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By Dr. James M. Dahle, WCI Founder
I am often accused by Bitcoin fanatics of being negative about Bitcoin. I don't think that's fair at all. I'm not negative; I'm completely neutral. I really don't have a dog in the fight. I don't own any Bitcoin, I don't own any of its competitors, and I am not short any cryptocurrency. I fully admit I have no idea where the price is going on Bitcoin over any time period. I am also often accused of knowing nothing about Bitcoin or about blockchain, its underlying technology. The argument mostly goes “If you just understood it better, you would not only buy a little, you would buy a lot.” I hear that one all the time from whole life insurance salesmen too. I assure you, with both products, that I understand how it works just fine. I'm still not interested in putting either one into my portfolio.
However, none of that means that there are no uses for either Bitcoin or whole life insurance. I've written about some of the reasonable uses of whole life insurance before, including the Bank on Yourself/Infinite Banking concept. Today I'm going to do something similar for Bitcoin; I'm going to talk about the reasons people use it, and debunk a few reasons why people say they own it.
7 Ways People Use Bitcoin
Bitcoin is the world's most popular cryptocurrency, and in some ways represents the others. What I write about Bitcoin in particular here also applies to most other cryptocurrencies. However, as I type, there are over 2,000 cryptocurrencies, so obviously there are going to be some differences from one to another.
# 1 Speculation
The # 1 use for Bitcoin and the reason most people buy it, no matter what they tell you, is speculation. That is to say, they think they will be able to sell the Bitcoin they bought at a certain price later at a higher price. They buy it because they are convinced it will go up in value. They may be right, they may be wrong; I honestly have no idea, and the truth is that no amount of reading or study is going to help me nor anyone else to know. You makes your bets and you takes your chances.
However, you should at least be aware of how a functioning market works. The price for Bitcoin is set on the open market, just like a stock, a bond, a house, or a car. It is the price at which, at least among those willing to buy and sell at all, the number of people willing to buy matches the number of people willing to sell. That's how markets work. So before you convince yourself that Bitcoin must go up, keep in mind that there are precisely the same number of people who believe the opposite. That's why the price is what it is. And all earthly experience indicates that the market, that is, the collective opinions and knowledge of all of humanity, is a lot more accurate at determining the right price than you, as an individual, are. So no matter what you read on a Bitcoin fanboy forum, there is no guarantee the price will go up.
Essentially, those who are speculating on Bitcoin, and hopefully doing so in full knowledge of what they are doing, are trying to do one of two things. The first is to make some money. Assets with a positive return contribute to the overall return of a portfolio. At least in the past, Bitcoin has done this. The second is to have something with low correlation to the rest of the portfolio—something that will zig when the rest of the portfolio zags. Bitcoin certainly meets this second criteria. Although it hasn't been around very long, it doesn't seem to have any sort of correlation with dollars, yen, euros, stocks, bonds, real estate, commodities, precious metals, or the price of butter in Bangladesh.
Of course, once you own some Bitcoin, you're now in on the game. What downside is there in convincing everyone you know, in real life and online, to buy some? None. It's just like a pump-and-dump penny stock scheme. You buy, then you convince everyone else to buy, then you sell at a higher price. Whether anyone wants to admit it or not, there's a lot of that going on out there, and it often does not end well. I told people at the end of 2018 that if they liked Bitcoin at $20,000, they should really like it at $3,000. But if your goal is to speculate, buying something AFTER it has gone up 1000% in the previous year might not be the best idea.
# 2 Gamble
This is slightly different from speculation. People speculate to make money. People gamble for the same reason they jump out of perfectly good airplanes—for the thrill of it. Some people go to Vegas to gamble. Others do it online. Still others do it with the stock market. And yes, there are lots of gamblers dabbling in Bitcoin. If you have a gambling problem, seek help. If you are not sure, consider the following symptoms of a gambling addiction:
- Did you ever lose time from work or school due to gambling?
- Has gambling ever made your home life unhappy?
- Did gambling affect your reputation?
- Have you ever felt remorse after gambling?
- Did you ever gamble to get money with which to pay debts or otherwise solve financial difficulties?
- Did gambling cause a decrease in your ambition or efficiency?
- After losing did you feel you must return as soon as possible and win back your losses?
- After a win did you have a strong urge to return and win more?
- Did you often gamble until your last dollar was gone?
- Did you ever borrow to finance your gambling?
- Have you ever sold anything to finance gambling?
- Were you reluctant to use “gambling money” for normal expenditures?
- Did gambling make you careless of the welfare of yourself or your family?
- Did you ever gamble longer than you had planned?
- Have you ever gambled to escape worry or trouble?
- Have you ever committed, or considered committing, an illegal act to finance gambling?
- Did gambling cause you to have difficulty in sleeping?
- Do arguments, disappointments or frustrations create within you an urge to gamble?
- Did you ever have an urge to celebrate any good fortune by a few hours of gambling?
- Have you ever considered self destruction or suicide as a result of your gambling?
Most compulsive gamblers will answer yes to at least seven of these questions.
