- 1 Bitcoin Investment Theses (Part 1)
- 2 A. Short holding period, wide adoption
- 3 1. Retail payments
- 4 2. Micropayments
- 5 3. Machine-to-machine payments
- 6 4. International remittances
- 7 B. Short holding period, narrow adoption
- 8 1. Tax evasion
- 9 2. Black markets
- 10 3. Ransomware
- 11 4. Online gambling
- 12 5. Unbanked businesses
- 13 6. Speculative trading
- 14 7. Ponzi scheme
- 15 8. Money laundering
- 16 9. Routing around capital controls
- 17 10. FOMO buyers
- 18 11. Vehicle Currency
- 19 12. Electricity monetization
Bitcoin Investment Theses (Part 1)
We can classify the investment theses for ( and against ) investing in Bitcoin into categories. This helps clarify how much of an shock a given narrative could have to Bitcoin ’ second valuation. investment theses that have a shortstop have time period are less meaningful for investors than ones with a long hold period. Likewise, theses with a large number of potential adopters are more meaningful for investors than ones with a small phone number of potential adopters. This is an imperfect heuristic that should be debated and refined . investment theses with a curtly hold menstruation are focused on using bitcoins as a method acting of payment. Some of these theses would find omnipresent custom while others are recess verticals. If you disagree with anything written here, feel free to contact me on Twitter or on GitHub .
A. Short holding period, wide adoption
1. Retail payments
thesis : Bitcoin, whether it ’ s on-chain, off-chain, or Lightning, will supplant stream retail payment methods including cash, checks, and credit cards. Bitcoin ’ sulfur advantage over cash and checks is that it is digital, the consumer entirely needs a smartphone and the retailer does not have to worry about handling cash or depositing checks. Bitcoin ’ sulfur advantage over credit cards is lower transaction fees, irreversibility which protects the merchant, and a “ push ” system with no credit card numbers — which protects the consumer. Fast colony means that merchants require less in working capital.
Reading: Bitcoin Investment Theses (Part 1)
Anti-thesis : reversibility increases consumer confidence. A “ pull ” organization enables subscriptions which are an significant occupation exemplary. On-chain transactions can not scale without centralizing the Bitcoin network. Off-chain and layer 2 transactions have an up-hill conflict against entrenched debit and credit card payment systems. Credit cards give consumers flexibility in financing their purchases. many countries have already deployed requital systems that are instant with low to zero fees. Consumers who acquire bitcoins with the purpose of making retail payments end up good holding the bitcoins for price taste rather .
thesis : Bitcoin ’ s Lightning network enables instant, high-volume micropayments. Micropayments will be leveraged by on-line games, content publishers, and social media tipping services to monetize interactions and consumption. Anti-thesis : Subscriptions provide a better tax income model for content publishers and social media tipping ignores why people actually engage with each other. Game creators and players presently have no serious issues with in-game purchases. If there are any complaints, it ’ s from players who feel nickel-and-dime, which would merely be worse with micropayments .
3. Machine-to-machine payments
dissertation : The Internet of Things ( IoT ) means your refrigerator could communicate with several grocery occupation APIs to negotiate for the best value refilling. Soon the grocery store commercial enterprise itself will automatically be negotiating with self-driving cars providing delivery services. This network of machine-to-machine payments will all be with Bitcoin ’ s Lightning Network. Anti-thesis : It ’ south indecipherable why the businesses, which own the machines, would not invoice each other on a monthly basis, alternatively of continuously streaming payments. Companies will continue to keep track of their payables and receivables, and netting them out for payment, in which case Bitcoin is not a necessity. Today Amazon Web Services charges by the second and can be controlled by an API, but payments are made monthly with fiat-denominated credit cards, cable transfers, or ACH .
4. International remittances
dissertation : money transfers between countries are expensive and slow ; Bitcoin can make them fast and bum. Anyone, anywhere in the global who has an internet connection can receive bitcoins. Anti-thesis : Senders want to send their local decree currentness and recipients want to receive their local anesthetic decree currency. Neither side has bitcoins. Using Bitcoin means adding an FX conversion on the transmitter ’ mho side and on the recipient ’ south side. This inherently increases cost. The cost of sending $ 200 anywhere in the world has declined from 10 % in 2008 to 7 % in 2017. money transfers are expensive due to physical locations, selling, license, and conformity. Bitcoin on its own does not solve any of those issues. The slow decree payment rails are being improved by fintech startups using decree banks and SQL databases .
