Written by Tristan Amzallag, President OnWatt Inc., Crypto Asset Specialist
Photos Provided Unless Noted
These days it seems like Bitcoin is everywhere; you hear about it on TV, on the internet and on the lips of everyone who has been involved with it since 2017. And for good reason: an investment in Bitcoin has beaten every single other asset class in the last 4 years in terms of growth and adoption. An investment in Bitcoin in 2019, when it was valued at $3,700, would yield a 1,864% return on investment in 2021 when it reached the high of $69,000. And it’s still not done climbing. Mention these numbers to any fund manager and you’ll see them turn green with envy as they try to explain the risks of such as asset.
In the short term, Bitcoin IS a risky asset class. It has seen price declines between 75% and 90% over very short periods of time (3 – 4 weeks). In fact, as I composed this article I watched Bitcoin lose 50% of its value. This can be very jarring to your average investor without the stomach for such volatility or the understanding of what Bitcoin actually is.
So what IS Bitcoin? Bitcoin is something new. It’s difficult to liken it to any existing asset types. Some say Bitcoin is like gold. While that’s partially true, it has much more utility than gold. Gold is heavy and cumbersome and doesn’t transport easily, so traveling with your wealth in gold isn’t easy, but Bitcoin only requires a USB key to allow you to transport hundreds of millions of dollars. Others say Bitcoin is like money. Yes that’s also partially true, assuming vendors are willing to accept it as currency, and many are using it that way. Still others have classified it as an asset, like a house or stocks. In fact, the US tax system treats it that way, with gains/losses being classified as Capital Gains/Losses and taxed accordingly. However, Bitcoin hasn’t been as tightly regulated as stocks and enjoys some of the tax loopholes that have been closed around stocks and real estate. I like to think of Bitcoin as Financial Freedom for the citizens of the world.
Bitcoin transactions between two private parties transcend borders, countries, and laws that may otherwise exist between the parties in a traditional Fiat transaction. (Fiat is the term used to describe what we all know as government issued currency such as the US Dollar or the European Pound or Chinese Yuan). Currently, when I want to buy goods or services using the US Dollar, I need to “ask” for permission from my bank to transfer the sum of money to the vendor in order to purchase the services I want. This has been refined into a fairly smooth process in the US with the use of credit cards, cash, and most recently through apps such as Paypal, but ultimately the bank holds my wealth, and therefore is in control of my wealth.
In 2008, financial institutions played fast and loose with our money by underwriting risky mortgage holders which led to a real estate market bubble. That bubble eventually burst and revealed the dangerous actions the institutions had undertaken, leading to the great recession. To combat this, President Obama launched several quantitative easing programs that helped prop up the market with free cash, but in turn raised our national debt more than all the previous presidents combined. All of this was possible because we had handed over control of our wealth to a handful of people we “trusted.”
Bitcoin was born from that chaos like a phoenix rising from the ashes. The inventor, known as Satoshi Nakamoto, wanted to take money out of the control of governments and put it back into the hands of the people so that we were no longer subject to whims of greedy individuals. Through the distributed nature of the internet, Satoshi was able to create a new network layer that sits on top of the internet to facilitate such permission-less transactions between two parties. Due to the international nature of the internet and the usefulness it has given to communication and e-commerce, Bitcoin is able to take advantage of that same usefulness and apply it a new field: Digital Finance (DeFi).
Bitcoin and other digital currencies now allows us to conduct financial transactions with the same ease and flexibility as sending an email or one swipe ordering from Amazon. Imagine being able to mortgage a house without the need to go to a bank, or fund a business idea without the need for shareholders. This has already been done with DeFi and this new field is just getting started. That’s the freedom Bitcoin can bring to the world of finance and to everyday people.
While Bitcoin only exists on the internet, Saratoga businesses can take advantage of its benefits even at the local level. Even though Bitcoin adoption is still relatively small, there are already millions of users. The novelty of Bitcoin may wear off someday, but today it is very much in the spotlight and users of Bitcoin love to find places where they can spend their currency. Being able to accept Bitcoin will open a business up to newcomers looking to spend their coins in novel ways.
Novelty is cute and all, but being in business means that everything we do affects our bottom line and Bitcoin can help you there as well. Since Bitcoin is a decentralized network and not a central bank, the fees for money transfers are very low and are shifted from the receiver (the business) to the sender (the customer). Yes, it’s true! Businesses that accept Bitcoin no longer need to pay the 3% fee that they are charged by credit card companies and that can have a huge impact on small margin businesses.
Another, albeit riskier, proposition, is a business opting to hold some of their net profit in Bitcoin, rather than converting it all to Fiat at the point of sale. Since its launch in 2009, Bitcoin has seen exponential growth in value, going from less than $1 per coin to an all-time high of $69,000 in 2021.
This may seem like “gambling with your profits” on a risky asset class, but I have two points to make about that: one, there are many large companies that are entering the Bitcoin world and holding a portion of their portfolio in Bitcoin. Even entire countries have started to look at Bitcoin, with El Salvador leading the way in 2021 when it announced that Bitcoin is now considered legal tender throughout the country. This adoption by more and more companies will remove today’s risk factors. Two, the free money monetary policies the Federal Reserve has enacted and upheld for over a decade has led to some of the highest inflation numbers I have ever seen in my lifetime, which means the buying power of the US Dollar is eroding and the profit being held by businesses is no longer as valuable as it once was. Since Bitcoin is deflationary in nature, it will protect against that erosion.
At the time of writing, Bitcoin’s Market Capitalization is $660 Billion. That’s a lot. But it’s a paltry sum compared to the size of the markets this technology could overtake. In its simplest form, Bitcoin is an easy way to store value and send that value across the world within minutes. Another good store of value is gold and if Bitcoin were to take the place of gold as said store of value then its market cap would be closer to $11 Trillion and Bitcoin would be worth $647,058 each. That’s a 10x growth from its previous all-time high and a 20x growth from where it is today.
Like gold, Bitcoin has a limited supply: there will only ever be 21,000,000btc in circulation. This was purposefully done by Satoshi in an effort to make Bitcoin a deflationary asset, contrary to the inflationary nature of Fiat. To put that into perspective, there are 23,000,000 millionaires in the US alone and 56,000,000 in the world, which simply means that if every millionaire wanted 1 Bitcoin, it would not be possible to fulfill that demand. In fact if each millionaire in the world wanted an equal share of Bitcoin then they would only be able to have 0.375 btc each. When looking at these numbers you can start to see the potential Bitcoin has in the coming decades, even just building a small nest egg in Bitcoin could result in substantial future gains.
Bitcoin can be divided by 8 decimal places. The lowest unit of Bitcoin is called a “Satoshi” or “Sat”. One sat is 0.00000001 Bitcoin equal to $0.00034. This means that any amount of USD can be invested into Bitcoin, you don’t need to invest in a whole coin which is worth $37,000 as of this writing. $100 will get you 0.00294118 Bitcoin or put another way 294,118 Sats.
Everything in life has a learning curve for us to go through before we feel comfortable with it. Email and online shopping both went through their periods of anxious adoption by the masses. In the early days of email, people didn’t know how to use it, some believed you still needed stamps, and others thought you needed to send it from the post office. Online shopping was rife with stories of stolen credit cards and lost packages. But those anxieties were overcome and new money making markets emerged. Bitcoin is no different; once you understand it and work with it, a whole new emerging market rife with innovation will open up to you.
Digital Finance is the next step in the internet’s evolution, and platforms like Bitcoin Lightning (Layer 2), Ethereum (The world’s super computer) and Solana are working hard to make these digital financial products as accessible to everyone as email, and one click shopping, are to us today.