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Bitcoin and Blockchain Technology: Allowing for a Financial System that is More Energy Efficient, Inclusive, and Fair to All

First, please know that nothing I share about blockchain technology and digital assets should be considered financial advice.  I am keenly interested in this area because I believe that the emerging digital asset economy that is built on blockchain technology will allow the world to operate on a financial system that is more energy efficient, inclusive, and fair to all.

Some will remember a time when a savings account offered 15% interest, give or take a few points.  Today, savings accounts at traditional banks should not be called savings accounts, as they pay little to no interest and actually lead to a loss in purchasing power as central banks continue to print trillions of dollars and do as they see fit with these funds - most of the benefit goes to individuals and businesses that already have financial assets, so the act of printing money based on nothing is a root cause of increasing weath inequality, and ultimately, is a way of stealing time from people who earn their living by providing goods and services for others.

If you keep $1000 in a savings account at any major legacy bank, one year from now, your $1000 will allow you to purchase about $760 to $900 worth of goods that you could purchase today.  Consider home prices, tuition, and anything else that the masses value and this loss in purchasing power over time is clearly evident.  This is what Bitcoin fixes - it has a mathematically programmed finite supply of 21 million coins that cannot be changed by any individual or government, and this is why its value has gone up close to 200% annually since its inception 12 years ago.  Over time, this rate of growth will invariably slow down as global adoption increases to billions of users, but the engineering of Bitcoin tells us that we can expect an average annual return of 50-100% over the next decade, making it the single best choice for savings and a store of value.

For centuries, gold has served as a global store of value that could not be easily debased by central banks.  Bitcoin is digital gold and far superior to gold as a store of value. Billions of dollars of bitcoin can be moved around the world in 5-60 minutes for a few dollars.  There is no cost to store Bitcoin.  Every Bitcoin can be divided into 100 million smaller units called Satoshis or Sats in short form.  The authenticity of Bitcoin can be verified by anyone anywhere in the world on a public ledger that is transparent to all. And perhaps most importantly, Bitcoin has a programmed finite supply of 21 million coins that is completely decentralized and cannot be corrupted by a central entity.  Gold is expensive to move, store, divide, and authenticate, and whenever the price of gold goes up, gold miners invest additional money to find and sell more of it, which pushes the price of gold down.

So when seeking the best possible store of value, the path leads to Bitcoin as the apex digital asset and gold as the apex analogue asset.  Throughout human history, every digital version of any analogue invention has ultimately surpassed its analogue counterpart in adoption and value.  Gold has a 10 trillion dollar market cap.  Bitcoin's market cap is still under 1 trillion. When Bitcoin's market cap equals 10 trillion dollars, the value of each Bitcoin will be over 500 thousand dollars.  It's rational to expect Bitcoin's market cap to ultimately exceed that of gold, so it's also rational to expect that the value of 1 Bitcoin will eventually approach 1 million dollars.

As blockchain analyst Willy Woo has pointed out, as of early 2021, in terms of adoption, Bitcoin has roughly the same number of users as the Internet had in 1997.  But Bitcoin adoption is growing more quickly than internet adoption did in its first decade, and the trajectory of Bitcoin adoption tells us that within the next 4 years, Bitcoin will be held by 1 billion unique people globally.  Eventually, many billions of people will self custody their own Bitcoin on their mobile devices.

Savings that are kept in fiat currencies like USD, CAD, AUD, EUR, and YEN are guaranteed to lose purchasing power steadily over time since central banks use money printing as their primary monetary policy tool to keep the wheels of the economy turning - this constant printing of money causes all existing fiat currencies to lose purchasing power.

If the trajectory of Bitcoin over the past 12 years continues, savings that are kept in Bitcoin should appreciate by 50-100% annually over the next decade.  It's critical to understand that no asset can grow at such an expotential pace without experiencing significant volatility.  In the first decade of Bitcoin's existence, it experienced multiple downturns of approximately 80% - this volatility goes hand in hand with the ability to produce the average annual return that Bitcoin has.  So while there may be years when Bitcoin underperforms other stores of value like the S&P index, over a 5 to 10 year timeframe, I expect Bitcoin to outperform all traditional assets by a large margin.

Given all of the above, my feeling is that it is rational to keep some percentage of our savings in Bitcoin with the understanding that any such allocation is meant for long term savings, and that significant downturns should be expected within the larger trend of long term price appreciation. To illustrate why this is a rational path, consider that as of early March of 2021, Bitcoin had 10-yr compound annual growth rate (CAGR) of 196.7%. During the same 10-yr period, Tesla stock had the second best CAGR at 63.8%. Amazon stock was third at 33.5%.
 
10-yr CAGR values for comparison:

Bitcoin:  196.7%
Tesla Stock:  63.8%
Amazon Stock:  33.5%
Nasdaq Composite: 16.94%
S&P 500: 11.22%,
Long Dated US Treasuries:  4.58%
Gold:  1.97%.

Before making the decision to include Bitcoin in one's portfolio, it's best to study the basics of blockchain technology and how it allows Bitcoin to operate securely and transparently via rules with no corruptible humans in charge of the network.  A good place to start is at Hope.com which offers links to a number of comprehensive video courses, podcasts, and other resources. Studying the mechanics of Bitcoin and blockchain technology will allow for an understanding of hashing and cryptography, decentralized computing, and principles of sound money - the greater the level of understanding of these topics, the greater conviction one will have to hold onto Bitcoin over the long term through periods of correction, some of which can last a year or longer.