B. Short holding period, narrow adoption
1. Tax evasion
thesis : good as restaurant waiters can under-report their cash tips, a person or business receiving bitcoin revenues could under-report them. There is no fiscal institution which the IRS can subpoena for records. If the tax evader is careful about how they use Bitcoin ’ s public blockchain daybook then they can besides avoid being caught with data psychoanalysis. Anti-thesis : tax auditors have experts in computer forensics and there ’ second constantly a composition trail for the initiation and sale of a thoroughly or serve. It would be hazardous and meter consuming to convert the proceeds into decree. Tax evasion does not scale due to whistle-blowers, coverage by third gear parties ( 1099 ’ south in the US ), and the lifestyle/income mismatch .
2. Black markets
dissertation : Before it was shutdown in 2013, the Silk Road was a marketplace for illegal drugs. It had tens of thousands of users and $ 22 million in annual sales. In 2017, a successor of the Silk Road called AlphaBay was besides shut down. It was ten times the size of the Silk Road with hundreds of thousands of users. Bitcoin enables the sales of illegal goods and services because it is a permissionless, censorship-resistant payments network. Anti-thesis : ultimately most goods and services have to be delivered in the real global, sol evening if the requital is pseudonymous the delivery can reveal the identities of buyers and sellers. additionally, even if the bitcoins are bought and sold in person for decree cash, there is a risk that the bitcoin broke is an witness or government agent. Buying and selling bitcoins on an on-line exchange with KYC/AML is even riskier. This problem is compounded by the visibility of on-chain Bitcoin transactions .
dissertation : Ransomware is when malicious software encrypts a drug user ’ mho data, locking them out of personal or business information. The virus demands payment in bitcoins to decrypt the datum. Anti-thesis : Increasing awareness of the problem is leading to effective extenuation strategies, whether with anti-virus software or offline data backups .
4. Online gambling
thesis : While on-line poker is legal in the United States, in rehearse the Unlawful Internet Gambling Enforcement Act of 2006 made it illegal for fiscal institutions to service on-line poker platforms and players. This finally led to the wide use of Bitcoin for funding on-line poker games. The phenomenon has expanded beyond poker. There are Bitcoin-funded sites for sports betting, blackjack oak, dice, and slots.
Anti-thesis : If US legislation changes to be more favorable towards online gambling then this niche for Bitcoin could disappear .
5. Unbanked businesses
dissertation : requital processors and banks are facing coerce to not service businesses for political reasons. These businesses include gun stores, cannabis dispensaries, and arouse workers. early businesses and individuals do not have access to bank services due to redlining or credit history. A Bitcoin wallet enables these demographics to “ be their own bank ” with a check bill and the ability to send and receive payments. Anti-thesis : vitamin a long as the rest of the economy is using decree currencies, the unbanked still need a direction to exchange their bitcoins for decree. They can use in-person cash substitute services, though there are cases of people being robbed and it is not a scalable solution for anything but the smallest clientele .
6. Speculative trading
dissertation : Bitcoin exchanges are open for trading 24/7. On top of Bitcoin ’ s volatility, they besides offer up to 100x leverage. Tech-savvy traders are building bots that use the exchanges ’ public APIs to execute their strategies. The match engines of exchanges are moving from AWS to dedicated host, in the same facilities where US equities trade. Exchanges are the most profitable businesses in the Bitcoin ecosystem, offering both spot and futures products. Speculators can immediately profit by going hanker or going unretentive. The limited supply of bitcoins has led to repeated inquisitive frenzies, where fortunes have been made and lost. Anti-thesis : meditation is zero-sum, finally bad traders will run out of capital and good traders will see diminishing profits and move to greener pastures. Bitcoin ’ sulfur volatility has been decreasing as its fluidity increases. The markets are manipulated to favor whales and they will be shutdown or become drilling when government regulators intervene to stop manipulation. The inquisitive frenzies are faked by wash-trading bulk and fractional reserve exchanges .
