The Big Bitcoin Debate

The Big Bitcoin Debate
Carl Hazeley

over 2 years ago3 mins

Mentioned in story

Bitcoin’s price has dropped dramatically last month, forcing backers of the cryptocurrency to reexamine their investment theses. One of the best ways to do that with any asset is to engage with the bear case – which is what this Insight is all about.

If you’re going to buy or hold bitcoin, you should have good answers to the following four arguments as to why it isn’t a good investment.

1️⃣ Bitcoin isn’t a currency

All currencies have four features: they’re units of account, means of payment, relatively stable stores of value, and act as single numeraires. Bitcoin fails on all four counts. It’s not a unit of account, since nothing is priced exclusively in bitcoin. Bitcoin’s network can only complete a dozen transactions per second versus Visa’s 65,000 – so it isn’t a viable means of payment at scale. You only need to look to bitcoin’s recent volatility to know it’s not a stable store of value. And there’s no base numeraire across the entire crypto universe.

2️⃣ Bitcoin isn’t an inflation hedge

A hedge should be closely correlated with the thing you’re trying to protect against: so bitcoin’s price should rise when inflation does. Annual US inflation has averaged 1.5% since 2013, while bitcoin’s price has risen an annualized 150% per year – but the two don’t move in lockstep. Bitcoin’s recent 40% tumble coincided with the US reporting its highest level of inflation in over a decade.

3️⃣ Bitcoin doesn’t have any fundamental value

Almost all assets have cash flow or some other utility that can be used to determine their fundamental value. Stocks provide dividends, bonds provide interest payments, real estate provides rental income or accommodation, and commodities have real-world uses. Even gold – a safe-haven investment – has major decorative and industrial applications. Bitcoin, by contrast, doesn’t generate an income or have any utility, leaving it lacking fundamental value.

4️⃣ Bitcoin isn’t truly decentralized

A handful of miners essentially control about 70-80% of bitcoin production, and its ownership is also highly concentrated. Less than 0.5% of addresses own around 85% of all bitcoin, according to CoinMarketCap data, and these so-called whales can easily manipulate prices.

Bitcoin could perhaps overcome some of these issues – but if it’s truly decentralized, there's no authority able to push forward a reforming agenda and make the cryptocurrency fit for purpose. And if there was such a central figure, bitcoin would stop being decentralized. That paradox could prove its downfall.

What’s the opportunity here?

There may well be arguments against all four of these points: check out the Related Content section below for various elements of the countercase. But my view at least is that these aren’t strong enough to justify buying into bitcoin in a big way.

Whether you’re new to cryptocurrency or looking to double down, the potential bitcoin investor has one big challenge to overcome. You’ve got to be convinced that the four issues above don’t stop bitcoin being an attractive bet – and that it’ll overcome them to reach a level above where its price is currently at. Ultimately, however, that may involve simply gambling on a game of the greater fool

Key takeaways

Four arguments against bitcoin as an investment are:

  • Bitcoin doesn’t meet the four requirements of any currency – so it isn’t one
  • Bitcoin’s price doesn’t correlate with inflation – so it’s not an inflation hedge
  • Bitcoin doesn’t generate cash flow or have utility – so it has no fundamental value
  • Bitcoin’s mining and ownership is so heavily concentrated that it isn’t truly decentralized
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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