An Honest Assessment of The Orange Coin
With both assets making new all time highs this year, the Bitcoin vs Gold debate is starting to get some mainstream play again. I still prefer holding both. But I'm liking one a lot more.
It probably seems like I’ve been picking on Bitcoin ($BTC-USD) a lot lately. As someone who has significant financial exposure to the asset, this may seem counterintuitive. The reality is there are plenty of people on the internet who are capable of telling you all the reasons BTC will go to $1 million. Additionally, there are plenty of people on the internet who are capable of telling you all the reasons BTC will be a long term goose egg. There are not that many people who are capable of offering a nuanced take that highlights strengths, weaknesses, opportunities, and threats.
Bitcoin’s SWOT Analysis
Let’s do a quick and easy SWOT summary on Bitcoin, shall we?
Strengths: permissionless, decentralized, fixed supply
Weaknesses: scalability, incentive misalignment, privacy
Opportunities: fiat destruction, non-custodial interactions, Gold
Threats: alternative coins and networks, criminalization, Gold
Yes, Gold is both a threat and an opportunity and I’ll get into why later. Before going much further, if you’re new here and want a more detailed explanation of how I personally view Bitcoin as a philosophical idea, you can read that here:
The reason I have steadfastly held firm on “bullish Bitcoin” despite its faults is the same reason I’ve steadfastly held firm on bullish Gold despite some of its faults; neither are state-issued or managed. Though you can lend against them and create as many IOUs as you soul desires, at the end of the day Jerome Powell can’t push a button and create more of either.
Bitcoin is not going to be everything to everybody. And that’s totally fine. What we have to do as individual investors/traders is determine whether we believe any single asset’s strengths outweigh the weaknesses. From there, we have to decide what the best way to express that idea is.
Bitcoin Strengths
Bitcoin is without question the most decentralized digital asset in the entire cryptocurrency market by almost any metric one chooses. At 89%, BTC is almost entirely held by “retail” investors/traders:
Retail buyers hold over 17.5 million of the 19.7 million BTC that is currently in circulation. Distributed supply of coins typically helps to prevent whales or large holders from manipulating the market. Decentralization of holders is just one part, one of the biggest strengths for Bitcoin is the decentralized system of compute power securing the ledger where BTC lives:
As the price of Bitcoin increases, there is potentially more competition for new coin issuance through the block reward. We touched on that earlier this week:
Computers, or “miners,” are rewarded with the new coins when they validate transactions on the ledger. Today, there are 6.25 new BTC issued through each new block. Next week, that figure will be down to just 3.125.
Regardless of how many coins are issued through new blocks, the competition for the block reward subsidy means there is no single entity that controls the supply of BTC. It can not be controlled or manipulated by central bankers. Anyone (with the capital and technical knowhow) can plug in machines and start mining. It’s entirely permissionless. This is the most significant selling point in my personal opinion - and coupled with the fixed supply - the lack of a central issuer is likely the largest reason Bitcoin has survived the narrative pivot from peer-to-peer currency.
Bitcoin Weaknesses
Let’s start with acceptance that, as currently constructed, Bitcoin is not the network for the masses that it was originally designed to be by “Satoshi Nakamoto” following the financial crisis. For some, this is perfectly fine. For others, much less so. But just because you or I may not transact in Bitcoin regularly, it doesn’t mean there aren’t people who are willing to do so. Transaction volume in recent weeks has indeed started to trend higher:
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