Answers to Puru Saxena’s Bitcoin Questions
*Nothing is investment advice here. Invest in Bitcoin at your own risk and do your own research.*
1. How is bitcoin a store of value when it moves up and down 15–20% in a day?
Answer: Vijay Boyabpeti brilliantly talks about why bitcoin is so volatile in a medium post (located here: https://vijayboyapati.medium.com/the-bullish-case-for-bitcoin-6ecc8bdecc1) and how that will change in the future so that more risk averse investors will be able to treat bitcoin as a store of value as well (it is correct to say that currently as of 1/6/2021 the investors buying bitcoin are less risk averse than average in their SOV holdings, an investor’s risk aversion level is subjective). Here is what Vijay wrote:
“Bitcoin’s price volatility is a function of its nascency. In the first few years of its existence, Bitcoin behaved like a penny-stock, and any large buyer — such as the Winklevoss twins — could cause a large spike in its price. As adoption and liquidity have increased over the years, Bitcoin’s volatility has decreased commensurately. When Bitcoin achieves the market capitalization of gold, it will display a similar level of volatility. As Bitcoin surpasses the market capitalization of gold, its volatility will decrease to a level that will make it suitable as a widely used medium of exchange. As previously noted, the monetization of Bitcoin occurs in a series of Gartner hype cycles. Volatility is lowest during the plateau phase of the hype cycle, while it is highest during the peak and crash phases of the cycle. Each hype cycle has lower volatility than the previous ones because the liquidity of the market has increased.”
In other words, Vijay is saying that Bitcoin is still in a growth phase as more people understand its use cases and the technology behind it. Also, many people need to see Bitcoin play out more to trust this new kid on the block as a store of value. You would be correct in saying that to most people, Bitcoin has still not become a store of value that they can trust. Others, however, do trust bitcoin and some have trusted it since its inception on January 3rd 2009. Remember when Uber came out and many people feared Uber drivers would abduct or murder them? With AirBnb people thought it was stupid to rent their house out to some stranger, because the stranger would trash it and burn their house down. Through time, both Uber and AirBnb built the trust of millions/billions of people as can be seen by their current market caps (both around $100 billion as of the time of these answers on 1/7/2021). Bitcoin believers believe that through time Bitcoin will also build the trust of more users/investors therefore increasing its market cap as well while lowering the risk involved (while writing this on 1/7/2021 Bitcoin has a market cap of roughly $700 billion compared to gold’s market cap of roughly $10 trillion). Puru, you know very well how a lower risk premia requirement causes an asset’s value to shoot up, and that is partly what you are seeing during this 2021 bull market for bitcoin. Acceptance is increasing as investors (this time 84% institutional for Grayscale at least as reported by Grayscale here: https://grayscale.co/insights/grayscale-q3-2020-digital-asset-investment-report/) trust Bitcoin more and more. Paul Tudor Jones called what we are witnessing with bitcoin a “birthing of a store of value” (https://www.cnbc.com/2020/05/11/paul-tudor-jones-calls-bitcoin-a-great-speculation-says-he-has-almost-2percent-of-his-assets-in-it.html). That’s what Vijay said as well. PTJ also called Bitcoin speculative, and that is true. Nobody knows with 100% certainty the future of anything.
2. How is Bitcoin a “store of value” when it crashes 80–85% in a year and then rallies 100s of % within months?
Answer: Please refer to my answer above for question #1. Also, if a 80% crash excludes Bitcoin from being a store of value then how is gold a store of value when it lost 80% of its purchasing power over twenty years like it did from 1980–2000? That’s abysmmal and you can see a chart of the fall here: https://www.sunshineprofits.com/gold-silver/dictionary/gold-purchasing-power/. Imagine someone retiring around 1980 and putting their assets in gold near the peak. They would have had to start grinding/working again and probably until their death! By the way, a true fact about Bitcoin is that, in the entire history of Bitcoin the price has always been higher than the price it was at four years earlier (spending power as well). Bitcoin investors could have saved themselves from losses during any Bitcoin peak simply by dollar cost averaging.
3. How is Bitcoin a safe haven/hedge when it is tied to global liquidity i.e. it goes up and down with other risk assets?
Answer: Partly answered in #1 since Bitcoin volatility and its safe haven status are still “a work in progress”. Gold also tracks risk assets at times as seen when gold fell over 10% when the Covid-19 scare and the ensuing liquidity crisis happened in March of 2020. Gold also fell by over 30% in the credit crunch of 2008. Therefore, just because Bitcoin at times tracks risk assets, that doesn’t mean that it can’t be a safe haven/hedge similar to gold which is an established safe haven/hedge.
