The Dark Side of Bitcoin

No this post isn’t about Criminals, Drug Dealers, or Terrorists.

The most common argument against Bitcoin is that it is used by criminals, drug dealers, and terrorists. Well, guess what? The US Dollar is also used by these groups. Shall we ban all cash?

While we are at it, we should go ahead and ban computers, phones, and the Internet as well, all of which are used by criminals, drug dealers, and terrorists. So, its use by criminals is not an argument against Bitcoin.

Energy Usage

How about its energy usage? Well, this isn’t a sufficient argument against Bitcoin either. Our financial system is mostly online and that uses energy as well. Mining and securing gold requires energy. Until an energy neutral way to store and transfer funds is invented, energy usage is not a sufficient argument against Bitcoin.

Bitcoin is a Ponzi scheme.

In a Ponzi scheme, there is a central operator promising unusual returns. They pay these unusual returns with the deposits from newcomers. The operation goes on until there is no more fresh money entering the operation and it collapses.

There is no central authority in Bitcoin nor promise of unusual returns. Unfortunately, some investors look at the past price movements and they hope for unusual returns. This doesn’t make Bitcoin a Ponzi scheme.

Bitcoin is based on the greater fool theory.

Bitcoin is only valuable if the following two requirements are met.

  1. The Bitcoin network stays operational.
  2. There are other people who also believe that Bitcoin is valuable.

The second requirement could be called a sort of greater fool theory, if the fiat currencies weren’t inflationary. The fiat currencies, currencies issued by central banks such as the US Dollar and Euro, are inflationary by design. It’s the official policy that they lose their value by a few percentage points every year to stimulate the economy.

If the fiat currencies weren’t inflationary, Bitcoin would be worthless except for its use to transfer funds. In that case, the greater fool theory argument would make sense. However, with the inflationary policies and low interest rates, the greater fool theory argument isn’t that strong either.

Only rich people can afford it.

Who can afford to buy a Bitcoin at $11K? Only rich people, right? Wrong. You can buy one hundred millionth of a Bitcoin. That wouldn’t make much sense, but it’s definitely possible to invest in Bitcoins starting with a few dollars.

1800 Freshly Minted Bitcoins per Day

This is where it gets serious. At this moment, 1800 new Bitcoins are minted every day to reward miners who maintain the underlying network of Bitcoin. At the time of writing this post, one Bitcoin costs more than $11K. 1800 new Bitcoins per day means approximately $19.8 million worth of new Bitcoins entering the market every day.

If the miners choose to sell all of their freshly minted coins every day, the rest of the market has to pay them $19.8 million in cash every day, just to keep the Bitcoin price at its current level.

An inflow of $19.8 million a day is not a problem during a bull market like the one we had until mid-December 2017. From then on, we experienced a pullback. As the prices pull back, I don’t see investors pouring $19.8 million every day to Bitcoin.

If the freshly minted coins are not offset with net inflow of cash, we will see the continuation of the pullback until a balance is reached.

My intuition says that the Bitcoin price will slowly pull back for the rest of 2018. I don’t see any reason for new money flowing into the market, because the average person only invests in assets that are already in an upwards trend. We are already past that point in Bitcoin.

Having said that, I’m not pessimistic about Bitcoin in the long term. I don’t think neither me nor anyone else can predict what will happen with the Bitcoin price in 2018. It can end up anywhere between $1K and $100K in 2018. So, take into account all the possible scenarios when investing into Bitcoin.

I believe 2018 will be the year the smart money will be accumulating Bitcoin. My plan is to join them. 3% of my savings are already in Bitcoin. I plan to increase this percentage to 5% in 2018.

My game plan is to divide the 2% of my savings in 12 and buy that amount of Bitcoin every calendar month. This plan matches my assumptions.

  1. Fiat currencies lose 2% of their value every year by design. (Official government policy)
  2. You can’t time the market. You can’t say when the market is at its highest or lowest point.
  3. You can’t predict the market, the lowest or highest prices of an asset.

Therefore, I’ll be using dollar cost averaging strategy over twelve months in 2018. In a given calendar month, I’ll enter a passive buy order below the market price order. If this order doesn’t get filled, I’ll buy from the market price in the last week of the month. I’ll repeat that for each month in 2018. This strategy worked in January and I was able to buy at $11K and $10K in January.

Summary

There are a lot of arguments circulating in the media against Bitcoin. Most of these arguments aren’t convincing. While people are busy discussing weak arguments, they are missing an obvious but strong argument against it: the constant cash inflow requirement to keep the Bitcoin price at its current level. Yet, even that might not stop Bitcoin in the long term.

If you have any other arguments against Bitcoin, let me know in the comments and I may discuss the serious ones in future posts.

Disclaimer and Disclosure

This post is for information purposes only and not intended to be investment advice. At the moment of writing this post, 3% of my savings was in Bitcoins.

Burak Bilgin
Software developer with a Ph.D. and 15 years of experience. I write daily on personal development and life lessons. Sign up to my email newsletter to receive a weekly overview of my latest content on personal development and life lessons.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.