlike government currencies, new Bitcoins cannot be produced at the whim of decisionmakers.  So as the unique properties of Bitcoin become more well known, more adopted and more sought after, the total value will go up.  As the total value goes up, the value per Bitcoin will rise accordingly.

There are 56 million millionaires in the world today.  In ten years, it is estimated that there will be 85 million millionaires.  Obviously, there are not enough Bitcoins for each millionaire to own even 1/4th of a Bitcoin.  In reality, given that the number of actively traded Bitcoins may even be as low as 6 million (assuming that a significant portion of Bitcoin is held by longer term investors like gold), a millionaire in 10 years will be lucky to get 1/10th of a Bitcoin as part of their portfolio.  This is just millionaires, and many more people outside of the millionaire community will want to own and transact in Bitcoins.

This scarcity will significantly drive upward momentum in the value of a Bitcoin as the adoption rate and the recognition of its unique properties as a storage of value increases.

Bitcoin has gained critical mass and is now being adopted by legacy government and banking institutions.  This will also drive its value up

Bitcoin now has critical mass.  Once its total market value passed 1 trillion US Dollars (it’s now a multiple of that), individual investors, fund managers, private wealth managers, payment services (like credit cards and internet payment systems), companies and governments have been forced to take notice.

Rather than argue about how to ignore or eliminate it, these institutions are now starting to embrace it and determine how it fits into normal regulatory and business processes.  Remember – there is nothing inherently bad or evil about Bitcoin, just like there is nothing inherently bad or evil about the US dollar.  People may abuse either, but institutions and businesses will need to embrace Bitcoin as its adoption continues to expand.

The adoption is already starting to happen, and governments are already starting to put laws in place to regulate and protect the ownership and transaction of Bitcoin.

Bitcoin is now on a long, upward trend towards adoption by individuals, businesses, and government institutions.  More demand will mean a higher value in total and a higher value per Bitcoin.

Other currencies are becoming more suspect as governments print money and drive inflation

The printing and spending of additional currencies around the world has taken on an almost unbelievable new level.  This is difficult to reverse and will undoubtedly result in significant global inflation.  This inflation will range from potentially manageable in developed countries to completely runaway hyperinflation in emerging or frontier markets.  This is nothing new, but has become more pronounced recently and will become a significant global issue over the next 3-5 years.

As inflation increases, the utility of storing value in a particular currency declines.  This occurs exactly in parallel as the utility of storing wealth in Bitcoin increases (due to greater adoption and scarcity as outlined above).   This inverse relationship supports even greater increases in value in Bitcoin.

Could some governments get the inflation of their currencies under control?  Most certainly yes, but even in these well managed situations, the value of the currency will decline by some amount every year (unless there is deflation, which has not been shown to be a viable economic growth managed scenario over time and is extremely rare).

A final summary – why you should invest in Bitcoin now

Bitcoin is a once in a decade (some would say once in a generation) investment opportunity which you should act on now.  I recommend that you put 1% of your net worth into Bitcoin and hold it for ten years.  If you have a higher net worth and are comfortable with bigger portfolio allocations, you should invest even more (although I would not recommend more than 10% of your total net worth).  This will generate a 10X+ potential gain over the next ten years.

Bitcoin is the clear brand name winner for the currency of the internet.

It has significant strong properties as a currency and as a storage of value which makes it better than most currencies and gold for this purpose.

The underlying Bitcoin technology and consensus ecosystem cannot be hacked and is well tested and sound, which ensures its long-term viability.  Bitcoin cannot be shut down unless the entire internet is shut down.

Bitcoin is scarce, and there will never be more than 21 million Bitcoins.  Scarcity coupled with increased adoption and demand will increase its value.

Bitcoin has gained scale and is in a process of being widely adopted by individuals, businesses, and government institutions.

Governments are printing and spending more money recently and the future likelihood for inflation and currency devaluation is high at the same time the outlook for the appreciation of Bitcoin is significant.

These factors over time will drive a volatile Bitcoin ever higher over the next ten years.  Make your investment now, hold it and do not trade it for ten years.  You will not be disappointed.

One last thing about how to safely buy and hold Bitcoin.  For most of the population who are just getting started in Bitcoin, I recommend buying and holding it through a regulated and secure exchange, like Gemini or Coinbase (these are the biggest and have been around the longest – there are others).  These exchanges have some of the best security experts in the world and provide a level of insurance against your holdings (like a bank does with your cash deposits).

If you are more sophisticated or want to manage the Bitcoin yourself, you can create and maintain your own Bitcoin wallet.  There are plenty of tutorials on how to do this on YouTube if you are interested, but this requires more attention and work.

You now have what you need to invest in Bitcoin as part of your diversified portfolio.  Enjoy any further discovery you do on the Bitcoin phenomenon and the ride upward over the next ten years.

The Chief
The Chief is a guest writer for The National Era on the topics of investing
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