[Disclaimer: I own Bitcoin and several altcoins. This is not investment advice and is provided for information only. This considers the economic case for cryptocurrency and is not a recommendation to buy. Do your own research and consult a financial advisor.]
Cryptocurrency is a fundamental shift in the nature of money.
It is much more than just a way to make a quick buck or as a way to diversify your portfolio.
I simplify things for myself in the cryptocurrency space by splitting coins into three categories.
- Attempts to be a better version of hard money than Bitcoin e.g. Monero
- Technology speculations e.g. Ethereum
I think this is a useful lens to view them through.
Bitcoin came first and because of its unique properties it is arguably the hardest money known to man. The case for Bitcoin is quite simply that it is a superior form of hard money. I firmly believe in the case for Bitcoin and will elaborate on it further in this article.
The altcoin world is much more complex. There are thousands of them, some clearly rubbish but others with interesting value propositions.
Some, like Monero with its privacy features, attempt to do a better job than Bitcoin as hard money.
Most altcoins, however, are essentially technology speculations that attempt to build a network or an app. The largest of these is Ethereum, which makes the case that its blockchain network will form the basis of a new decentralised internet.
I own both Bitcoin and altcoins but I own them for different reasons. In my mind Bitcoin is in a similar category to gold, whereas Ethereum is in a similar category to Apple, Microsoft and Google when they were in their infancy.
I think Bitcoin will stand the test of time as money, whereas the altcoins may or may not survive depending on their technological utility and market adoption.
Table of Contents
The History of Cryptocurrency
The concept of cryptocurrency actually predates Bitcoin by a few decades. There were several efforts to pioneer a digital currency from the 1980s to the 2000s.
Yet it wasn’t until Bitcoin that the concept took off.
Bitcoin was conceived by the anonymous Satoshi Nakamoto. In November 2008 Nakamoto published a white paper online explaining his concept of a decentralised peer-to-peer payment network.
In 2009 the software was made publicly available. This revolutionary idea initially stayed within a small circle of enthusiasts who experimented with mining and exchanging Bitcoin.
In 2010 the first Bitcoin purchase was made when two pizzas were bought for 10,000 BTC.
In 2011 the first altcoins emerged on the scene. Litecoin was developed by a Google engineer called Charlie Lee. Lee believed that Bitcoin would be too slow to process transactions and therefore could not be used as everyday money.
He wanted to design something that would complement Bitcoin by being faster. The idea would be that Bitcoin would be a store of value while Litecoin would be a more practical means of exchange.
While most of the early altcoins have fallen by the wayside, Litecoin has survived and thrived.
2011 was also the year of the first big spike in the price of Bitcoin as it soared from $1 in April to $32 in June before plummeting to $2 that November.
The second big run was in 2013, with a double top. The initial run went from $13.40 in January to $220 in early April before falling rapidly to $70. It then slowly grinded up to $123 in October before delivering a near 10-bagger in two months, spiking to $1156 in December.
In those early days about 70% of Bitcoin trades were processed by Japanese exchange Mt Gox. They had suffered a hack in 2011 but had recovered and continued trading. The run up in price in 2013 had lured the hackers back. In Feburary 2014 Mt. Gox announced that it had lost 850,000 Bitcoin. Their loss equated to USD $450 million and pushed the company into insolvency.
This triggered a further sell off and Bitcoin went into a bear market that would last until early 2015.
2015 was also the year that Ethereum was released. Founded by Vitalik Buterin, Ethereum has become the largest and most popular altcoin. While it too offers digital money in the form of Ether, it positions itself as a broader proposition than Bitcoin.
Instead of the network just being used for money, as Bitcoin is, Ethereum claims its network can be used for just about anything, which is why it positions itself as a new decentralised internet.
The next big price move occurred in 2017. Bitcoin moved from around $1000 at the start of the year to reach just over $20,000 by December. Altcoins too experienced massive increases with Ethereum rocketing from about $7 in January 2017 to a peak of over $1000 in January 2018.
It was these price moves that firmly catapulted Bitcoin and cryptocurrencies in general onto the mainstream radar.
2017 was also the year of the Initial Coin Offering or ICO. An ICO occurs when the developers of a new crypto platform want to raise funds. They sell some of the coins of their new project in exchange for something like Bitcoin. In a way it is kind of like Kickstarter combined with angel investing. The new project raises money and the investor gets an early shot at picking up an asset they think will perform well in the future.
ICOs had been around for a while. Mastercoin developed the concept in 2013, with Ethereum also having an ICO in 2014 before launching the following year. But in 2017 with the Bitcoin spike, ICOs took off.