Even if you don't have a gambling problem, you may be using Bitcoin to entertain yourself. Just like we look forward to the football game between our university and another all week and then cheer on Saturday afternoon, some people find watching the price of Bitcoin change to be endlessly entertaining, especially once they own some.
# 3 Conceal Illegal Business Activity
Another use of Bitcoin is to conceal illegal business activity. One of the greatest benefits of a cryptocurrency is that it is particularly difficult for governments and law enforcement to track. It is anonymous and requires no government to back it with its military or taxing authority. Rather than having to obtain and move crates of Benjamins around, an arms dealer or drug king can simply use Bitcoin. Easy—peasy. If you don't think this is a significant use of Bitcoin and other cryptos, you're fooling yourself. As much as 46% of Bitcoin transactions involve illegal activity. There is at least one report out there suggesting only 1% of Bitcoin transactions are illegal, but most reports suggest the number is at least 25%. Obviously, it's notoriously difficult to track illegal transactions, and most criminals, like most regular people, still prefer to do their deals with dollars.
# 4 Squirrel Money Out of a Country
Perhaps the most reasonable use of Bitcoin involves escaping with at least some of your money in a failed currency or failed country scenario.
Fanatics Proponents like to point to historical episodes, like the hyperinflation of Zimbabwe, the economic and political troubles of Venezuela, or even the rise (1918) and fall (1989) of communism in Russia. Bitcoin is a “carrier asset”, meaning you can easily take it with you. Gold is also a carrier asset, of course, but Bitcoin is easier to hide and, frankly, lighter to carry. However, many of the same risks apply. When you have Bitcoin keys physically on you, they are subject to being stolen. Even if you somehow memorize them (good luck, it's typically 64 digits), you can still be forced to spit them out with a gun put to your head. You can store them online, but they are also subject to being stolen by hackers there. You are reliant on your ability to hide the asset or pay to secure it. Heck, 20% of all the Bitcoin in the world has already been lost.
At any rate, if you have a $10 million portfolio, is it crazy to have $100K in Bitcoin that you can take with you (along with your canned goods, ammo, $10K in dollars, $10K in pesos, and $10K in euros) as you escape to Costa Rica in your Range Rover? No. You may view it as the cost of insurance. I keep a generator, gasoline, camping gear, and months worth of food at my house. Some people include some Bitcoin in their emergency stash.
# 5 Impress others
Everybody loves a good cocktail party brag session. You can brag about the Tesla you own (not only are you rich, but you care more about the environment than they do) or the Tesla stock you own. Or you can brag about your Bitcoin. Either way, you can spend a half-hour discussing all the intricacies of the blockchain, what business now accepts cryptocurrency and what hedge fund now owns some. You'll look so smart and savvy, and if the price of Bitcoin seriously tanks, as it seems to frequently do, you can simply not mention it and talk about the football game this week and how the team should have used the double-wishbone offense instead.
# 6 Get a Head Start on Possible Future Currency
Some people are absolutely convinced that we will all be using cryptocurrency regularly in 2 years, 5 years, 10 years, or 100 years. Not only that, but they are convinced the cryptocurrency we will use is Bitcoin. They figure they'll get a head start on it by buying some now. Now this doesn't really make a lot of sense when you think about it, but if you ask Bitcoin owners, this is often a reason they own it. The reason it doesn't make sense is that if we are really going to use Bitcoin instead of dollars, I can just trade what I have of value (my stocks, bonds, real estate, services) for Bitcoin at that time. The enthusiasts are so excited about this new technology they just can't wait, though, so they buy some now in anticipation. Frankly, I think most of the people using this as their reasoning just don't want to admit they're speculating on its price. They don't just want to spend Bitcoin in the future, they want to have more of it than they would have if they waited to get some until they actually needed to spend some.
# 7 Hedge Against Bizarre Global Catastrophic Circumstances
This is where the Bitcoin enthusiasts and the gold bugs join forces. However, the same issues come up. In the Zombie Apocalypse, nobody cares about your gold coins. They want canned goods, a rifle, and lots of ammunition. Maybe a katana. So you have an exchange problem. Remember blockchain doesn't work without a functioning internet, so just like with gold, the circumstances have to be really bad, but not that bad, for the hedge to work.
# 7 1/2 Assist with Some Underdeveloped World Banking Issues
Another use some proponents give for Bitcoin is to resolve some issues in the undeveloped world, specifically with people who don't have access to the banking system. This exists in the developed world too; US estimates are in the 8-18% range—best guess 55 million people are not using the banking system as you and I do. But it is a much bigger problem in underdeveloped countries, about 1.7 Billion people total in the world. The theory is that cryptocurrency is faster, cheaper, and more secure than conventional online banking. In particular, remittance payments can be expensive for the unbanked. These are generally people sending money home to an underdeveloped country from the developed country where they are working, but it occurs between underdeveloped countries, as well. For example, intra-African cross border transfers can charge as much as 17% in fees. I'm not sure you really need cryptocurrency to fix this issue, but as the system currently works, it seems to be a solution for some. The major issue that keeps the rest of us from using cryptocurrency as a currency (i.e. the volatility) obviously still applies. Speaking of which, let's get to what Bitcoin is terrible at.
