Recently BofA analyst Francisco Blanch issued a report called “Bitcoin’s Dirty Little Secrets”. The long-form-pdf file states “there’s no good reason to own bitcoin unless you see prices going up.” And A “single Bitcoin purchase at a price of ~$50,000 has a carbon footprint of 270 tons, the equivalent of 60 [internal combustion engine] cars. So that becomes the question of the day. Is one bitcoin worth 60 cars?
Keeping in mind that this same investment advisor has also stated Bitcoin is “exceptionally volatile”, “impractical,” and an environmentally disastrous asset that is useless as a store of wealth or an inflation hedge. Of course, none of these statements address the fundamental question – Should I buy Bitcoin now?
The nature of Bitcoin is that the currency is based on a computational hash. Any commodity is priced according to its rarity. Gold is more expensive than Silver because it is less common. Diamonds are more expensive than Amethyst because it is less common. Bitcoins are “rare” because there is an intentional computation that makes new bitcoins harder to find. This process is called mining, and Bitcoin miners use power to create more bitcoins.
Worldwide Bitcoin mining uses a huge amount of computational power and needs electric power to run. The total power consumption is balanced against power price – as it would be impractical to mine if the cost of electricity exceeds the cost of Bitcoin. So as the price of Bitcoin goes up, more people mine it, and the more power is consumed by Bitcoin mining operations.
Unless you live in a tent, everything else in your life is balanced by this same power management discussion. For instance, your ability to travel on vacation is directly tied to airline tickets’ price, which is tied to the airline’s fuel cost. If fuel is cheap, you go far away, and if fuel is expensive, you stay close to home. I have never heard someone say they will defer a vacation because it would increase worldwide power consumption. The Bank of America analyst will not turn down the AC in his office because he is concerned about worldwide fuel consumption. To mix a personal choice with some over-arching goal is privileged thinking. Why not point out that the entire investment industry misuses computational resources to effect fast trading because slower trading would use less power? Newer computers use less power, so why does Bank of America still use old computers in their operations?
The author points out that the bulk of the Bitcoin Power Consumption problem is because Chinese miners use Coal Based power which is cheap in their area. Suddenly privilege markers abound because he mixes ethnic bias and nationalism into his discussion. The implication that power usage by Chinese people is bad leaves unstated that power usage by privileged Americans, which one a per-capita basis is four times higher.
The author is simply pulling out garbage arguments to save his privilege and his job. Bitcoin is just as valid an investment as S&P 500 index funds. No one knows if it will go up today or down tomorrow. What people know is that over the past 20 years, it has consistently gone up. Past performance is not an indication of future results.
If you invested $1000 in Bitcoin in January 2017 (1 bitcoin), your investment would be worth approximately $60,000 today. If you invested $1000 in the popular S&P ETF called SPY – (4 shares), your investment would be worth $1558 today. So over four years, SPY has returned about a 50% rise in value. Bitcoin has returned a 6000% rise in value Bank of America’s investment advisors charge approximately 2% per year to manage your account. So over four years, they would charge $80 for your SPY investment, lowering the net gain to only $300 for the four years. On the other hand, no advisor charges for Bitcoin, so you get the full rise in your pocket.
You can see that Bitcoin is a far better investment than Bank of America advisors can offer you. That is why they write garbage-filled misleading points that one Bitcoin will feed Chinese Menace Coal Miners and destroy the world.
You can easily offset the problem after Bitcoin makes you marvelously wealthy by donating a portion to the University of Sichuan to help disadvantaged Chinese youth. Do not forget to donate to the Unemployed-Investment-Advisor’s Children’s College Fund.
Bitcoin is not easy to buy. It takes many forms. The more you learn, the more lost you can feel. There are also many investment rules to follow. You can buy Bitcoin or any alternative like Ethereum, or Dogecoin, or Stellar Lumens. US Tax rules mean you cannot easily hold Bitcoin in an IRA.
One easy way to invest in Bitcoin is to purchase an ETF that holds Bitcoin. As an ETF, you can do this with your IRA. Also, the tax consequences are clearly defined since you are simply holding an ETF. The common EFT for Cryptocurrencies are Grayscale Bitcoin Trust (GBTC) or Grayscale Etherium Trust (ETH).
You can also purchase stock in companies that operate as miners like RIOT, and you will note that the stock movements in these companies follow the price of Bitcoin. Finally, there are hybrid bitcoin plays like Overstock (OSTK), which use to sell goods but became a big player in Bitcoin, PayPal (PYPL), and even NVDIA (NVDA), which makes chips that optimize bitcoin mining even though they are trying to get out of this business.
You should never invest all of your capital in a single investment. Bitcoin is volatile. At worst, it has at times dropped more than 90% of its value. That means a $1000 investment today might become $100 tomorrow. But over the past ten years, Bitcoin has proven to be a durable asset with explosive value. If you can spare some play money today, perhaps in four years, you will again see something that matches past gains.
Note: The author has been long GBTC since Bitcoin was $400, and often smiles broadly. Reprinted with permission.
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