A crypto winter followed the December 2017 peak. This term is given to a two to three year period following a big price spike where cryptocurrencies fall and flatline. This is a great accumulation phase for those who sold at the top at higher prices or a time to lick one’s wounds if you bought high and held on all the way down.
During the crypto winter, many of the projects that survived the ICO mania of 2017 went to work building their applications.
In 2018 the term DeFi or decentralised finance was born. This term refers to the entire ecosystem of financial applications that are built on blockchain technology.
Arguably the entire crypto space since the birth of Bitcoin is DeFi, but this term is normally applied to these newer financial applications, emerging during the 2017 ICO manic, many of them operating on the Ethereum blockchain.
DeFi projects claim that they will be able go beyond the sound money that Bitcoin offers and collectively offer an alternative to the current financial system with things like lending, insurance, trading and more. The difference is that these would cut out the middle man, like a banker or a broker, and would operate peer-to-peer with smart contracts recorded on the blockchain.
These are big revolutionary aims and there are many skeptics. Whether DeFi succeeds or not remains to be seen.
Part of Bitcoin’s appeal has always been its hard money qualities and this has been particularly attractive in the post-GFC environment of quantitative easing. The beginning of the Covid-19 pandemic in early 2020 began a new round of central bank monetary easing, which renewed the appeal of Bitcoin.
After initially selling off due to the pandemic, Bitcoin and the other cryptocurrencies rebounded along with everything else. The prices in 2020 gradually started to rise. This time it was not just retail investors buying Bitcoin but institutional money was starting to flow into the crypto space. The timing also coincided with Bitcoin’s four year cycle. After big moves in 2013 and 2017 it seemed like Bitcoin was poised to take off in 2021.
Sure enough in December 2020 Bitcoin blasted past it’s all time high. After a brief pause a few choppy moves it reached a new all time high of $64,863 in April 2021.
In June 2021 El Salvador announced that it would make Bitcoin legal tender. This came into effect in September. This was a monumental announcement, as the first nation to adopt Bitcoin as an official currency. This is a significant move because most governments treat Bitcoin as an investment and charge capital gains tax, which severely limits its ability to function as money.
Choppy price action since the April all time high has led to a divergence of opinion as to where Bitcoin and crypto goes next. Some argue it will follow the 2013 pattern, with a top early in the year before cooling off and reaching new highs towards the end of the year.
Others argue that the top was in April with $64,000 and we are at the start of the next crypto winter.
Only time will tell.
Why Bitcoin Is The Best Money
At its heart money is a unit of account. It is a measurement tool and a way to keep track of who owns what.
On one hand it doesn’t really matter what we use as money. We could use shells, beads, feathers, cows, stones, metal coins or government paper. It all functions as money.
Yet while many things can and have been used as money, some things function better as money than others.
For something to be useful as money it needs to be durable, portable, divisible, fungible (all units equal) and scarce.
Our current money does a pretty reasonable job with all of that list except for the last one. It’s in plentiful supply with new injections on a regular basis.
Gold has done a very good job as money throughout history. It’s scarce, durable and fungible, however, its downside is that it is pretty cumbersome when transacting in large quantities and not quite as easily divisible.
Bitcoin functions as money more effectively than anything else humans have used throughout history because it most effectively fulfills all the properties of money.
This argued most convincingly by Saifedean Ammous in The Bitcoin Standard.
Ammous outlines how the real genius of Bitcoin, and the reason why it is revolutionary, is in its decentralised blockchain ledger. This enables digital peer-to-peer exchange without a third party intermediary, verified and recorded on the common ledger of balances and transactions, the blockchain.
If that doesn’t quite make sense, then let me explain.
When we transact in cash or gold coins (or cowrie shells or cows for that matter) that is peer-to-peer. Peer-to-peer is advantageous because it is immediate, final, no trust is required and no third party is necessary to process the transaction. The downside is you have to be physically present in the same place at the same time.
When we transact digitally through the banking system this is not peer-to-peer. We need a third party financial institution involved. This adds convenience because we don’t need to carry cash and we can make payment remotely. But we must trust the third party so there is some risk and there is also likely to be a cost for their services and a delay in processing the transaction.
Until the concept of Bitcoin arrived it was not possible to have a peer-to-peer digital payment. The flaw was that there was no way around what is known as the double spend problem and no way to verify transactions without a third party.
If we attempted a digital money system without an intermediary to verify the transaction, such as a bank, there would be nothing to stop a dishonest person spending their digital money more than once. We needed banks.
Bitcoin solves this problem with the blockchain, which is a common ledger of all balances and transactions. Members of the Bitcoin network, known as miners, verify the transactions and update the blockchain.