Also, keep in mind Bitcoin is the only asset no government can take away from you if you store it correctly, making it possibly the ultimate safe haven asset. A government can take away your: gold, real estate (even in the USA https://en.wikipedia.org/wiki/Eminent_domain_in_the_United_States), stocks, and every asset other than Bitcoin (and other crypto) assuming you store your Bitcoin in your own private wallet and keep the key to yourself. This is especially important in certain countries which I won’t name and you can easily Google. In the past, one of the most horrific examples of a government seizing its citizens assets was possibly Nazi Germany. Nazi Germany seized: art, real estate, company holdings, gold, and every other asset type you can name that existed back them. Certain governments practice this same sort of barbaric/shameless/grotesque misuse of power today. Bitcoin solves this and Winklevoss capital explains how here: https://winklevosscapital.com/the-case-for-500k-bitcoin/
“Bitcoin works like your email, which means it’s borderless and never sleeps — any amount can be sent anywhere in the world over the Internet, 24/7/365. This makes it not just very portable, but also very censorship resistant (e.g., blockades, seizures, etc.). It’s not hard to move bitcoin in the middle of a pandemic, a war, or a change of government. It’s easy to move bitcoin, full stop.”
Of course to move Bitcoin this easily one needs to already own Bitcoin and keep it in their own private wallet.
4. With this level of volatility, how can Bitcoin be a means of payment?
Answer: Again, Bitcoin is still growing so only using Bitcoin and not quickly converting it to another SOV could change the price of a good purchased by a significant amount during the transaction. As Bitcoin grows and then stabilizes, this will change as mentioned above especially in the Medium post linked to above by Vijay Boyabpeti. If you study up on the Lightning network here https://lightning.network/ you will see that you can send bitcoin instantly and therefore you could then exchange this for a less volatile currency instantly making bitcoin transactions have low volatility in the currency of your choice. Here is an implementation of the Bitcoin lightning network created by Strike by Zap and Jack Mallers: https://jimmymow.medium.com/announcing-strike-global-2392b908f611. Recently an NFL player named Russell Okung received half of his NFL salary in Bitcoin using Strike by Zap: https://news.bitcoin.com/pro-football-star-russell-okung-13-million-salary-bitcoin/
5. How is Bitcoin a unit of account when people earn in fiat and governments tax in fiat?
Answer: Bitcoin is a unit of account to many Bitcoin owners and many alternative coins are valued in BTC at exchanges making BTC a unit of account. Some people do earn in Bitcoin as shown above with Russell Okung and soon a government may very well tax in Bitcoin; only time will tell. Will every government and will every person use Bitcoin as a unit of account? No, of course not. Will a significant amount? Maybe not, but bitcoin is more like gold and gold seems to be fine as an asset while gold is not a unit people earn in (normally) nor governments tax in (normally).
6. How is Bitcoin a medium of exchange?
Answer: I believe the links above and my answers above have already addressed this. Of note again is that Bitcoin to many is seen as less of a medium of exchange and more of as a store of value.
7. How can Bitcoin be a widely used means of payment when it can’t process many transactions per second unlike Mastercard, Paypal, and Visa which are able to process thousands of transactions per second?
Answer: Great question, and again I have already answered this question above. If you study up on the Lightning network as shown here https://lightning.network/ you will see that you can send bitcoin instantly and that it is capable of millions to billions of transactions per second. This uses Layer-2 technology (https://academy.binance.com/en/glossary/layer-2).
Bonus Answer: Now if you want me to compare the Layer-1 capabilities of Bitcoin to the credit processors you mentioned, then you need to do an apples to apples comparison with Mastercard, Paypal, and Visa. None of those transactions happen in a second actually. For the money to truly clear with Mastercard, Paypal, and Visa when going across banks/trusted intermediaries (bitcoin doesn’t need an intermediary which is key to the reason it has so many die hard fans) it actually takes 2–3 days (for Bitcoin each block takes roughly 10 minutes, and therefore it transfers much faster than cash and therefore Mastercard, Paypal, and Visa on an apples to apples basis even when accounting for the extra 6 blocks many people require to consider bitcoin confirmed as that would be roughly 70 minutes). It doesn’t seem that way to the user, because behind the scenes your credit card company or payment processor is your trusted intermediary and assuming the risk of you defaulting on your payment. Bitcoin travels at the same speed using only Layer-1 as credit cards if trusted intermediaries accept the counter party risk. So Coinbase and Gemini, for example, could instantly credit the others users or their own users with bitcoin from another user if they worked together (if within one Crypto exchange then no trust of the other exchange is needed and Bitcoin transfers instantly between parties, because only the IOU is moved). So Bitcoin Layer-1 transactions would also travel as fast as cash when one uses Mastercard, Visa, and Paypal as the Bitcoin would be moving using similar underlining technology when on an apples to apples comparison. Of course you can always just use Layer-2 as well.