One of the most powerful features of Bitcoin is the ability to self custody coins i.e. be one's own bank.  Bitcoin can be stored on hot or cold wallets. Hot wallets are typically on a computer or mobile device that are connected to the internet.  Cold wallets are devices that are not connected to the internet, and are therefore seen as the more secure choice. Reputable cold wallets include devices made by Ledger and Trezor - such cold wallets typically cost between $100-200.

Bitcoin can be purchased at various exchanges.  Kraken and Coinbase are two reputable centralized exchanges.  Bitcoin that is purchased at an exchange can be left in one's account at the exchange, but generally accepted best practice is to transfer coins to one's own cold wallet.

If setting up an account at an exchange and learning how to handle one's own cold wallet are steps that feel a bit daunting, an easier path to gain exposure to Bitcoin is by purchasing ETFs or equities that serve as proxies for the value of Bitcoin through conventional brokerage accounts.  As of this writing, the Securities Exchange Commision (SEC) in the U.S. has not approved a Bitcoin ETF, though they are considering applications from several reputable financial institutions that are eager to offer Bitcoin ETFs.  Canada, however, has approved Bitcoin ETFs, and the one that I like best can be found as the following ticker symbol:

BTCX.B (Canadian dollars)
BTCX.U (U.S. dollars)

On U.S. exchanges and Over The Counter Markets, I like the following investable assets as proxies for Bitcoin:

GBTC - Grayscale Bitcoin Trust - this is a trust whose shares can be bought and sold over the counter and is highly liquid.  Once the SEC begins approving Bitcoin ETFs, the Grayscale Bitcoin Trust should convert into an ETF.

MSTR - Microstrategy - this is a public company whose CEO Michael Saylor is a prominent educator in the Bitcoin space.  Microstrategy holds more than 100,000 Bitcoin in their treasury, and they are in effect, a publicly traded company that is generally seen as a conservatively leveraged Bitcoin ETF.

Other countries offer funds similar to a Bitcoin ETF, so for those who are outside of the U.S. or Canda and wanting to gain exposure to Bitcoin, it is prudent to check to see what is available via regulated national exchanges. Eventually, I fully expect all developed nations that have stock exchanges to offer Bitcoin ETFs.

Another asset that serves as a proxy for Bitcoin and the rest of the developing digital asset economy is Galaxy Digital founded and run by Mike Novogratz.  Galaxy Digital - available as GLXY on the Toronto Stock Exchange and BRPHF over the counter elsewhere in the world holds large amounts of digital assets including Bitcoin and Ethereum on their balance sheets, has early investment positions in leading digital asset companies, and is well positioned as the premier "picks and shovels" or infrastructure investment in the digital asset economy.  Galaxy Digital will be listed at a major U.S. exchange in the near future, likely Q4 of 2021, and this event plus the upcoming closing of the acquisition of BitGo, a global leader of institutional digital asset custody, trading, and finance make Galaxy Digital undervalued in my view compared to other proxies for Bitcoin.

Yet another way to gain exposure to Bitcoin is through mobile payment applications like Paypal and Square - both provide an easy way of purchasing and storing Bitcoin and other digital assets like Ethereum, and in the near future, both will allow users to transfer any such assets to cold wallets for self custody for those who prefer to hold their own assets.  Though only available in the U.S. as of this writing, I expect that within the next few years, this option will become available in most countries, if not through Paypal and Square, then through similar mobile banking applications.

Regardless of which path one chooses to gain exposure to Bitcoin, it's vital to recognize that the most rational approach is to buy and hold for the long term.  Every person should consider their unique circumstances and invest only what they wish to keep as long term savings that they won't need to access for the next 10 years.  Investing in Bitcoin should be done with the understanding that there will likely be occasional drops in price of 50% or more, and it's a certainty that there will be regular waves of fear, uncertainty, and doubt that ripple through mainstream media as governments and central banks around the world discredit Bitcoin, as Bitcoin threatens their ability to print fiat money at will.  

Please remember that none of this is financial advice, and each person should consider risk management for their own unique circumstances and needs in the days and years ahead.  

Going forward, I will use my Twitter account @Ben_Kim to share ongoing updates on the development of the digital asset economy, and will elaborate on relevant topics like the mechanics of blockchain technology and what everyday spending, banking, and investing will look like in the years ahead as blockchain-based applications improve upon and even replace much of the legacy banking system. 

Within 10 years, banks as we know them today will be largely unnecessary, as anyone with a mobile phone will be able to store, invest, and send and receive money without intermediaries charging fees to be middlemen - all of this is actually already happening, but it will take more years for the masses to onboard and integrate with the digital asset economy.

Please feel free to connect with me at Twitter @Ben_Kim and ask any questions that you have.  

And one last note for those who are relatively new to Bitcoin and digital assets:  If you choose to take custody of your own coins, please know that no trustworthy person or institution will ask you to send them any amount of your assets.  Never send any of your assets to any entity unless you are knowingly purchasing something you want and you have verified that the intended recipient is clearly trusthworthy.

To learn more about the why behind Bitcoin, please feel free to have a listen to the following conversation between Michael Saylor of Microstratagy and Ross Stevens of NYDIG:

 
 

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