So there is verification but instead of being done by a centralised institution, which is a single point of failure, it is done by anyone across the Bitcoin network.
Saifedean Ammous explains the process:
“Whenever a member of the network transfers a sum to another member, all network members can verify the sender has a sufficient balance, and nodes compete to be the first to update the ledger with a new block of transactions every ten minutes. In order for a node to commit a block of transactions to the ledger, it has to expend processing power on solving complicated mathematical problems that are hard to solve but whose correct solution is easy to verify. This is the proof-of-work (PoW) system, and only with a correct solution can a block be committed and verified by all network members.”
The miners incentive is a reward,
“Once a node solves the proof-of-work correctly and announces the transactions, other nodes on the network vote for its validity, and once a majority has voted to approve the block, nodes begin committing transactions to a new block to be amended to the previous one and solving the new proof-of-work for it. Crucially, the node that commits a valid block of transactions to the network receives a block reward consisting of brand-new bitcoins added to the supply along with all the transaction fees paid by the people who are transacting. This process is what is referred to as mining, analogous to the mining of precious metals, and is why nodes that solve proof-of-work are known
Bitcoin combines the advantages of peer-to-peer money with all the convenience of digital money. It’s not the coins per se that have value. It’s the effectiveness of the ledger as an accounting tool and the size and strength of the network that are valuable. The coins derive their value from that.
In addition, Bitcoin is the only form of money that is truly scarce. Bitcoin is programmed so that there can only ever be 21 million coins. When the last one is mined that is it, no more.
This makes it much more scare than gold, which can always be mined in greater quantities if the price is such that the miners can turn a profit extracting the more difficult to reach metal that remains within the earth’s crust.
Bitcoin is volatile because it is a new technology that is still gaining traction in the market. Not everybody sees it for the hard money that it is. That means it isn’t exactly behaving like a good store of value at the moment and behaves more like a speculative asset. This hinders its use as money right now but is just a temporary growing pain.
As the rate of adoption in Bitcoin increases the value will rise but the volatility will reduce. It will become better and better as a store of value and will then be able to function as money more effectively.
Of course the market is free to adopt Bitcoin or free to reject it. I personally think it will continue to adopt it, particularly as its hard money properties become better understood.
I can’t remember who said it, but the best analogy I’ve heard is that owning Bitcoin now is like owning gold before it was used as money. You can see how its inherent properties make it great money but the rest of society hasn’t quite caught on yet.
But if you get in early and hold on, when the market catches up, you will make a handsome reward.
Why Bitcoin Is Better Than Gold
A lot of people who like Bitcoin as hard money disparage gold. I am not one of them. I think there is still a role for gold even in a world where Bitcoin gains increasing dominance.
But here is why Bitcoin is better.
1. Bitcoin has a Fixed Supply
The first reason why Bitcoin is better than gold is its supply. As mentioned there are only 21 million Bitcoin that can ever exist. The supply of gold is limited only by the effort we are willing to go to to extract it out of the earth’s crust. An increase in the price of gold incentivises mining and leads to an increased supply. With Bitcoin, no matter the price it goes to, there will always be only 21 million Bitcoins.
Bitcoin’s supply has increased significantly in its early years. However the rate of new supply is slowing and will continue to slow. It will soon fall below that of gold.
2. Bitcoin is Digital
The second reason Bitcoin is better than gold is its digital nature. Large quantities of physical gold are not always easy or cheap to store and move.
After all that’s why paper money was first invented – as a means to make gold more convenient by having the paper represent the gold. This was very efficient, but not as efficient as Bitcoin.
Bitcoin allows value to be transported anywhere in the world in a matter of minutes.
3. Bitcoin is Harder for Government to Control or Manipulate
The third reason Bitcoin is better than gold is because gold’s physical nature allows it to be controlled by governments and central banks in a way that is much more difficult for them to do with Bitcoin.
Our global fiat system with the US Dollar at the centre was built upon Roosevelt’s actions in 1934. He confiscated private gold and outlawed its use amongst the citizenry but allowed it to be used as government and central bank money.
It was very easy for the government to do this. Over time gold had flowed from private hands into private banks. Then it flowed into the national banking system and then into the Federal Reserve System. Roosevelt’s actions was the final move in centralising gold under government control.
This is much more difficult for governments to do with Bitcoin as it can be stored offline in cold storage, making it harder to confiscate.
Of course it still might be possible for them to do so. Alternatively governments and central banks could start buying Bitcoin the way they buy gold and exert influence and control over the market that way.
Yet even if they did so, the ability of private citizens to see the blockchain ledger would inevitably lead to more transparency over the activities of central banks. This would still be an advantage over the classical gold standard because even back then banks could engage in a small degree of manipulation or money supply inflation.
