Even Near All-Time Highs, Significant Questions Still Surround Bitcoin

I’ll admit up front: I’m probably one of the last investors who would consider bitcoin as a long-term investment. I’m a traditional, and (usually) value-focused investor. The volatile and unquantifiable nature of the cryptocurrency leaves it mostly outside my existing skill set.

Bitcoin vs. S&P 500 index

Source: Chart by Josh Enomoto

That’s not to say that I would dismiss bitcoin entirely. As a financial instrument, it’s intriguing. As a social experiment, its rise since 2008 has been fascinating.

We’re only ten-and-a-half years removed from the legendary pizza order that cost 10,000 bitcoins, a stunning $184 million at current prices. It’s only been three years since the epic 2017 rally from under $1,000 to over $18,000. After what looked like a bubble that had burst, bitcoin now is not far from reaching new highs.

But underneath that volatility and excitement still sit important and so far unanswered concerns. All speak to one core question: why? Why is 1 BTC, as I write this, worth $18,487.50? Why is 1 BTC worth anything at all?

Certainly, the interest in, and fun of, trading Bitcoin is self-evident. But to believe in the long-term case for the cryptocurrency requires that the question of “why?” be answered. Personally, I haven’t seen enough.

Currency Problems

The original point of Bitcoin was to serve as a way to disintermediate large financial institutions. Indeed, the title of the original white paper published by the pseudonymous Satoshi Nakamoto was “Bitcoin: A Peer-to-Peer Electronic Cash System.”

The problem is that Bitcoin actually isn’t a great currency. It’s slow by design: transaction time often is measured in hours.

And in the meantime, peer-to-peer cash transfers have become remarkably simple. PayPal (NASDAQ:PYPL) has Venmo, Square (NYSE:SQ) has Square Cash, major banks have developed Zelle…the list goes on and on.

Some proponents have argued for bitcoin’s supposed privacy. But even that argument falls flat. Bitcoin exchanges have KYC (Know Your Customer policies). “Blockchain analysis” offers another way to unmask users.

No less a bull than Bitcoin Magazine argued this summer that, when using bitcoin, “Unless you really know what you’re doing, it’s best to assume you have little privacy.”

All told, the vision of bitcoin as a decentralized, anonymous currency has fallen flat in the real world.

Bitcoin as a ‘Store of Value’

And so proponents have slowly shifted their argument over the past few years. Bitcoin is less hyped as a cryptocurrency (with the associated advantages), but as a “store of value” that is an alternative to gold.

But, again, the question is: why? Gold has uses, both cosmetic and industrial. Its value doesn’t come solely from the idea that everyone else sees it as valuable. For bitcoin, however, that has to be the case: there is seemingly little value to what metaphorically is a checkmark in a digital ledger.

It’s also concerning that the argument has changed — and so quickly. The move from “bitcoin is a transformative currency,” as envisioned by Satoshi, to “bitcoin is a store of value,” certainly seems like changing the facts to fit the argument, rather than the other way around.

Meanwhile, bitcoin hardly seems safe. Hacks are endlessly common. Even the Winklevoss twins, among bitcoin’s loudest advocates, have recommended so-called “cold storage” of Bitcoin keys. Cold storage requires the use of offline methods to guard against online thieves, hackers, and scammers. So why, exactly, is any of this preferable to gold?

The Bull Case

Admittedly, there’s a simple retort to these and other concerns: bitcoin keeps going up. Most people who own bitcoin have posted nice profits, if only on paper.

To be fair, there are better answers as well. It may be that bitcoin can be a store of value simply because its holders believe it to be. All financial instruments to some degree rely on confidence, whether assets or currencies.

Bitcoin’s use as a currency, meanwhile, could improve over time. Privacy concerns can be ameliorated by “mixing” and other strategies. Better-capitalized and more efficient exchanges and practices could limit the need for cold storage.

The Bottom Line on Bitcoin

Simply put, it’s still early days. The cryptocurrency (and others like it) will evolve. It’s not a sign of a flaw in Satoshi’s work that bitcoin hasn’t turned out exactly the way he (or she) predicted.

I’m sympathetic to the argument that it might be a sign of his (or her) genius.

But there are still a lot of questions to be answered, and valuation among them. The market, right now, has decided that 1 BTC is worth more than $18,000. Personally, I’d like to see much more in the way of utility to even consider paying that price.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.


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