Graham’s Newsletter

Bitcoin is back

Published 27 days ago • 7 min read

“First they ignore you, then they laugh at you, then they fight you, then you win.”
– Not Gandhi

Few people are as famous in the Bitcoin community as Laszlo Hanyecz, the man who bought two Papa John’s pizzas using Bitcoin in what was one of the first commercial transactions on the network. But what’s so special about buying pizza with Bitcoin, you ask? The amount. He paid 10,000 BTC for that one purchase – worth approximately $41 at the time, in 2010. Now, 10,000 BTC is worth $667 million!

Laszlo said he had no regrets about the purchase because, hey, hindsight 20/20. But one thing’s for sure – nobody foresaw Bitcoin becoming what it is now, and Bitcoin hitting $1 was a major milestone, at a time when most financial institutions thought it was a joke. Now, the Bitcoin Spot ETFs have been approved, and money is flowing into them by the millions, with the same institutions that once shunned Bitcoin now marketing them as the best performing asset of the decade.

Despite all that, veteran investors like Warren Buffett say they wouldn’t purchase all the Bitcoin in the world for $25. So why do so many people have polar opposite views of this decade’s most controversial investment?

The number of requests I've got to talk about this topic is unbelievable. So let’s jump in to understand exactly how this started, what has changed, and where Bitcoin is headed in the coming year – and how you can make the most of it all.

How it started

Ironically, Bitcoin started as a protest against “the Man”, the financial institutions that had caused the Great Financial Crisis, as a way to create a currency that was completely detached from mainstream banks and government. The creator Satoshi Nakamoto remains anonymous. Here’s why Bitcoin was special:

  1. It was open-source. Anybody could verify how it worked and fix issues.
  2. It was mined using computers solving complex algorithmic puzzles – the supply was predictable and would get scarcer over time.
  3. There would be only 21 million Bitcoins in existence EVER.

As of now, it’s estimated that 19.4 million of those Bitcoins have already been mined, leaving only 1.6 million coins. However, because the mining process gets harder with time, through a process known as “the halving”, it’s estimated that the final bitcoin won’t be mined until 2140. But though Bitcoin has increased by 23 million percent in just 14 years, it hasn’t been a smooth ride. There have been three times in the last decade that it’s ended the year more than 50-60% down. Despite that, here we are, near all-time highs – so what’s happened?

Most of this can be attributed to one word: Demand. Initially, bitcoin demand was mostly between individuals who believed in the concept and exchanged it as currency (or thinking it was a good investment). But now, adoption of Bitcoin is growing more widespread:

And the most recent and significant step – The Bitcoin ETF was approved.

The Bitcoin ETF

This works by essentially creating a publicly traded “holding company” that offers exposure and tracks the price movements of Bitcoin without you actually having to go and buy bitcoin. In simple terms: You can buy into a fund that holds bitcoin, and, by buying that fund, you own a corresponding amount of bitcoin.

This business model has proven so popular that in less than 2 months, Blackrock’s Bitcoin ETF passed Michael Saylor’s entire stockpile – inflows passed $1 Billion in 24 hours. Since the beginning of February, ETFs have purchased an average of 3,500 to 4,300 coins each day, considerably more than the 900 coins being created each day by the bitcoin network over the same period. Soon, with only 450 bitcoin mined per day after the halving, there just might not be enough bitcoin for everyone – and that might push up the price.

So, why is Bitcoin witnessing a sudden resurgence? Even though the US dollar is backed by the strongest economy in the world along with the full faith of the US Government, its value has declined in the long term.

The purchasing power of your money has consistently fallen this century as more of it gets printed. Bitcoin is the exact opposite – its supply is capped at 21 million, and it won’t have any inflationary pressures. But to get more technical, any currency’s value is assessed on these six factors (according to Investopedia):

  1. Scarcity
  2. Divisibility
  3. Acceptability
  4. Portability
  5. Durability
  6. Uniformity

Bitcoin now ranks the highest in every single factor – except for the fact that it isn’t issued by a government, which many people see as a positive. Bitcoin will soon be arguably scarcer than Gold, it’s more durable because it’s software, it’s uniform because it’s global, it’s divisible into a 100 million units (called satoshis), acceptable anywhere, and it’s easily portable.

On top of this, the true number of Bitcoins in supply might be significantly lower than the “21 million” that’s assumed as the standard – because Bitcoin’s creator himself amassed more than 1 million coins, and 3.9 to 4.8 million coins could be considered lost, bringing the total supply down to 17.1 million, according to Blockworks. This doesn’t even take into account the people who want to “HODL” – by buying and holding forever. Combined with excessive demand, worldwide usage, and mainstream adoption, this could give Bitcoin room for the price to continue expanding.