4. The Gold Standard Failed
The classical gold standard was a glorious era for money.
But at the whim of several warring governments it ended in 1914.
When those same governments went back onto the gold standard after the war, they mucked up the price and crashed the global economy.
The other flaw in the gold standard is that governments can still increase the amount of paper they issue against gold. While they were restrained in how much they could do this under the classical gold standard, it was still possible.
As Andy Edstrom explains:
“Every system of money is effectively a ledger that keeps track of who owns how much money. Bitcoin is no different. The problem with ledgers is that someone has to be trusted to maintain the ledger accurately. In the case of gold, the ledger is reflected in who has physical possession of how much gold. But if you introduce a gold-backed system with paper claims against gold, then you have to trust the custodian of the gold not to issue multiple paper claims against the same amount of gold. In the past, such trust has proven to be misplaced, and gold-based systems have failed as governments printed too many paper claims against a limited quantity of gold.”
Until now the gold standard was the best we had, despite its flaws. Now we have the opportunity of the Bitcoin standard and it is better.
The cryptocurrency ecosystem is now way bigger than just Bitcoin.
Bitcoin was the godfather but now there hundreds of young pretenders called altcoins.
Bitcoin’s value proposition is that it is hard money. It doesn’t try to do anything else. it just sticks to its core role and does it well.
Some altcoins have tried to improve on Bitcoin’s ability to be sound money. Others have very little to do with being money at all and have a completely different value proposition. As I mentioned at the beginning of the article, I tend to think of these more as technology speculations.
While I am convinced of the use case for Bitcoin, I have mixed feelings about altcoins. But if I can recognise the utility they offer and if I believe that adoption will increase over time then I am happy to have a dabble.
However, I am very careful to recognise in my mind that I am not buying an investment, I am speculating.
This is a brief summary of my thoughts on a small selection of altcoins.
This is the second largest cryptocurrency by market cap and it has really taken off in the last few years. Its value proposition is that it is the blockchain upon which a new decentralised internet will be built. A lot of commentators say that owning ETH, the native taken of the Ethereum network, is like buying shares in the internet in the early 1990s.
I like that analogy but I don’t understand the technology well enough to know how accurate that is. Picking future technology trends is not my strong suit.
There are also plenty of criticisms around the monetary policy of ETH. And even if the Etheruem blockchain does start an internet revolution that doesn’t necessarily mean that ETH will be any good.
Still, it’s hard to ignore Ethereum at the moment.
Monero makes the case for being sounder money than Bitcoin and it is actually quite compelling.
They key advantage Monero has over Bitcoin is that it is private and untraceable. Bitcoin on the other hand is merely pseudonymous. The Bitcoin blockchain records every transaction forever and it is not that hard to trace Bitcoin addresses back to real life people.
Now privacy more or may not matter to you. But even if it doesn’t it has an impact on the fungibility of the coin.
For money to be effective it needs to be fungible. This means that each unit is exactly equal to each other and therefore you do not care which one you have.
An example of a store of value that is not fungible is land. Since every piece of land is different it cannot be used as money.
Bitcoin is fungible in theory except for one potential problem. A Bitcoin could be tainted by its use in a criminal transaction. Unlike gold which can be melted down with no trace of its past, a Bitcoin’s record is immutable. This means that “clean” coins may trade at a premium over “tainted” coins, thus destroying the fungibility of Bitcoin.
As a private untraceable coin Monero will not have this problem. It is through privacy that Monero maintains its fungibility. This concept is best explained by Daniel Kim and I highly recommend watching Kim’s presentation on this issue.
However, unlike Bitcoin, Monero does not have a fixed supply. Once all the 18.4 million Monero are mined, a small mining reward of 0.6 Monero will be issued infinately as an incentive for miners to verify transactions and keep the network secure.
This also makes sense as the security of any blockchain network relies on the miners. With Bitcoin it remains to be seen whether they will continue to fulfil their function once the full supply has been mined. Although the theory is that transaction fees should be enough to keep the miners incentivised.
For Monero this means it will be slightly inflationary, although it will be predictable inflation. While only time will tell this is another potential advantage over Bitcoin as there will be an incentive for the miners to secure the network indefinitely beyond just the transaction fee.
Dogecoin is what is known as a meme coin and was essentially created as a joke. However, it is a joke that has exploded in value and made a lot of people very rich.
Using the famous Shiba Inu doge meme, this coin was create as satire. One of its satirical components is that there is no supply cap, unlike Bitcoin. 5 billion Dogecoin are added to the supply each year.
