11 Reasons Why Everybody Should Own Bitcoin
*Disclaimer: this article only represents the personal opinion of the writer and should not be treated as financial advice.
Bitcoin has appeared more and more often in the mainstream media in recent years and the number of people who are aware of Bitcoin has been increasing steadily. As discussed in the previous article, many people are still unwilling to buy Bitcoin or other cryptocurrencies. In this article, we are going to discuss why it is important for everyone to own some Bitcoin.
1. Bitcoin is decentralized.
Decentralization means that Bitcoin is not controlled by any single entity like a corporate company, government or central bank. Bitcoin is controlled by verifiable mathematics which is programmed into computer code. The code alone defines when and how much Bitcoin is produced.
2. Bitcoin is transparent.
The Bitcoin code is 100% open source and can be viewed on Github. This enables anybody to do his or her own due diligence to examine the code. Bitcoin is not anonymous. It is pseudonymous, which means that information on how much Bitcoin is in each wallet’s address is public information. But the wallets are not tied to a real identity.
3. Bitcoin transaction fees are cheap.
Transaction fees are the cost of sending any amount Bitcoin from one wallet to another wallet. The fee is paid to a miner to include a transaction in the Bitcoin blockchain and announce it to the network. Currently, one block has a limited size of 1 MB. About every 10 minutes a new block a formed. This means if users want their transactions to be confirmed quicker, they need to raise the fee they are paying. Miners always process the transactions with higher fees first. Bitcoin transaction fees are not fixed, they are subject to change. According to the website bitcoinfees.info, the current transaction fees (as of this article was written) range from 0.08 to 0.75 USD.
The international transaction fees from banks can vary. Here we take Bank of America as an example [1]: The international fee is 3% of the transaction value in USD. What is more, by putting money in a bank, the customer could also be charged for a card-replacement fee, ATM withdraw fee, minimum balance requirement penalty fee, monthly maintenance fee, early withdraw fee, etc.
4. Bitcoin is permissionless.
According to a report in 2017 [2], around 1.7 billion adults in the world are unbanked, i.e. they do not have bank accounts. As we know, in order to apply for a bank account, a number of requirements need to be fulfilled which includes the proof of age, residency, address, personal details, social security number, contact details including phone number, minimum deposit amount, etc. Especially in poor regions, many people do not have all of this information available.
By contrast, anyone can download a Bitcoin wallet and own Bitcoin.
5. The Bitcoin network is immutable.
Banks can go bankrupt, a safe might get stolen, but it’s almost impossible to hack the Bitcoin network. Due to Bitcoin’s decentralized nature and proof of work consensus algorithm, 51% of the total mining computing power would be needed in order to reverse a confirmed transaction. The possibility of an attacker achieving this much computing power is highly unlikely.
6. You are controlling your own funds.
Putting money in a bank is an everyday process. What many people do not understand is: when they save money in a bank, it is not their money anymore. The bank is offering a service to help them keep their money safe and many banks charge a maintenance fee for doing that. At the same time, the bank is using the money to make a profit by lending it out to others. What is more, a bank could freeze any account, restrict how much people can withdraw from their account and where they can send money.
Users who own Bitcoin in a wallet and hold their own unique private key are in 100% control of it (unless the private key gets lost). Users can decide the amount they put inside a wallet, to whom they send funds and how much to send. Nobody can confiscate their Bitcoin.
7. Bitcoin is censorship-resistant.
If a government imposes control on its currency (we will see some more examples later in this article), Bitcoin can help people to bypass it.
For example, the US government can order Visa and Master card to block payments to WikiLeaks, but anyone can donate to WikiLeaks by sending Bitcoin to their address.
8. Bitcoin could diversify investment portfolio risk.
Correlation between traditional assets such as stocks, gold, and Bitcoin is very low. From the table below [3] we can see that Bitcoin has a very low negative correlation with the S&P 500, and a very slight positive correlation with gold.
Recently, Thomas Lee from Fundsrat [4] argued that Bitcoin will only reach a new all-time high after the S&P hits a new high. However, because Bitcoin was launched in 2009, just after the last crisis happened, there is a limited amount of data available for analysis, and even though many investors think Bitcoin could help investors to hedge against risks, Bitcoin still needs to go through a real financial crisis to prove that.
What’s interesting is: PlanB modeled the Bitcoin price with a Stock-to-Flow model [5] based on Bitcoin’s scarcity. The model shows that gold and silver price are in line with the Bitcoin price for Stock-to-Flow.
9. The adoption of Bitcoin is increasing every day.
There is more adoption for Bitcoin as time passes. For example, there are more and more firms accepting bitcoin as payment, among which there are some well-known companies such as Wikipedia, Microsoft, Expedia and Overstock [6]. I have compiled a graph from the data on coinmap.org showing places accepting bitcoin from January 2013 until September 2019 (accumulated):
Worldwide Bitcoin ATMs have grown to almost 6000 until the end of September 2019.
