Maybe there have been a few things that have stopped you from investing in this new asset class. Perhaps a friend or family member discussed some scathing view of Bitcoin over dinner. Or maybe you read some articles or watched some YouTube videos that collectively made you run for the hills like Tom Cruise’s character in War of the Worlds. Unfortunately, there are plenty of misconceptions surrounding this market that prevent many of us from embarking on the best financial journey and investing opportunity of our lifetimes.
The goal of this post is to slap you in the face, pour ice water on your head, and show you the cold hard truth. We’ll identify the most common misconceptions or hesitations that people might have and then show why they’re either not true or should be viewed differently. It’s too important to not look through the correct lens and see digital assets for what they are: a tremendous long-term investing opportunity.
The Top 3 Crypto Misconceptions and Hesitations
#1: They’re not backed by anything. What gives them value?
“Yeah, but Bitcoin’s not backed by anything. It’s just digital. Anyone can create more of it.”
Bitcoin is the world’s first and most secure peer-to-peer decentralized store of value network with over 1,000,000 unique miners who use electricity and computing power to mine Bitcoin. The decentralized nature of the network (miners spread all over the world) and the consensus mechanism, which is called proof-of-work, is what makes Bitcoin’s network so secure and powerful. The beauty is that Bitcoin becomes harder to attack with each passing year as mining becomes more difficult and more decentralized.
It’s programmed in Bitcoin’s code that the mining difficulty increases every four years with what’s called a halving event. During a Bitcoin halving event, the rewards for mining are cut in half, effectively reducing the rate at which new coins are created. This is an important supply and demand characteristic unique to Bitcoin.
What happens to the supply of gold when its value goes up significantly? Mining operations get ramped up and more gold is extracted from the earth until supply eventually outstrips demand. This has a significant inflationary impact despite the relative scarcity of gold. Bitcoin’s properties, on the other hand, lower the amount of available supply over time even during periods of high demand. Another valuable property is that any owner can take their Bitcoin with them anywhere in the world. This is done through self-custody and the use of hardware wallets, ultra-important concepts that we’ll go over in another post. Why is this such a valuable characteristic?
Digital Assets Represent Economic Freedom
In the United States, we’ve seen a mass exodus of people from cities like Los Angeles, New York, San Francisco, and Chicago. People in these cities are fed up with the crime, the exorbitant costs of living, the unfair tax laws, and the overall quality of life. As a result, they’re moving to jurisdictions that treat them more favorably and give them much better value. This competition for citizens is also taking place globally.
As The Sovereign Individual eloquently summarized, we’re quickly transitioning to a world where technology is forcing nations to compete for citizens and their tax money. Bitcoin is the first asset that acts as digital property and allows any owner to take their net worth to the most favorable jurisdictions in the world where they’re treated most fairly.
Fact:
Bitcoin is the world’s first cryptographically scarce, secure, permissionless form of money. The security and decentralized nature of the network, along with the sheer amount of electricity and computational power required to mine it is quite literally what’s “backing” Bitcoin. It’s a rare asset unlike anything in the world and is ultimately backed by the same thing that backs anything of value: confidence and choice. Confidence in Bitcoin and decentralized assets is spreading like wildfire.
#2: It’s too volatile.
“Volatility is the price you pay for performance.”
Michael Saylor, the CEO of MicroStrategy, a company which has boldly accumulated a massive amount of Bitcoin through issuing company debt, championed the volatility of Bitcoin and other digital assets with the above quote. When you invest early in anything, you have to expect some serious ups and downs. Apple, Amazon, Netflix, Tesla, and any of the big winners from recent decades all had incredibly wild up and down swings in their early days. Amazon famously went through a 95% correction in 2000 and 2001. Apple lost three quarters of its value between 1983 and 1985. It fell 81% from 1991 through 1997 and has experienced multiple 50%, 40%, and 35% corrections along the way to becoming the most valuable company in the world. They’ve all gone through it. But you can’t be afraid of investing because an asset is volatile. With great volatility comes great opportunities.
Another important thing to remember is that the stock market was extremely volatile in its infancy. Just as many have likened digital assets to a wild and unregulated market, the stock market was referred to as the Wild West in its early days. In London, shipping companies would issue shares overnight and often make thousands of pounds before a ship even left the harbor. There was very little regulation, so it was hard to determine a legitimate company from an illegitimate one.
