reason #12
BITCOIN is not as volatile as you think
The most common complaint about Bitcoin is its tear-the-skin-of-your-face volatility. Most people are puzzled by this volatility so I embarked upon a quest to try and explain this through comparisons. When you look back over the past 25 years, there have been many system changes. Amazon was the first company to harness the power of the internet and scale its growth into exponential adoption of e-commerce. So I decided to study the price action of Amazon since it was listed in May 1997.
It listed at around 9 cents and guess what happened over the next 30 months - it gained 5,855 percent to 536 cents. In other words, it went up 200 percent every month. The next 24 months were brutal for Amazon as the tech bubble burst and Amazon declined 93 percent. It then rallied 634 percent between October 2001 and January 2004, only to decline 51 percent to August 2006. Over the next 15 months, Amazon stock gained 250 percent only to decline 60 percent in the wake of the 2008 financial crisis. Between 2008 and 2021 Amazon rallied almost 10,000 percent or 64 percent per month. That is a wild ride for a company that is now one of the largest in the world with broad institutional ownership and a market valuation of over 1 trillion dollars.
The adoption of new technology and paradigms are seldom smooth. Look at the first 20 years of Apple's life. The stock traded in a violent range between 9 cents and 124 cents. Its stock price fell 78 percent during the dot.com bust. It declined almost 59 percent with the Lehman Brothers crisis but since then it has delivered exponential returns to shareholders. In the 12 years following Lehman Brothers, it has gained 5,600 percent as it roared from 3 dollars to 172 dollars.
Who is rewarded the most when it comes to investing in life-changing technologies? The patient - those investors that are able to look through all the noise and never lose focus of the long-term thesis.
So how did Amazon change the world? It was not the first bookstore to sell online. Books.com was launched in 1992. But its vision was beyond books. Bezos wanted to create an everything company and today, 25 years later, Amazon has reshaped retailing permanently. Shopping can be hard work wandering down multiple aisles looking for stuff, dealing with crying and nagging kids, and waiting in long checkout lines. Today, stores reach out to shoppers anywhere, anytime and through multiple channels - and while they are at it, they will stream your video and, if you are in the mood, they will also store, manage and protect your data.
Apple changed the world by laying the foundation for the first smartphone ushering in an era when you can literally do anything with a device that fits in your pocket. Before that, back in the 80s, they brought computers into the mainstream, changing the world as we know it.
So how do Bitcoin and cryptocurrencies plan to change the world? Firstly, it will disrupt traditional finance first due to its ability to make instant cross-border payments with little or no cost, delay, or foreign currency fluctuations. This could set Bitcoin up as the next global reserve currency. Secondly, it makes e-commerce stronger. Crypto is money for the internet. Our current payment systems were never built for a digital economy - they represent a square peg in a round hole. Thirdly, they offer a stable alternative to unstable currencies. Speak to someone in Venezuela and ask them how important crypto is in their lives and you will be amazed by the response. Finally, crypto allows you to take control of your money. It makes possible a world without banks and counterparty risks, where you have safe and easy access to your money without asking permission from a financial intermediary.
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This is not to say that Bitcoin is not risky. Here are the six biggest risks that Bitcoin faces:
1) Cybertheft
Bitcoin is technology based which means that it is open to cyberattacks with exchanges the most vulnerable to attack. Crypto exchanges are the banks of cryptocurrencies and therefore the intense focus of hackers. As the saying goes, if you want to steal something - go where there is a lot of it. Traditional banks, however, are also vulnerable to cyberattacks.
2) Fraud
In addition to hacking, there is a fair amount of fraud in the crypto market. Exchanges can be fake or set up with pretenses. FTX could be a good example, although the jury is still out on this one. It is yet to be proven that Sam Bankman-Fried was a fraudster like Bernie Madoff - it may be that he was a terrible banker. Banks use customer money all the time. It is possible that SBF did not steal customer money - he traded it and found himself on the wrong side of the market.
3) Little or No Regulation
I am not a total libertarian. I like a little regulation. A few smart rules go a long way to maintain order in a world that is sometimes a little crazy and unhinged. The Bitcoin market is currently operating without any major regulations. Governments do not have a clear stance on cryptocurrencies on account of the relative newness of the market. It is difficult to tax which could lead to problems if Bitcoin starts to pose a major threat to government currencies. As of today, it is not widely accepted as a currency, but the future is ever-changing.
4) Technology Reliance
Bitcoin relies heavily on technology. Coins are digitally mined, exchanged via a smart wallet, and stored either online or offline. The underlying value of any cryptocurrency is the strength of its underlying technology. They have no physical collateral to back them up. With gold, real estate, bonds, or mutual funds you own something that can be exchanged. With crypto, you are 100 percent reliant on the underlying technology.
5) Block Withholding
New Bitcoins are created by solving complex mathematical equations called blocks. A mining pool can use computational power to mine a block and hide it from honest miners instead of reporting that new block to the network. Essentially, this is a way for a select few to reap the benefits while the others are left with nothing.
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6) Young Technology
Crypto is still a very young technology. Bitcoin is only on the point of becoming a teenager and there is still no telling how the market will evolve. It has all the potential to become something great but the risk of investing in it is still high.