Not to mention the increasing number of crypto exchanges and over the counter (OTC) Bitcoin exchange places. Bitcoin can also be traded peer to peer.
A more recent development in the adoption of Bitcoin is that some governments are supporting Bitcoin mining:
The central bank of Iran is going to issue licenses to local Bitcoin miners [7].
The president of Belarus has recently mentioned that the country’s excess nuclear power can be used to mine cryptocurrencies. [8]
10. Bitcoin has better infrastructure development now.
The Bitcoin code was initially written by the unknown person Satoshi Nakamoto, but over the years, countless developers around the world have worked voluntarily to contribute and maintain the Bitcoin network.
One important development is the Lightning Network. It has brought scalability, faster transaction speed and very low transaction costs into reality, making Bitcoin more practical for making day-to-day small transactions.
Another example is the MimbleWimble protocol [9] which can be integrated into the Bitcoin network to ensure more privacy [10].
As a result, Bitcoin one day could be used in our daily life as a tool for micro-payments such as for a cup of coffee or grocery shopping in supermarkets.
11. Bitcoin is the solution to different kinds of crisis such as hyperinflation and sanctions.
Combining all the above characteristics, Bitcoin can be the solution to a series of problems we have around the world:
In 2018, Venezuela experienced hyperinflation [11]. The estimated inflation for 2018 is 1 300 000%. More than 3 million people have fled the country due to food and medical shortages, political instability, high unemployment, and crime rate.
In June 2019, Zimbabwe’s inflation surged to 175.7% [12] and the government banned its people from trading in foreign currencies because the country was short of cash [13].
As of August 2019, inflation in Argentina [14] was 53.6%. In September 2019, the Argentinian government imposed currency control [15]. As a result, each individual needs to get permission to buy USD. What’s more: the amount should not be more than $10.000 per month.
Under these circumstances, people in those countries cannot transfer their money abroad or hold other assets but accept the fact that their wealth is diminishing every day. But they can buy Bitcoin and keep their wealth safe.
Sanctions from the US government against Iran [16] can be dated back to 40 years ago. As a result, it is not possible for companies to do business in Iran and the domestic businesses have also been hurt very hard.
Now international payments can be made in Bitcoin which is difficult to block. This could help Iranians to do trade with companies in other countries.
However, with all of the above being said, here are some points that I think people should be aware of when they buy Bitcoin:
Manipulation
Due to the fact that Bitcoin is censorship resistant and pseudonymous, trading of the cryptocurrency is very difficult to regulate. Someone with a lot of Bitcoin could dump them in the market and cause a sudden fall of price. Recent research found evidence that the Bitcoin price could be subject to market manipulation.
Price volatility
The Bitcoin price is very volatile. It can increase or decrease up to 20% within one day. It is definitely not smart to invest all your budget in one go. It is sensible to set a time horizon and divide your budget into smaller portions, and slowly accumulate Bitcoin over time. Do not chase the highs in fear that you are missing out. It is also important to set up goals because nobody really knows how high Bitcoin will go and when the price is going to crash again. Sell when you think the profit has reached your expectation and never try to chase the top. Remember: no matter what people try to tell you; nobody can predict the price with high accuracy — not even the most experienced traders.
Don’t invest more than you can afford to lose
All kinds of investments carry a certain amount of risk, be it traditional assets such as stocks, state-issued bonds, or rare metals such as gold, silver, or derivatives such as futures contracts, swaps, etc. Even though the price trend has been going upwards since Bitcoin was invented, there is still significant risk involved. Over the years, Bitcoin price has seen several pull-backs of 80–90% causing many investors to lose their funds.
Last but not least, Bitcoin is very complex, a thorough understanding of Bitcoin requires you to know programming, cryptography, economics, financial systems, mathematical modeling, human psychology, etc. Probably you might never fully understand this technology, but you will learn a lot of new things if you decide to own Bitcoin!
Reference:
[1] https://www.bankofamerica.com/deposits/resources/personal-schedule-fees.go
[3] https://www.ccn.com/bitcoin-price-correlation-stock-market/
[4] https://twitter.com/fundstrat/status/1172160466841456640
[5] https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25)
[6] https://99bitcoins.com/bitcoin/who-accepts/
[7] https://www.coindesk.com/iranian-government-proposes-annual-license-for-bitcoin-and-crypto-miners
[8] https://news.bitcoin.com/will-belarus-be-the-first-country-with-nuclear-powered-bitcoin-mining/
[9] https://download.wpsoftware.net/bitcoin/wizardry/mimblewimble.txt
[10] https://www.mycryptopedia.com/mimblewimble-explained/
[11] https://www.bbc.com/news/world-latin-america-46999668
[13] https://www.bbc.com/news/world-africa-48757080
[14] https://tradingeconomics.com/argentina/inflation-cpi
[15] https://www.bbc.com/news/business-49547189
