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Intrigued by my staunch stance, some industry colleagues asked me about my view on bitcoin and other cryptocurrencies.
I shared a story that seemed to surprise them.
I recounted how I bought a block of bitcoin about five years ago and vowed to add to that block over time… and never sell.
That vow underscored that I wanted the crypto bellwether to be part of my estate, part of my financial legacy — one that opens doors and fulfills dreams for my children, their children, and generations of Kaplan heirs to come.
But that vow also underscored my long-term belief in bitcoin itself.
And with cryptos having been hit hard — bitcoin, for instance, is down nearly 70% from its record high — I wanted to revisit that long-term belief and explain how this promising but controversial asset class is still part of my “real investor” thesis.
Follow the “Money”As an entrepreneur and software guy, it’s easy to explain my fascination with bitcoin.
It has real uses, thanks to the blockchain technology that serves as its foundation. It’s becoming an accepted form of payment for e-commerce and other retail transactions. It’s viewed as a financial asset. And it has “scarcity,” since only a finite number of coins can be mined.
In fact, setting aside all the technical details, those monetary properties are probably the most compelling and easiest-to-explain reason to own bitcoin today.
You may have heard folks refer to bitcoin as “digital gold.” When you consider it though this monetary lens, it’s easy to see why.
Many different things have been used as money throughout human history, including seashells, beads, salt, cattle, and countless paper or “fiat” currencies.
But only gold has maintained its monetary value for thousands of years. This isn’t a coincidence.
Gold has maintained its value because it meets all the characteristics of “sound money,” as explained by the Greek philosopher Aristotle nearly 2,500 years ago.
Sound money should be:
- Durable — It must not decay, break down, corrode, or change through time or exposure to the elements.
- Portable — It must be easy to transport and store.
- Divisible — It must be easy to divide into smaller quantities.
- Fungible — One unit must be identical and interchangeable with another.
- Verifiable — It must be easy to recognize as authentic.
- Scarce — It must be difficult to obtain or to produce in quantity.
Bitcoin has only been around for a little over a decade, but it shares many of these characteristics too. In fact, it meets some of them better than gold itself.
For example, gold is one of the most durable natural materials in the world. But as a digital asset that exists on a decentralized global network, bitcoin is not subject to physical durability concerns at all. And while it doesn’t have gold’s long-term track record, it has also proven incredibly resilient to all attempts to control or “hack” the network so far.
Bitcoin is clearly more portable than gold. You can potentially carry thousands, millions, and even billions of dollars anywhere in the world on a tiny USB device, a slip of paper, or even in your mind (if you manage to memorize your private account numbers). Try doing that with a large amount of gold.
Bitcoin is also divisible to eight decimal points (0.00000001) — a unit known as a “satoshi,” after the name of bitcoin’s pseudonymous creator — while gold simply can’t be divided so easily.
Bitcoin is generally fungible. One bitcoin is interchangeable with any other, just as a one-ounce gold bullion coin is generally interchangeable with any other.
Thanks to its underlying blockchain technology — which is essentially a big decentralized public spreadsheet — every bitcoin can be authenticated more easily and quickly than even the most popular gold coins.
And finally, like gold, bitcoin is scarce.
As you probably know, gold’s scarcity is a result of its relative rarity within the Earth’s crust, and the significant time and energy required to mine it.
Bitcoin’s scarcity is built into its computer code. Only 21 million bitcoins can ever be mined, and the rate of new creation is pre-programmed to gradually slow to zero over time.
In short, despite criticisms that bitcoin isn’t “real” and is “backed by nothing,” it’s arguably one of the soundest forms of money the world has ever seen.
But to really understand the potential upside of bitcoin, we also need to look at the three traditional uses of money.
Historically, money has first and foremost been used as a store of value — a way to hold and protect wealth over time and space. Naturally, the more people use a particular money as a store of value, the higher its purchasing power rises.
Eventually, if a money becomes widely owned as a store of value, its market price will reach a high plateau. At this point it is stable enough to become a “medium of exchange” that is used in financial transactions.
Finally, if a money is widely used as a medium of exchange for long enough, it can eventually become a “unit of account” in which goods are actually priced.
It’s Early — But Don’t Wait Too LongAgain, it’s still early. But if bitcoin maintains its “soundness” — and there’s currently no reason to believe it won’t — its role as digital gold is likely to grow.
At a minimum, I expect it could eventually challenge (or even surpass) gold as the preferred store of value for the global economy.
But what if bitcoin were to eventually challenge fiat currencies as a global medium of exchange or even a unit of account?
With all of the possibilities out there, it’s no wonder there are implications that bitcoin could eventually be worth hundreds of thousands of dollars — or even millions.
Of course, this is far from certain. And in the current cryptocurrency market, it might even feel like it’s impossible.
But it’s not impossible.
And it doesn’t need to get anywhere near that extreme to develop real value for investors.
And that brings me back to my “real investor” mantra.
When you think about cryptocurrencies, you need to approach them just as you would publicly traded companies. There are thousands of cryptocurrencies out there. Before you invest a single penny, you should be able to talk about the underlying fundamentals — the ”use case” — and everything else connected with the cryptocurrency, just as you would with stocks, bonds, or real estate.
That’s what “real investors” do.
Start with bitcoin. And diversify from there.
We can help you do so with confidence.