Although, not everyone agrees – here’s why:

The case against Bitcoin

Let’s start with one of the most respected investors in the world: Warren Buffett, who famously said that “You can’t value Bitcoin, because it’s not a value-producing asset… If you buy something like Bitcoin or some cryptocurrency, you don’t really have anything that has produced anything. You’re just hoping the next guy pays more.” He’s repeatedly referred to it as a “Gambling Token.

He explained further, “Assets, to have value, have to deliver something to somebody. And there’s only one currency that’s accepted. You can come up with all kinds of things – we can put up Berkshire coins… but in the end, this is money (referring to $20 bill), and there’s no reason in the world why the United States government is going to let Berkshire money replace theirs.” His partner Charlie Munger felt a lot more strongly, calling Bitcoin “Rat poison that will go to Zero” and “Crazy, stupid gambling,” capping it off with this quote:

“Somebody else is trading turds and you decide, “I can’t be left out”.”

Jamie Dimon, the CEO of JP Morgan, also agrees with this, slamming Bitcoin as “worthless and a tool for criminals,” and then famously drawing comparisons to smoking, where you have a right to use and own it, but it’s bad for you. Leading economists share similar opinions:

  • Nouriel Roubini asks how something that falls 20% one day and rises 20% the next can be a stable store of value.
  • A Harvard Economics professor argues that people in power will move to regulate anonymous transactions, taking away a major selling point of Bitcoin.
  • Critics also point to the fact that just 100 addresses hold roughly 15% of all circulating bitcoin and total value, and that it isn’t decentralized like it looks.

But all of this pales in comparison to Peter Schiff, an economist and investment advisor who has been incredibly vocal about his distaste for Bitcoin, dating all the way back to 2017. His recent tweet has been going viral because it claims Bitcoiners will “have fun staying poor.” In his defense, recently, gold has done fairly well and it’s up 10% this year, which means it’s just barely outperforming the S&P 500.

In the long term, gold has been a relatively safe and stable store of value, but as an investment, it’s nowhere in the picture with just about every other asset class outperforming since 1974. Personally, I tend to believe that even though Gold and Bitcoin could share some commonalities because it attracts people looking to store their money in a “secure” alternative, fundamentally, they are completely different. Peter Schiff isn’t wrong for liking gold, but gold isn’t a substitute for Bitcoin, or vice versa.

Price predictions

Some experts have high hopes for where Bitcoin will go in the near future. The asset manager of 3IQ says that his “mid-to-high range price target for Bitcoin this year is between $160,000 and $180,000. Next year, it anticipates an eye-popping target of $350,000 to $450,000.” Here are some other predictions:

  • Another analyst arrived at a $150,000 price target assuming “$10 billion dollar inflows for 2024, and another $60 billion for 2025.”
  • Cathie Wood believes that $1 Million Bitcoin could happen around 2030.
  • As far as the highest projection I’ve seen, Robert Kiyosaki takes the win, believing that a single Bitcoin will one day be worth $2.3 Million. Where did he get that number? Your guess is as good as mine.

But on a more analytic note, some people cite past performance after the Bitcoin halving, in which – so far – prices have increased in the following 18 months. To be fair, others are still very skeptical, like Deutsche Bank, whose customers firmly believe it’ll fall below $20,000 by the end of the year. Harry Dent says the “US Economy’s Biggest Crash will send Bitcoin to $200” – and Jamie Dimon still thinks it’s like owning a Pet Rock.

While there are plenty of critics out there, I personally see the appeal. Like Fortune recently published a fantastic piece about how Cryptocurrency is seen as “intergenerational revenge” on the financial system, and for the first time, people can take complete ownership of their own money without the government’s involvement.

Younger people are also increasingly believing that cryptocurrency will be their way of securing financial independence by taking matters into their own hands, and investing in something their parents wouldn’t even consider. Of course, with that comes some potentially disastrous risks, but so far, for those that have bought and held bitcoin, they’ve been correct.

Here’s the problem: The most vocal bitcoin proponents tend to be the most eccentric as well. As a consequence of that, they might turn off people who would otherwise have been totally receptive to the idea – like Max Keiser for example. Sure, he’s been right, but even thought tearing up dollar bills is a memorable moment, it causes some people to not take him as seriously. Although, then again, we’re talking about him because of that, so maybe he wins.

That’s why I believe that, sure something like Bitcoin has its purpose and could one day be worth a lot of money. But as multiple occasions have shown, it could also drop a substantial amount when you need the money the most, and that needs to be considered if and when you invest in it.

That's it for today. I hope you enjoyed this article. Let me know your thoughts by responding to this email - I read every single comment :)

Stay safe, stay invested and I will see you next week – Graham Stephan.

113 Cherry St #92768, Seattle, WA 98104-2205
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Graham’s Newsletter

by Graham Stephan

A 33 year old real estate agent and investor with over $120M in residential real estate sales. This is my way of sharing actionable ideas that will make you a smarter and wealthier investor.

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