8. Will governments allow the world to get off of fiat and onto the Bitcoin standard?
Answer: Some governments may, but many if not all will probably not. I in fact assume governments will never move to Bitcoin as they will want to continue having their own currencies to keep their existing powers that you are well aware of like their ability to tax in their own currency and inflate or deflate their currency to effect monetary policy in various situations. However, again Bitcoin is seen by many as more similar to gold and therefore it can peacefully exist side by side will the currencies of governments. Additionally, governments will soon issue their own digital currencies (https://www.wsj.com/articles/why-central-banks-want-to-create-their-own-digital-currencies-like-bitcoin-11603291131) and many governments are close to doing this (Covid-19 accelerated this as physical money can spread diseases). When this happens, I and most Bitcoin owners believe this will only create more awareness for Bitcoin and also create more trust for digital assets thereby increasing the value of Bitcoin.
9. If the world gets on the Bitcoin standard and its supply can not be increased…
Answer: Again this is not the argument most pro Bitcoin people give as giving Bitcoin value. Bitcoin is mostly seen as a store of value, not a currency. It is more comparable to gold. Therefore, this is not an important question except for the more fringe owners of Bitcoin which I am not one of. Maybe as complete conjecture The Seasteading Institute will use Bitcoin as their currency and talk more about this: https://www.seasteading.org/
10. If Bitcoin replaces fiat…
Answer: Same answer as #9.
11. This question is another question that assumes Bitcoin becomes the world’s reserve currency which the US dollar is currently.
Answer: Same answer as #10.
12. If a currency doesn’t have some intrinsic value relative to real world assets/liabilities or the full backing of the government…its value will swing wildly…it won’t be a store of value. How does Bitcoin get around this issue?
Answer: Gold’s value consists of mostly intrinsic value (>80% is intrinsic as shown in Vijay’s Medium post in Answer #1 above as it has a great illustration showing this) and the amount of gold used for industry/physical goods production use cases only consumes around 7% of the new supply coming into gold each year as shown here: https://www.statista.com/statistics/299609/gold-demand-by-industry-sector-share/. Yet even though gold’s value is mostly intrinsic it is seen as a stable store of value. Bitcoin gets around this issue with time as trust builds as mentioned above in Answer #1. Bitcoin is in it’s birthing stage as Paul Tudor Jones put it and the link to his statement is shown above in Answer #1.
13. Bitcoin is a zero sum game..bitcoin doesn’t produce anything and it doesn’t have intrinsic value..if Bitcoin is a store of value with 30–35x potential…why shouldn’t everybody just sell every other asset and just hoard Bitcoin?
Answer: Many people have almost their entire net worth in Bitcoin. Didi Taihuttu sold almost all of his belongings and put all of the proceeds into Bitcoin! Link: https://diditaihuttu.com/about/. Have a talk with him if you want. Also, Raoul Pal put 98% of his liquid net worth into Bitcoin and Ethereum with an 80/20 split according to this article (and he bought at what were all time highs at the time he made the full move to crypto with his liquid assets): https://www.coinspeaker.com/raoul-pal-liquidate-gold/. Talk with him if you’d like. Talk with Chamath. Talk with Jack Dorsey (the founder of Twitter as you know who has his Twitter profile only displaying #bitcoin and the bitcoin logo under his picture). Talk with the Winklevoss Twins (most of their net worth is probably in Bitcoin). Game on with Bitcoin! It is a technological disruptor, and the future looks bright!
Additionally: It is suggested to get involved in Bitcoin slowly and not all at once. It is still a young and volatile asset and has large swings as it grows into a more stable asset as discussed above. The more you understand Bitcoin the more you will want to own in my opinion, and many suggest a dollar cost averaging technique. In the entire history of Bitcoin the price has always been higher than the price it was at four years earlier, so a four year averaging could be used for those just getting their feet wet. Others will and should invest at their own time preferences.