Bitcoin

This bear market will give me a chance to buy BTC.

What is Bitcoin?

Bitcoin is a trustless and distributed database/network running a shared ledger.  If that means nothing to you, the best explanation is:

If you buy bitcoin you need to watch the 30 minute video to understand it is.  Even if your'e just trading, you have to know what it is so you can risk manage and position size it (can it go to zero?).  Its also the foundation for understanding other cryptocurrencies.  Chapter One of Crypto for Dummies.

Key points derived from the above:

• Bitcoins are just the unit of currency on a shared ledger.  There's a maximum of 21 million of them.
• No one controls the bitcoin network.  All miners together agree on changes to the ledger by following the protocol.  This is the mind blowing thing about it - its a ledger/currency with no centralised exchange or backing.  The closest thing in the real world is gold.
• The only way to control is to gain control over more than 50% of the mining power.  Then the next valid block is whatever you say it is.
• No one can just change the ledger (or the code implementing it).  If you did this, you are creating a new, separate network.  You could call it "Bitcoin2" but its not worth anything, unless the rest of the world agrees with you and joins your network (starts mining on it).
• Bitcoin transactions are slow by design.  By itself, bitcoin is not suitable to use as everyday money.
• Holding a bitcoin just means it is assigned to an address (public key - just a long string of digits) to which you - and only you - have the private key (another string of digits, specific to that public key).  If someone else gets the private key, they can transfer the bitcoin.  If you lose the private key, you lose (access to) the bitcoin forever.
• All bitcoin transactions are stored on the blockchain forever.  Someone with enough resources and motivation (like the FBI or IRS) could trace the trail of addresses back to the money initially used to buy it.  I wouldn't use bitcoin at a strip club, for example.

Bitcoin Trends

Increasing Adoption

As bitcoin is more widely adopted as a store of wealth, it becomes more valuable, so more likely to be adopted.  A  bit like gold, which is valuable because its rare, fungible, (a bit) divisible, and because everyone else values it.  As bitcoin was the first electronic and trustless store of value, it has a first mover advantage and a network effect.

If the lightning network gains enough users, bitcoin may end up being used as everyday money.

Cyclical Trends

Bitcoin is 'digital gold' but it doesn't trade like it.  It trades as a risk on commodity.

Before 2020, it was uncorrelated with the S&P 500, after that it correlated weakly:

Source: IMF Blog, Jan 2022

I'm waiting for the end of this correction to buy it.

Threats

Regulatory Threats

Bitcoin is not under threat from the SEC, it is not a security.  It never underwent an ICO.  The anonymous founder of bitcoin, Satoshi Nakamoto, mined his coins it along with everyone else after introducing it in 2009.  He never issued bitcoins to "investors".

The IRS is asking about cryptocurrencies 2021's tax return.  While this makes it harder to use bitcoin as money (having to calculate capital gains tax every time you 'sell' to BTC to buy something), it means the government is unlikely to ban it.

Decentralisation

The bitcoin network is highly decentralised.  No one controls it, and even the US government could not shut it down if they wanted to.  The best they could do is to limit people from buying it on (most) exchanges.

China used to have a 75% share of (power used in) bitcoin mining, potentially giving the CCP control of the network.  After their crackdown on bitcoin mining last year, they now have less than half.  This was the biggest threat to the bitcoin network.

Technical Issues

The protocol is simple and has been tested for years, with no bugs or exploits.

Quantum computing will be a threat later, allowing a private key to be derived from its public key.  I think there are quantum resistant algorithms that the bitcoin network can fork to.  But I'm not sure (quantum-proof, or quantum resistant?).

ESG

This is the biggest long term threat.  Bitcoin scores poorly on ESG criteria, because of its power usage.  Other cryptocurrencies that don't use Proof-of-work may be more widely accepted.

USDT and Leverage

This is the biggest short term risk.

Tether (USDT) is a stablecoin commonly used to buy bitcoin.  Its issued by a Hong Kong company, who says the USDTs they issue are backed by real-world USDs.  This has never been proven.  A collapse in USDT would hit bitcoin (and all cryptocurrencies) hard.

My gut feeling is it will happen sometime.  Any bubble - any asset rising 100 times in under 10 years - is going to attract both leverage and crooks.

Conclusion

I think the bitcoin network is stable, tested, growing and legal enough that it will still be around in ten years.

Crypto is the ultimate "risk-on" asset.  Bitcoin has fallen around 50% since its highs early last year.  I plan to buy some when the correction ends, or is over, using Hedgeye for market timing.  Its so volatile, and the risks are so great (Tether), I don't want to hold it through a down market.

Or wait for Tether to crash/de-lever the whole crypto market so badly that no one wants to buy.  Then nibble at it.