— Dogemarine (@Dogemarine) June 25, 2021
This inflation of Dogecoin should in theory lead to the collapse of its value over time, yet since its creation in 2013 it has followed the path of the broader crypto market – up with wild and volatile swings.
One theory is that Dogecoin’s predictable inflation is what will actually maintain its value in the future. As discussed already, there is speculation that once Bitcoin reaches its 21 million coin cap miners will leave the network because they will have no incentive. That shouldn’t happen in theory because miners should be incentivised from earning fees by confirming transactions even if they don’t get new coins.
But who knows what might happen in reality and it will be entirely new territory when that day arrives.
A coin like Dogecoin that has an increasing supply will theoretically attract miners to keep the network alive because of the reward while at the same time offering a fixed, predictable and limited inflation.
Litecoin was one of the earliest altcoins, founded by Google engineer Charlie Lee. Litecoin copied Bitcoin’s source code and modified it to make transaction speed faster.
Lee was not trying to create a competitor to Bitcoin, in fact he has always argued that Litecoin should be seen as complimentary. He thought Bitcoin would become a store of value but not something that would be used in everyday transactions. The idea was that Litecoin would fulfil that niche, becoming the silver to Bitcoin’s gold.
Why Buy Cryptocurrency
Despite being over a decade old, cryptocurrency is still incredibly new. Its revolutionary effects are still to be felt.
In these early days it has been incredibly volatile. That is scary to some and a great opportunity to others.
But as the mainstream wakes up to the real advantages of cryptocurrency, there will be benefits for those who are early. Even so, when the speculative mania dies down after a few more cycles, there will still be plenty of valid reasons to buy crypto.
Most of the reasons to buy cryptocurrency outlined below apply specifically to Bitcoin and Bitcoin only. Bitcoin is essentially the “reserve asset” of the crypto space and while altcoins come and go in each cycle, Bitcoin remains the king.
1. Bitcoin is a Store of Value and Protects Against Inflation
[Disclaimer: The argument that Bitcoin is a store of value applies to the long term. In the short term Bitcoin can experience volatility and steep price declines and you can lose money. Of course as a new and emerging asset class there is a risk it could potentially go to zero.]
Much like gold, Bitcoin is a store of value that will protect you against inflation. This argument may also be applied with caution to other hard money altcoins, like Monero. However, the market is still going through a process of sorting the wheat from the chaff. With altcoins, it is very difficult to predict which ones will survive from cycle to cycle.
Bitcoin’s price has skyrocketed since its inception. Some of that price action is due to its status as a revolutionary new money and its price is benefiting from the increasing adoption. In this way it is behaving like a technology stock.
However, the Bitcoin price action is also benefiting from its fixed supply and people’s desire to protect themselves from inflationary central bank policies.
In this way, rather than seeing the Bitcoin price as rising in US Dollars, it is more accurate to see the US Dollar declining in value against Bitcoin.
In the absence of Bitcoin and cryptocurrencies in general, I firmly believe those seeking a sound money safe haven would have moved into gold and that instead the crypto market has captured a lot of that money.
However, please be aware that the concept of Bitcoin as a store of value only applies over a long timeframe. In the short term medium term it is extremely volatile and you can lose a lot of money very quickly. There is also a risk the whole market goes to zero.
Do your own due diligence, be conservative in your positioning sizes and try to avoid buying at the peak of the mania.
2. Bitcoin Has Limited Counterparty Risk
Counterparty risk is when you rely on some other entity to remain solvent in order for your asset to maintain its value.
For example a bank deposit requires the bank to remain solvent, as when you deposit money you are actually giving the bank an unsecured loan.
Cash, bonds and stocks all have counterparty risk.
Only gold does not.
Bitcoin has some limited counterparty risk.
When you engage with hot wallets or exchanges you introduce a counterparty risk as they might get hacked, lose your crypto or go out of business. There is also an argument that miners introduce an element of counterparty risk even though the design of the network incentivises them to behave ethically.
However, crypto held offline in cold storage has no counterparty risk just like gold. So as long as you are prudent and careful with how you store your crypto then you can limit your counterparty risk.
3. Cryptocurrency Removes Wealth From the Banking System
The compelling offer of the entire cryptocurrency ecosystem is that it is creating an alternative decentralised financial system.
For those who have concerns for the stability of the current system this is appealing. Rather than waiting and hoping for politicians to make the difficult decisions that real reform would entail, crypto offers the opportunity to opt out and participate in an emerging parallel system.
By removing some of your wealth from the banking system you are protecting yourself from the risk of a bank failure, a bail in or even capital controls.
While this risk may seem remote many Greeks, Cypriots, Argentines and Chinese might disagree.