What Bitcoin is NOT Good For
There are a few other reasons that people give for using Bitcoin. They're all bad reasons, though. Let's go through them one by one, and I will show you why.
Bitcoin is Not a Useful Currency
Lots of people think Bitcoin is currently a useful currency. That isn't true, at least outside the illegal guns and prostitution trade. It's not useful. I can't buy gasoline with it. I can't buy groceries with it. I can't even buy a used car with it. Bitcoin enthusiasts claim that 36% of small businesses accept Bitcoin. That's laughable. Go to your favorite online and brick and mortar businesses and ask them if they take Bitcoin. Report back with the percentage. If you actually look at lists of businesses that take it, you end up with a list of companies like these:
- Fight for the Future – Leading organization fighting for Internet freedom
- i-Pmart– A Malaysian online mobile phone and electronic parts retailer
- Curryupnow.com – A total of 12 restaurants on the list of restaurants accept Bitcoin in San Francisco
- Dish Network – An American direct-broadcast satellite service provider
- The Libertarian Party – United States political party
- Yacht-base.com – Croatian yacht charter company
- Euro Pacific – A major precious metal dealer
Even the companies you have heard of and would consider using (Home Depot, Whole Foods) require you to go through a third party to use Bitcoin there. Essentially these parties convert your Bitcoin to dollars before you spend them. The de facto currency in the US and throughout much of the world is the US Dollar. That will likely change at some point in the future, but nobody has any idea when that will occur or what will replace it. But Bitcoin clearly is not a useful currency for regular people at this time. Sorry, if you can't see that, there is zero sense in continuing a conversation about Bitcoin with you.
Bitcoin is Not a Stable Store of Value
Even if you couldn't use Bitcoin as a currency, if you could exchange it for a useful currency and in the meantime it provided a stable store of value, it would still be useful. Unfortunately, Bitcoin is not stable in any way, shape, or form. As I write this, Bitcoin went up 50% in the prior month. It went up 40% the month before that. It is massively volatile. Academics can calculate exactly how volatile it is and some have done so. Take a look.
Even if you don't go any further than the standard deviation, you can see that it is almost 6 times as volatile as gold, 4 times as volatile as silver, and dramatically more volatile than stocks. If you shouldn't put any money into stocks that you need in the next 5 years, what does that say about Bitcoin? That you shouldn't put any money into it that you need in the next 30? One glance at a Bitcoin chart tells you this is not a stable store of value and anyone who thinks otherwise is frankly missing a few brain cells.
This is a 2020 chart. The Spring showed a 50% drop. The summer showed another 20% drop. In stocks, we call that a bear market. In the fall, it had a 33% rise. All in the same year. Now nobody minds volatility when it is going up, but Bitcoin doesn't just go up. Take a look at 2018:
Yea, that's basically an 80% drop. In a single year. Remember when that happened with stocks? Then you're at least 100 years old because it occurred over a period of three years from 1929 to 1932. When the price of something is this volatile it indicates one thing—nobody is really sure what it is worth. At any rate, I think I've made my point. Bitcoin cannot be used as a stable store of value. Because its value isn't stable.
Bitcoin is Not an Inflation Hedge
A good inflation hedge goes up in value when inflation goes up. It generally goes down when inflation goes down or, worse, when there is disinflation. Commodities, stocks, real estate, TIPS, and even precious metals have been shown to have some positive correlation with inflation. Bitcoin? It doesn't correlate with anything, much less inflation. Don't believe me? Let's look at the charts:
This is a busy chart, but the key is to look at the red line, the 12 month moving average of inflation as measured by CPI. Basically, it has been between 5% and 0% over the last 30 years, mostly in the 2% range, and generally falling. What does the Bitcoin chart look like for the last decade?
It looks like this:
So unless I'm missing something, and we had massive inflation in 2017 and 2020, and a terrible depression in 2018, you don't need to run the numbers to see that the price of Bitcoin does not track the rate of inflation whatsoever. Now the
enthusiasts fanatics will say “You're measuring inflation all wrong, the government is hiding it, and you need to weigh education and health care more heavily in your inflation indices.” Conspiracy theories aside, I still go to the store. It doesn't feel like it did in the 1970s US much less Zimbabwe. Nobody is coming in with wheelbarrows of $1 million bills. Sure, education is climbing at about twice the rate of average inflation and health care has lots of problems. But no reasonable inflation index looks anything like a Bitcoin chart. Sorry.
Not a Great Way to Show You Love Bitcoin or Blockchain
Some people just want to support the concept of Bitcoin or blockchain or cryptocurrency, so they buy some. This is also a dumb reason to buy. You can be the world's greatest proponent of blockchain without ever buying a Bitcoin. Put a Bitcoin sign in your front yard and organize fiat currency protests or something instead. You're just using this as an excuse to speculate. Just admit what you're doing and go on your merry way. It's your money and you can speculate with it if you like. As with any speculative asset, you would be wise to limit it to a single digit percentage of your portfolio. That digit for me is a 0, but you can do what you want.
What do you think? Why do you think people own Bitcoin? Why do you own Bitcoin? Comment below!