7. Ponzi scheme
dissertation : While Bitcoin may not fit the definition of an actual Ponzi system, it has a bunch of similarities. Preston Byrne popularized the concept of a Nakamoto Scheme. early buyers of bitcoins recruit and sell to later buyers, at ever higher prices. The cries to “ HODL ” are there to prop up the price and keep the scheme from falling aside. “ Tulips ” and “ greater fool hypothesis ” are used as shorthand for this thesis. Once the number of gullible buyers runs out, the price will crash as everyone tries to get out at the same clock, much like a bank run. Anti-thesis : Every money has no intrinsic value. They are bubbles, shared illusions, inter-subjective Schelling points. A money is an unproductive asset which is best suited to be society ’ s medium of exchange, storehouse of respect, and unit of report. Bitcoin is bootstrapping to potentially fill that function from a measure of zero. This has led to an astounding runup in its decree price. What goes unexplained in the Ponzi schema thesis is why severe drawdowns ( most recently a 91 % extremum to trough drawdown in 2014 ) are not a deathblow. so far, the value of Bitcoin has recovered and ultimately has increased beyond the previous all time high gear .
8. Money laundering
dissertation : Corrupt politicians who were bribed with bitcoins want to convert them into legitimate assets without raising suspicions. The money launderer can take advantage of Bitcoin ’ s fragmented grocery store by sending belittled amounts to many unlike exchanges to sell for decree, a kind of structuring. A money launderer can besides mix the illegal Bitcoin revenues with legal Bitcoin revenues, for exercise from an on-line poker business they control or spouse with. A growing scheme is purchasing property with bitcoins, and then selling the property for decree. Anti-thesis : Any participation of Bitcoin raises suspicion, so laundering bitcoins is ultimately harder than laundering decree. Data indicates that Bitcoin money laundering has been an increasingly bare natural process. Bitcoin faces potent rival from boastfully international banks, which continue to be the go-to providers of money wash services .
9. Routing around capital controls
dissertation : Countries which have a currency peg, like China, have to rely on das kapital controls to prevent their currentness ’ mho exchange pace from appreciating or depreciating in an unexpected manner. For model, chinese citizens can only purchase up to $ 50,000 of foreign currentness per year. taiwanese regulators have besides recently prevented offshore investments into U.S. substantial estate. Bitcoin allows people to route around capital controls, by buying bitcoins locally, sending them to an exchange overseas, and selling them for the alien currency. Anti-thesis : While Bitcoin can help small-scale evasion of capital controls, it is not fluent enough to capture grocery store contribution from other forms of evasion. Governments have and will crackdown on their local Bitcoin exchanges to foster reduce fluidity .
10. FOMO buyers
thesis : retail investors see the price going up and experience a “ fear of missing out ” on foster price gains and the sociable phenomenon. Individuals want to be able to relate to each early, i.e. if your friends are talking about investing in Bitcoin then you feel a motivation to do so yourself. When the price stops going up parabolically the social fad cursorily passes. Conversation turns to embarrassing losses and moves on to the following trendy investment. Anti-thesis : The FOMO buyers become FOCO ( fear of cashing out ) holders. They sit on the bitcoins they impetuously bought, waiting for the adjacent bubble. A little share begin to research what Bitcoin is and continue accumulating during the hold market .
11. Vehicle Currency
dissertation : In 1979 Paul Krugman published a paper titled “ Vehicle Currencies and the Structure of International Exchange ”. In this composition he explained that “ People who want to exchange one currency for another will not inevitably make the change directly. They may make the exchange by way of some third currency, which becomes a “ vehicle ” for the transaction. Historically, certain currencies — the pound greatest before 1914, the U.S. dollar in late years — have come to be widely used as vehicle currencies. ” Bitcoin has the potential to become the vehicle currency of international trade.
Anti-thesis : Bitcoin is not about fluent adequate to be a vehicle currency. Competing with the U.S. dollar for this is extremely unmanageable, the most probably candidate has been the euro and it has made little build up .
12. Electricity monetization
dissertation : Governments and individuals that are struggling to get hard currency can use cheap local electricity to mine for bitcoins. The venezuelan politics has been seizing imported Bitcoin mine equipment so that they can use it themselves. The north korean government acquired 11,000 bitcoins through a combination of mine and hack. Anti-thesis : As Bitcoin mining finds increasingly cheap sources of electricity, it will become less and less profitable for governments to mine tied if they have friendly access to fossil fuels .