You don’t have to be a financial genius to grasp that you would have become a whole lot wealthier if you’d been holding Bitcoin over the last few years.
But to many people, investing in Bitcoin can feel like a gamble. The price has gone up – but what’s to stop it coming crashing back down again?
The more I have learnt about Bitcoin, the more I’ve come to understand that the things that bring Bitcoin’s price down are temporary glitches. China can ban it (again) and Bitcoin blinks. Elon can comment that it’s environmentally unfriendly – Bitcoin shrugs and carries on regardless. But the things that give Bitcoin its value are here to stay.
To understand how Bitcoin changes the face of money as we know it, we need to delve a bit deeper into what money is and how we use it.
Beads, shells and cattle have all been used as currency (in fact, the name of the stock market comes from the word “livestock”) but the best known types of money for many centuries and across many civilisations were precious metals. The most precious has always been gold, and we still value it today.
Gold won out because it was the hardest metal to produce, compared to its existing stock. Wherever possible, people have always tried to find ways to simply make more of whatever was used as money, rather than earning it. We know this increase in the money supply as inflation. It brings us directly to the value proposition of Bitcoin, the hardest money ever invented. There will only ever be 21 million, based on completely fixed supply schedule rewarding those that choose to opt-in and drawing value like a black hole from everything else.
In order for something to be used as money, it needs to be able to do three things. We need to be able to use it as a unit of account, a medium of exchange and a store of value. In layman’s terms: we need to be able to come to agreement about how to measure its value, we need to be able to agree about what we can buy with how much of it, and we need to be able to keep it for long periods without it rotting, rusting, dissolving or otherwise deteriorating.
For ancient people it’s easy to see why gold and silver were attractive. Standardisation of weights and measures meant that people could be certain that the gold coin from, say Macedonia was worth the same as the gold coin of the same weight from Athens and silver coins made up for the fact that it was difficult to pay small sums with gold.
Translating this into modern times, we can’t help but feel that the euro is a poor replacement for gold and silver. Above all, the euro, although it works quite well as a unit of account and medium of exchange, is a hopeless store of value.
Inflation is the rust which eats away at our savings if we keep them in euros. It’s tempting to look at Portugal’s comparatively low inflation rate (1.3% annual rate compared to, say, Poland at 5%) and think that our savings are relatively safe. But it’s the principle of the thing. The point is the 10,000 euros today would buy you considerably less than 10,000 euros would ten years ago. While one Bitcoin today buys you astronomically more than one Bitcoin would have ten years ago.
Bitcoin is a value proposition like no other we have ever seen. It is the best store of value there is, appreciating greatly in value the longer you store it. It is divisible into fractions for small payments (each Bitcoin is made up of 100 million satoshis – at the time of writing one Satoshi is worth 0.00036 euro) and, unlike gold (which is hard to transport) it can be transferred in the blink of an eye. No wonder Bitcoiners call Bitcoin digital gold.
But is it for you?
We’re all used to a certain degree of comfort around our finances. Lost your bank card? No problem. The bank will send you another. With Bitcoin, it’s not like that. If you lose the phrase which gives you access to your funds, you have lost your funds. In this sense, Bitcoin is not for the faint of heart. If you want to take the financial gain it brings and, dare I say it, participate in the innovation it brings to money, you need to step up and be prepared to actively take responsibility for your finances too.
Diversifying investment is always a good strategy, balancing out high risk and low risk investments. Considering the inherent risk of the euro, vulnerable as it is to inflation and the uncertainty of other traditional investments like real estate, putting a part of your wealth into Bitcoin, even if (or especially because) you and you alone are responsible for it seems the best strategy for a good long term return.
For expats living in Portugal the tax implications of their investment portfolio is also a crucial consideration. Portugal welcomes those who store their wealth in Bitcoin, imposing no capital gains tax on it. Reason enough to buy Bitcoin, hold tight and enjoy Portugal’s welcome.
If you want to learn more about the history of money and the role Bitcoin plays, I’d highly recommend the Bitcoin Standard by Saifedean Ammous, an excellent and easy to read guide.