The root problem with conventional currency is all the trust that's required to make it work. the central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.
Satoshi Nakamoto, 2009
Probably, yes. Here's five reasons why:
It is hard to deny many Central Banks around the world are devaluing their currency through their policies. The Federal Reserve being one of the least aggressive at this point in time. If you want to keep some assets in a safe currency you are out of luck because there is none left. Bitcoin isn't exactly a currency and its volatility is off the charts, so I'm not saying it's one of the few safe currency's left. However, it is starting to look better because everything else has gotten worse…
The idea of a sort-of-currency that can't be devalued by a central organisation is becoming more attractive and more useful by the day.
Stocks and bonds in the aggregate are priced so we shouldn't expect a very high return. That's making cash look more attractive because we can wait until risk premia return before building up our stock and bond positions. As argued in point one, this is made more difficult by central bank policies. Return on cash isn't looking too good either. Bitcoin because of its built-in deflationary mechanism compares favorably in this regard. Current events help the argument Bitcoin could be part of a basket of currencies.
We are in the early stages of Bitcoin potentially becoming an accepted asset class but we shouldn't wait too long. There is now The Bitcoin Investment Trust (OTCQX:GBTC) sponsored by Greyscale and the Winklevoss brothers have been working for years on a Bitcoin ETF (Pending:COIN). The ETF is a very convenient way to trade and investors have gotten really comfortable with the ETF structure. It is also very common for ETF's to be built around an esoteric theme. Bitcoin fits in well at this stage. Ark Invest, an investment firm that wrote a white paper on Bitcoins, was the first publicly traded fund to invest in Bitcoin through GBTC. It holds GBTC in its Next Generation Internet ETF (NYSEARCA:ARKW) and the ARK Innovation ETF (NYSEARCA:ARKK). Ark Invest has now been followed by Horizon Kinetics that invested in GBTC though its Kinetics Internet No Load (MUTF:WWWFX), Kinetics Paradigm No Load (MUTF:WWNPX), and Kinetics Market Opportunities (MUTF:KMKAX). When institutional ownership becomes widespread this can have a profound effect on the valuation of Bitcoin.
An investment into Bitcoin can only go to zero but if it takes on a prominent role in society its market cap will need to expand manifold. For example if Bitcoin would become something of a digital gold, its total valuation could increase to something like $8.2 trillion. That would mean its value from today (about $600 / bitcoin) would increase 910x. How is that for asymmetric? If it became a true global currency the ceiling is much higher while the floor doesn't change.
This is not so much a reason to buy Bitcoin but the disappearance of a reason not to invest in Bitcoin. It is becoming easier to buy bitcoins ourselves (instead of hold them through an ETF with a sizeable expense ratio). For example a crypto-currency platform like Coinbase makes it very easy and user friendly to acquire a few bitcoins. Hardcore crypto fans don't seem to like it very much because there are quite a few security measures that take away some of the freedoms you can enjoy. There is always Bitcoin core for the purists. In my experience Bitcoin armory is less easy to use but best in class as far as security goes. In summary there are bitcoin wallets to suit each person's preferences.
At this point I'm still not inclined to make Bitcoin a large investment but it is clearly gaining traction in the world around us and to some extent that justifies at least considering exposure. Having said that there are also problems with Bitcoin and investing in Bitcoin which I will discuss in the future.