4. Cryptocurrency is Easy to Store
Cryptocurrencies are very straightforward to store, as long as you follow some basic safety considerations.
It’s not quite as simple as storing funds in a bank or brokerage account, but it is much easier than storing real estate, collectibles or precious metals.
Cryptocurrency is stored and accessed using something called a private key. This is a long alphanumeric sequence, which is often converted to a 12 or 24 word mnemonic seed phrase. This is the cryptography part of cryptocurrency.
It sounds complicated and it can be if you go deep into it. But from a user’s point of view, what you need to do is make sure have access to and store the private key or mnemonic seed phrase somewhere safe, such as a home safe or a safety deposit box.
This should be done with paper or preferably something more solid like a steel plate. It should never be written down or stored on a computer or phone.
Hardware wallets such as Ledger and Trezor can help you do this in a secure way.
5. Cryptocurrency is Liquid
Traditionally people seeking to preserve their wealth with a stable store of value over time have used land, collectibles and gold.
Of those three, gold is very liquid but land and collectibles are not. The latter two are not fungible and can only be sold for whatever a market participant is willing to pay. Price is very subjective and it can take a long time to find a buyer.
Like gold, cryptocurrencies have a deep and very liquid market. This especially true of the major high volume cryptos.
While the price can be quite volatile, there is no difficulty is disposing of cryptocurrency for cash through a crypto exchange if you need to urgently liquidate.
6. Central Banks Continue Easy Money Policies
Hard money cryptocurrencies like Bitcoin are essentially in competition with other forms of money.
Bitcoin’s status as hard money stands on the technological innovation of its blockchain, the decentralised verification and its limited supply.
Fiat currencies are not hard money since it is very easy to create new units of currency, which is what the banking system has been doing in increasing quantities since the financial crisis of 2008. The soundness of those currencies depends entirely on trust and confidence, something former Fed Governor Alan Greenspan has candidly admitted to.
While I think Bitcoin is the best form of money created, government money benefits from legal tender laws and the weight of recent history as the dominant form of money.
If central banks operated in such a way so as to preserve trust and confidence in fiat currency and trust and confidence in their stewardship, then the need for Bitcoin would be diminished. Bitcoin would still be better but there wouldn’t be such an urgent need for it.
Yet because the actions of central banks over the last decade have not inspired confidence in a large and growing segment of the population, the case for an alternative money is more compelling.
As greater quantities of new fiat money goes looking for a store of value more money will flow into cryptocurrency.
7. Increased Institutional Buying of Cryptocurrency
The first few bull markets in cryptocurrencies came from either enthusiasts or retail investors.
This limited the amount of money that could flow into the crypto space.
However, as crypto has gained in popularity there has been more and more institutional interest, especially recently.
Institutional money doesn’t like volatility and they also have additional regulatory hurdles to overcome to invest in assets like cryptocurrency. But there are big moves happening now.
This is because forward thinking institutions can see the technological appeal of cryptocurrencies and they want to be part of that future. Others merely see a new asset class that has now gained mainstream credibility and they want to be part of the price action.
This increases the case for cryptocurrency for several reasons. Firstly, large amounts of institutional money flowing into assets with small market caps will have the potential to massively move the needle on price. So being in early will be good.
Secondly institutional adoption increases the credibility of cryptocurrency in the eyes of the skeptics, encouraging more people and other institutions to participate in the market. This will have a snowball effect.
Thirdly, while cryptocurrency technology is sound, it still needs to be accepted by the market. Even the hard money Bitcoin could in theory be rejected by the market. Institutional buying shows the clear trend that the market is embracing and not rejected cryptocurrency.
8. Portfolio Diversification
Cryptocurrency is now firmly established as its own asset class.
Although I have argued that some cryptocurrencies, like Bitcoin, should be seen as sound money and not as an investible asset at all.
Nevertheless, cryptocurrencies as an asset class have outperformed everything else over the last decade.
While they are hugely volatile and therefore it is wise to keep your exposure small, the explosive gains can have a huge influence on the performance of your entire portfolio.
These life changing gains won’t be around forever as the market stabilises with increasing adoption. Yet the ability to hold some wealth in an uncorrelated asset class makes a lot of sense for diversification purposes.
9. The Speculative Potential of Early Adoption
This reason won’t last forever but for now it is still incredibly valid. The crypto market is still in its infancy and there is still so much room for increasing adoption to lead to a massive run in prices.
Regardless of the use case of Bitcoin as sound money or Ethereum as the new internet, there are speculative gains to be made in these emerging technologies.
I’m a sound money guy and a conservative investor. So I’m not going to bet the farm on crypto. While I’m not great at understanding the finer points of cryptocurrency technology, I understand enough of the economic case to give me confidence that adoption will continue to increase. Therefore I’m happy to speculate.