The Dow Jones Industrial Average was wildly volatile in its first several decades of operation. You can look at the index (symbol: DJI) on TradingView to see the rollercoaster nature of the Dow Jones during its early days. It lost 45% of its value from 1901 to 1903. Then it went up 135% in less than two and a half years. It then fell back down almost 50% from February 1906 through December 1907. It also tanked 45% from 1919 to 1921. Then, after rising nearly 500% in the following years, the great crash of 1929 and the consequent Great Depression sent the index spiraling down nearly 90%.
Volatility was simply common in the beginning of the stock market. Why? Just like with digital assets, there was very little money in the market’s early years compared to today. Knowing what you know now, wouldn’t you want the opportunity to invest in the early days of the stock market?
Fact:
We’re investing in the beginning of an entirely new financial market that’s being rapidly built before our eyes. Instead of fearing the volatility and using it as a reason to avoid investing, look at it as a tremendous early-stage opportunity.
#3: It’s a temporary bubble and will soon die out.
‘Tulipmania’ was a craze that occurred in the Netherlands in the 1630s. Tulips reached such an extreme price that, at the height of the bubble, a single tulip sold for as much as a mansion on the Amsterdam Grand Canal.
What followed was a colossal crash in tulip prices. The uninitiated critics of digital assets love to compare them to this tulip bubble. Here are a few of the classic quotes over the years.
In 2013, former president of the Dutch Central Bank (not surprisingly, another central banker) said Bitcoin is “worse than the tulip mania. At least then you got a tulip, now you get nothing.” On November 12, 2013, one of the Bitcoin community’s favorite characters, the legendary gold bug Peter Schiff said, “To me, it looks like a modern-day tulip mania.” Keep in mind that the price of Bitcoin was around $300 during these 2013 comments.
On July 20, 2017, the Elliott Wave theorist, Elliott Prechter, said, “The price activity and manic sentiment that led to present prices have dwarfed even the tulip mania of nearly 400 years ago.” The price of Bitcoin was $2,500 on that day.
A phenomenal website, 99Bitcoins (https://99bitcoins.com/bitcoin-obituaries/), has kept track of every time since 2010 that Bitcoin has been declared dead by the media. At the time of writing this post, the number of Bitcoin obituaries stands at 435. The most recent obituary came from the Bank of England, saying on December 16, 2021, that Bitcoin “could ultimately become worthless.” Fascinating, considering the sinking nature of the British pound.
Although this negative rhetoric will continue, large hedge funds, companies, institutions, large net worth individuals, and, ironically, even banks lined up to get a piece of Bitcoin in the last market cycle. Goldman Sachs, one of the world’s largest banks, and previously one of the biggest spewers of negativity toward Bitcoin, launched a trading desk focused on Bitcoin and now offers Bitcoin investment vehicles to some of its wealthy clients.
“In reality, Bitcoin is nothing like the Dutch tulip mania. Bubbles don’t burst three times in a decade and come back stronger each resurgence, and the investing public is finally waking up to this fact.” This is a quote from Nik Bhatia, author of Layered Money, whose Twitter handle is @timevalueofbtc.
Fact:
Bitcoin and other digital assets have been doubted and called a bubble since their inception. Bitcoin has been declared dead hundreds of times by the media, and this will probably continue for the next decade. The evidence, however, is overwhelming that digital assets are here to stay. The overall market cap of digital assets continues to create new all-time highs in each new market cycle.
In the next post, we’ll take a look at self-custody, one of the most important concepts to understand in this new market.
Thanks for reading! If you enjoyed this post, there’s a much more in-depth analysis of the most common misconceptions and hesitations that some investors have about digital assets in my book, The Modern Investor, which is now on Amazon. Maybe there’s something you’ve been curious about or an important concept that you can’t seem to wrap your around when it comes to investing in this asset class. I’ll bet you it’s in the book.
You can check out the other articles on this site and don’t forget to follow me on Twitter @andrewdfarrar for up-to-date crypto content. In these crazy times, it’s never been a more important time to learn about this new asset class.