Simple and outlandish arguments can be infectiously persuasive.
I’ve been investing in Bitcoin (BTC 1.24%) on and off for more than 10 years now, but I never quite had the conviction to hold onto my coins for very long. After all, it’s doubtful that the coins will ever have real utility like a precious metal might, and there’s certainly no major nation-state or equivalently powerful actor supporting its value or accepting it as a medium of exchange.
A couple of years ago, however, I heard an absurd argument that completely sidestepped all of those concerns, and now I’m convinced that I’ll be buying and holding Bitcoin forever.
Value is a social phenomenon
We use dollars as our primary currency every day. Despite the fact that a piece of paper with a U.S. president on it will never be inherently useful for any productive industrial purpose, there are many people worldwide who recognize that such a piece of paper is still valuable.
In fact, people are so deeply convinced that dollars are valuable that they’re habitually willing to trade their time, effort, and other resources to acquire them. In other words, there is a widespread social consensus that the pieces of paper known as dollars are themselves exchangeable for other people’s resources.
There isn’t yet such a consensus about Bitcoin, despite its dramatic strides in becoming more widely accepted as a store of value. Nonetheless, there’s a popular stereotype that posits the existence of a group of diehard cryptocurrency enthusiasts who are utterly convinced of Bitcoin’s merits regardless of what anyone else has to say about it, to the point of being delusional.
Detractors will claim that such investors are accumulating Bitcoin out of an inability to discern that the digital coins are in fact worthless because they’re not useful for doing most of the transactions that one needs dollars to perform. On that point, the detractors seem to be right; if you’ve ever tried using Bitcoin to buy a burrito, you have probably gone home hungry. The financial infrastructure for using it for daily purchasing just isn’t there, and it doesn’t appear to be on the way.
But the bears miss a much more important point. The people with a cult-like appreciation for Bitcoin are so convinced of its value that they are effectively immune to any attempts to dissuade them, no matter how adept, extensive, or factually correct the objections may be. They simply don’t care; their minds are made up, and, if they’re to be believed, their opinion on the matter is set in stone. They’re practically indoctrinated, because they’ll always be willing to buy Bitcoin from someone who doesn’t believe in it anymore.
And if they can help it, they’ll never sell a single fraction of a Bitcoin. In their view, as the coin’s mining difficulty increases over time as a result of halvings that are encoded into the protocol, fewer and fewer new tokens will be added to the ones circulating, and the price will go up. So to them it’s rational to buy it at any price, because in the future it’ll be higher.
Put differently, the existence of these serious Bitcoin aficionados implies that the coin cannot go to zero, as even if the price falls sharply, there will still be individuals who want to buy it so long as they have the dollars or other currencies to do so. Therefore, there is a floor for the price of Bitcoin.
They think that this perpetual buying behavior will be rewarded in the long run. The group exerting constant upward pressure on the coin’s price is responsible for providing a baseline level of demand that produces the price action they desire. They invest and evangelize as knowing acts of self-fulfilling prophecy.
So far, they have been rewarded handsomely for their conviction. And, so the absurd argument goes, you don’t even need to believe in the Bitcoin protocol’s merits to see why it’s a good investment — you just need to believe that the zealots exist, and they’ll take care of the rest.
There is no guarantee it’ll go up forever
Could it really be the case that a relatively small clique of evangelists is all that Bitcoin needs to grind upward forever?
It doesn’t sound correct. But it probably is. More investors are adding the coin to their portfolios every day, and there will never be more coins in existence than the 21 million described in the protocol.
When taking the diehards into account, any growth in the coin’s investor population at all implies that prices will rise even if the new converts aren’t as convinced. Of course, it’s possible that investors’ conviction will be fickle. It’s also possible that Bitcoin’s value will fall tremendously and then never recover, making it a terrible investment.
But the bullish argument is persuasive because it acknowledges that the direct utility of a currency can be a separate issue from its role as a store of value. Likewise, all something needs to be a store of value is for other people to believe that it is and behave accordingly. For Bitcoin, the belief is already there, so that’s why I’ll be slowly buying it for quite some time.