There is nothing wrong with speculation as long as you keep your position sizing small and you are clear in your head and in your portfolio what the differences are between investing and speculating.
How to Buy Cryptocurrency
When you are ready to buy cryptocurrency you will need to find either an exchange or a broker.
An exchange hosts buyers and sellers and facilitates transactions.
There are a lot of different exchanges out there, each with their own unique features, so it is worth doing a bit of research before committing to one.
Some are great for beginners, others are better for advanced traders.
The major exchanges host an order book and allow you to place orders.
Some platforms (technically retailers not exchanges) act more like bullion dealers and will buy and sell cryptocurrency for the market price plus a premium. This way you are buying from the platform rather than having them match you with someone else on the other side of the trade. This is much simpler but is normally devoid of advanced features.
Some exchanges will allow you to buy Bitcoin and altcoins directly with fiat currency. Others only allow you to purchase Bitcoin with fiat. You then will need to use the Bitcoin to exchange for an altcoin.
The other option is a decentralised exchange or DEX, where buyers and sellers come together to trade peer-to-peer without any other company acting as an intermediary.
How to Store Cryptocurrency
This is a very important consideration when buying cryptocurrency and should not be glossed over or taken lightly.
With most exchanges it is possible to leave your assets on their exchange. DO NOT DO THIS as there is significant risk involved. In the short history of cryptocurrency many exchanges have been hacked or have gone out of business and people have lost their funds.
I speak from experience, as I once left too much Bitcoin on an exchange for too long and lost it. It wasn’t that much money at the time (it was 2016) but it would be worth a lot now.
When you move your cryptocurrency off the exchange you have two options. You can use an online or hot wallet. These are generally considered safe for small amounts but still have some risk. They could also be hacked or there could be a problem with the wallet provider.
The safest form of storage is in a hardware wallet. The hardware wallet takes your cryptocurrency offline in what is known as cold storage. This type of wallet protects your private key.
Ledger, one of the leading hardware wallets explains how they work:
“When you own cryptocurrencies, what you really own is a “private key”, a critical piece of information used to authorize outgoing transactions on the blockchain network. Whoever has the knowledge of this key can spend the associated funds…If you are keeping your crypto assets on an exchange, you are entrusting a third party with these private keys… Owning your private keys gives you much more power and control, but it also comes with the needs to take care of their security… A Hardware wallet is a physical device that allows you to store the private keys in a secure offline storage…even if a hacker succeeds in getting control of your computer, he will not be able to steal your private keys and access your crypto assets. Your private key is kept offline and limits the risk of hacking.”
When using a hardware wallet, you will be given a mnemonic seed phrase which can be used to restore your account. This seed phrase essentially is how you access the device where your private keys are stored. Therefore protecting this seed phrase is also incredibly important, more important than protecting the device itself.
You could write the seed phrase on paper. But an even better option is to use a steel wallet and punch the seed phrase into a steel plate. There are numerous companies that offer this.
Whatever you do, DO NOT store your seed phrase on a computer or any other digital device. It will be exposed to hacking or malware and you will put your cryptocurrency at risk.
When to Buy Cryptocurrency
This is a personal choice. But here are some things worth thinking about.
Cryptocurrency is incredibly difficult to value. Since there are no earnings (if you don’t consider recent developments in staking) traditional equity valuations don’t apply.
It doesn’t have the historical precedent, central bank purchases or production cost floor that gold has.
So all that really remains are technical indicators, which is slightly problematic for those who normally like to invest based on fundamentals.
What cryptocurrency does have going for it, which makes it a little bit easier if you are patient, are consistent and predictable albeit volatile cycles.
There are long bear markets in between crypto cycles that normally last about four years. These are great times to dollar cost average into a position. Then you can just sit tight and ignore the short time noise and volatility on the next ride up.
Another simple but useful metric is paying attention to the psychology of the market cycle by keeping an ear to the news.
All markets go through predictable psychological phases. The point of maximum euphoria is the top of the market and the point of maximum pessimism is the bottom of the market.
It is counter-intuitive and it takes a lot of courage but if you buy when everybody is fearful and sell when everybody is manic you will normally do alright. This is just as true, if not more true, in the crypto market as it is everywhere else.
Criticisms of Cryptocurrency
There are a number of significant criticisms of cryptocurrency that are worth considering if you are thinking about buying.
Given the rapidly changing market conditions and unfolding development it’s not possible to definitively refute these criticisms. While I love crypto I think many of them have a good point and that is why, despite my optimism, I am still cautious.
You have to do your own research and weigh up the risks against the rewards.
