EDITOR NOTE: Most of us know that Bitcoin is a purely-speculative asset. You trade it if you’re a trader. Anything other than that and you’re gambling with your money, plain and simple. Bitcoin isn’t a widely-adopted medium of exchange. It isn’t a stable store of value. In short, besides “scarcity,” it doesn’t have any real function as money or as a safe haven despite its “branding” as both. It’s a herd play; one that has a great deal of FOMO sentiment behind it. But here's something even more disturbing: as dollars can be created out of thin air to support government spending, there are allegations that Tether and other “stablecoins” pegged to the dollar are being “created out of thin air” to pump up the price of Bitcoin. This is not unlike creating counterfeit dollars to buy Bitcoin, but because stablecoins aren’t officially “legal tender,” there’s no counterfeiting. If that’s the case, then what’s been fueling Bitcoin’s skyrocketing price is partly a scam. If you’re holding Bitcoin in your portfolio, it's only a matter of time before it buckles under the weight of its illegitimate value. The fall in price will be spectacular, and so too will be the loss of value in your investment.
When I bought my first bitcoin (BTC) in 2013 at 25 years of age, it was a small investment appropriate for my risk tolerance and stage of life. Not knowing much about it at first, I began learning all I could. My conviction grew, and in 2015 I invested much more, between $400 and $700 a coin. Little did I know I was about to go down a rabbit hole that would ultimately take me to a small town in central Washington state, building rudimentary data centers in garages to cash in on the bitcoin mining craze.
Bitcoin was designed to be a digital cash system. Unfortunately, the first real use case was Silk Road, an online marketplace for buying and selling illegal drugs. Although this gave bitcoin a bad name, the potential for its use in legal commerce was obvious. I liked the fact that a limited supply of bitcoins (21 million) was built into the protocol. It was a currency, not backed by a government but by computing power and law,1 so its value could not be inflated away. Bitcoin as a cash system was a very attractive investment in my view.
In the early days of bitcoin, because few people really understood how it worked,2 investors would send and receive units of bitcoin to gain a better understanding of the investment they had made. They saw their BTC leave one wallet and enter another wallet within seconds.3 In the early 2010s, instantaneous payment tools such as Venmo, Cash App, Apple Cash, and Zelle did not exist. Options for sending money were limited. An ACH transfer took several days and wiring money could take several hours at a cost of around $25, whereas bitcoin fees were less than a cent. Bitcoin had a magical feel to it.
Today, bitcoin fees are roughly $10 per transaction, yet the average investor has never actually used bitcoin for transacting. Why would they? Modern USD payment tools are far superior to BTC. Instead, investors are purchasing units of BTC on Coinbase and watching in awe as the value of their investment increases. Certainly, the magic remains, but because bitcoin has changed over time, investors need to work to stay informed about their investment.
By 2017 my BTC call had resulted in windfall returns. I decided to quit my job in quant finance, roll my BTC profits into bitcoin mining equipment, and move from sunny, beautiful Newport Beach, California, to (less sunny, less beautiful) Wenatchee, Washington. Wenatchee was situated next to a giant hydroelectric dam on the Columbia River in Chelan County and had the cheapest electricity in the nation at a cost of about 3 cents per kilowatt hour. Electricity is a bitcoin miner’s largest expense after the cost of purchasing specialized mining computers.
After purchasing a large number of these computers, I was up and running, making several thousand dollars a day. Sadly, the magic did not last long. Although I diligently abided by all regulation related to bitcoin mining in Chelan County, in January 2018 I had to shut down my mining farms because I was putting a strain on the electrical grid. To make matters worse, soon after that, the BTC price started falling, and my equipment, gathering dust, was depreciating even faster. Overloading the grid and being forced to shut down was a risk I had not contemplated. Lesson learned: Always know what you are investing in!4
Originally posted on Research Affiliates