To Hold Bitcoin or Not? Here are 3 reasons
From Tesla CEO Elon Musk to the cashier at Walmart, everyone has their reasons to buy Bitcoin. It doesn’t matter if you’re a trader, an investor, a financial advisor, or a billion-dollar publicly traded company. Everyone buys it for three possible reasons. In this blog, we detail the three reasons and why you need to figure out what your reason is before buying Bitcoin.
The Bitcoin Revolution
Bitcoin was created in 2008 in the aftermath of the financial crisis as a universal, permissionless, and decentralized medium of exchange and store of value. No government, bank, or person could control it. It was an answer to the centralized, government-controlled currencies of the world. Bitcoin was to be the currency of the internet, not routed through banks, settled in dollars, or printed by governments.
With such an extreme objective and ardent opposition, the early days were a “Bitcoin Revolution.” The early adopters purchased the cryptocurrency to be a part of the revolution. Their main goal was to use a decentralized currency as a “medium of exchange.” Transactions, away from government networks and banking rails, was the aim, and Bitcoin provided it.
There were other iterations of Bitcoin previously like E-cash and Liberty Reserve, but BTC is different for three reasons. First, its creator(s) – Satoshi Nakamoto is pseudonymous. Second, BTC is limited with a decreasing supply. And third, BTC is verifiably scarce, this means at any given time, anyone can verify how many Bitcoins are in existence.
The early adopters aren’t in Bitcoin for the money. They are holding onto Bitcoin because it’s the only decentralized disintermediate currency in the world. They hold onto it in case traditional fiat currency collapses or the government seizes all forms of wealth. This is why the early adopters hold BTC on external cold storage platforms. This could be a hard wallet, disconnected from the internet. Or, a decentralized soft wallet, unlinked to a centralized exchange like Coinbase, Gemini, or Binance. The goal for the revolutionaries is to support a medium of exchange decentralized currency against the government and big banks.
The Bitcoin Macro Hedge
Bitcoin was the best performing investment in the last decade. Better than gold, the US dollar, or any FAANG stock. In the midst of this economic crisis, Bitcoin is up by 800%.This is the macro hedge of Bitcoin and emphasizes why it is such an important ‘store of value.’
A ‘store of value’ is an asset that retains value over time. This was the title given to gold. But recently, investors have taken to digital gold as a store of value. The main reason why BTC and gold are stores of value is because they’re scarce. But Bitcoin is not just scarce, but verifiably scarce. It has a fixed supply of 21 million. Already 18.5 million or 88% of all Bitcoins are in supply. At any time, the total number of Bitcoins in existence can be verified.
Compare this to the unlimited supply of any fiat currency. Whenever these currencies increase supply, through quantitative easing, decreased interest rates, or stimulus packages, inflation arises. This results in increasing prices of goods and services. In a situation like this holding an asset with a limited supply, like Bitcoin and gold, will retain buying power. This means during inflation, the value of scarce assets will go up.
This is why companies like – MicroStrategy, Tesla, and Square are buying Bitcoin. And why institutional investors like Paul Tudor Jones, Stanley Druckenmiller, and Bill Miller are bullish on Bitcoin. They expect BTC to retain value, much more than the US dollar.
Since these companies and investors are buying Bitcoin by the millions, they need security. They’ll look at external third-party custody providers, ones with insurance, or go for verified hard wallets having authenticated cold storage. The goal is to hold a store of value assets for the long term.
The Bitcoin Micro Bet
Bitcoin is also a favourite of retail investors. These are everyday people like you and me who play Bitcoin’s volatility. These investors look at Bitcoin in the micro view. They aren’t bothered about the revolutionary aspect or the macro hedge aspect. They just want returns quick and fast.
These investors allocated a certain amount of Bitcoin exposure in their portfolio. This is based on the expected returns and safeguarding against volatility. Every few months, quarters, or years, they rebalance their portfolio. The BTC gains are put into equity or bonds because they still see traditional investments as safer than cryptocurrencies.
Investors like these might not self-custody the crypto either in a hard wallet or any external cold storage. They will use third-party custody like an exchange address which also provides immediate liquidity to play on the volatility. Other specialized financial products like exchange-traded funds (ETFs) could also be used to gain exposure to Bitcoin. More sophisticated investors could also have a separately managed account with a financial advisor.
The goal here is reaping the price gains of Bitcoin for the short term.
Find your reason
Each reason is different. Whether you’re part of the revolution, protecting against inflation, or want to profit from volatility, find your reason to buy and hold Bitcoin. Once you do find your reason, stick with it and ignore the noise. You don’t need to worry about the ‘overhaul of the banking system’ if you want to make short-term price gains, or worry about the volatility if you’re in need of a decentralized global medium of exchange. Ignore what isn’t relevant and stick to your reason.
Once your reasons for holding Bitcoin are clear, you should make an investment plan. We explain what this means here.
If you’re interested we have a course for retail investors. Check it out here.
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