1. Bitcoin is Good but Altcoins are Trash
This criticism is based on an appreciation for the sound money properties of Bitcoin, the strength of its decentralised network and its first mover advantage.
Bitcoin maximalists, as they are called, believe that all altcoins will ultimately fail and that Bitcoin alone will survive.
One of the key arguments is that Bitcoin has no development team as the network is in the hands of the miners, while altcoins are compromised by their centralised control. I think this is a fair criticism but this argument doesn’t necessarily mean an altcoin can’t survive if it’s good.
2. Cryptocurrencies are in a Bubble
This is the criticism made famous by Peter Schiff. He recgonises that Bitcoin has a limited supply but argues that since there is no limit to the amount of altcoins that can be developed, there is no limit to the amount of cryptocurrency in general that can be created.
I can see his rationale and he is right, there is no limit to the number of altcoins that can exist. But the market can reject the pretenders.
There is vocal counter criticism arguing either that Peter is completely ignorant on crypto or that he may be right on altcoins but that Bitcoin will survive because of its sound money properties.
Ultimately the market will prove him right or catastrophically wrong.
3. Cryptocurrency is Too Volatile
This is fair argument when considering cryptocurrency’s use as money. But many argue that the volatility will decline once the market penetration increases. I do believe that the cryptocurrencies that survive with see greater price stability over time.
If you are in crypto for the speculative gains then volatility is not a problem, in fact its your best friend.
If you want crypto to take over the financial system and be used as money then you will have to be patient.
4. Cryptocurrency has No Intrinsic Value
This criticism isn’t valid because nothing really has intrinsic value. It has value because the market gives it value.
This criticism comes from Warren Buffett and is the same argument that is levelled against gold. Both gold and bitcoin have no productive yield.
But just like gold, Bitcoin derives its value from its monetary qualities. It has no yield because it is not an investment, it is money.
It is not the coin that is the primary driver of value. It is the superior ledger technology that makes Bitcoin valuable. It sends, verifies and keeps track of payments better than anything else.
That is its value. It’s not intrinsic, but the market gives it value nonetheless.
5. Cryptocurrency Mining has High Energy Costs
Mining cryptocurrency is energy intensive. There is no escaping that. The same criticism has been leveled at gold for many years – that mining is wasteful.
The real question then is what is sound money worth to society? And if not Bitcoin or gold, what else would act as money and how wasteful would that be?
Is silver wasteful? Is copper?
Government paper seems less wasteful on the surface. But if you factor in the enormous economic and social costs of unsound money then perhaps mining cryptocurrency isn’t so bad.
And what about other so-called wasteful activities. Is it justified to “waste” electricity on Netflix and social media?
The other thing to consider is that crypto mining often takes place in parts of the world where there is cheap excess energy.
There is a kernel of truth in this criticism but the reality is much more nuanced than the critics will ever acknowledge.
People have strong views on cryptocurrencies. Many feel strongly it is the way of the future and will continue is rise, while others think it is a ponzi scheme that is destined to fail.
Then you have factions within the crypto believers. There are those who are Bitcoin maximalists and those who back their favourite altcoin.
My position is that I am bullish on Bitcoin because it is sound money, while being open to the fact that it may be rejected by the market.
I am cautiously bullish on some altcoins, while being open to the fact that they may fail to deliver on their promises.
Some may accuse me of not taking a stand and that’s fine. But as an investor I don’t think you should be ideologically wedded to one view and I think you should be prepared to change your investment thesis as circumstances change.
Perhaps it’s my historian’s mindset that I want to wait until more water has flowed under the bridge until I make a judgement but I think the jury is very much still out on the future of cryptocurrency. I want it to succeed but only time will tell.
I’m reminded of Zhou Enlai’s famous line. When asked about the impact of the French Revolution he is reputed to have said, “It is too early to tell.” (Although supposedly he was actually referring to the Paris Riot of 1968)
What will the impact be of the emerging cryptocurrency revolution?
It is too soon to tell.
Ammous, Saifedean. The Bitcoin Standard : The Decentralized Alternative to Central Banking Hoboken, New Jersey: John Wiley & Sons, Inc, 2018.
Edstrom, Andy. Why Buy Bitcoin : Investing Today in the Money of Tomorrow. Los Angeles, California: Countercycle Media, 2019.
Alan Greenspan is in the public domain
About The Author
My name is Thomas Maurer. I am a high school History teacher and a student of monetary history who has been investing since 2011. My economic philosophy is predominantly Austrian. This website was created to help you understand the economic and monetary paradigm we are living in, how we got to this point and how to both protect yourself and prosper in these challenging times. Read more about me.