Bitcoin: Hold On for Dear Life

HODL – Hold On for Dear Life – is an acronym for those searching for some means to preserve their net worth in this day of ever-depreciating forms of money. And who can blame HODLers? Just consider the U.S. Dollar today is worth the equivalent of three cents back in 1913 when the federal reserve system was established and, with it, the means to debase the nation’s currency in the blink of a central banker’s eye.

There must be a way to address this insatiable hunger for some absolute that is outside the arbitrary, whimsical, capricious clutches of man. There’s real estate, of course, with its fixed supply. Or maybe precious metals though that too has shortcomings.

We will discuss what role Bitcoin, with its defined scarcity, might have in the preservation, accumulation, and transfer of wealth. The subject becomes far less daunting once the mumbo-jumbo of the crypto vernacular is removed from what is essentially a pretty simple concept.

Start by imagining a game which can be played by anyone with an internet connection. The game features tokens (just refer to them that way for the time being) which can be acquired by players through purchase or otherwise “earned” (by means that are beyond the scope of and not terribly important to this discussion).

These acquired tokens are assigned to the player, and the player alone. The tokens may be transferred to other players. Anything done in this game, including the history of any and all transactions, is readily observable by anyone with a computer connection. This total transparency is a feature that supports the integrity of the system.

What is totally private, however, is the player’s personal identity. While each player has a public key, sort of like an email address, with which to send and receive tokens, the private key is known only by that player. If you lose your private key you’ve lost your tokens. Some fellow participants in our session may help us through the mechanics.

This anonymity assures that all transactions are instant, final, and private and thus outside the purview of any third party, financial institution or legal authority. While the opportunity for abuse is obvious, so are the efficiencies of such a system. One country has actually made bitcoin its legal tender in parallel with the U.S. dollar.

The key feature of the game lies in the token scarcity. New ones can be added to the current outstanding nineteen (+) million only through a daunting and increasingly limiting process that absolutely guarantees a cap on the cumulative total issuance to twenty-one million by around the year 2040. There is no central bank in this closed system to conjure up token inflation.

We will discuss whether and what value can be assigned to the system generally and to each token specifically. This is where nomenclature comes into play. The terms bitcoin and cryptocurrency make it sound as if money and currency are being moved around. They are not.

What is actually being transacted are tokens with the value of each set by a simple supply and demand dynamic. It might be better to think of bitcoin as a unit of account on a general ledger that supports a vast kind of bartering mechanism. With real money (or goods) put into the system and real money (or goods) taken out, the system is essentially a transfer mechanism.

That finite token supply, however, insulates it from the kind of abuse first warned about in that well-known dictum by banking cartel member Mayer A. Rothschild “Give me control over a nation’s currency, I care not who makes its laws” such that we ended up with a private (yes, private) federal reserve acting under the color of a public authority and, with it, a nation so indebted – and this is math, not politics – that it points to some form of default, Weimar-style or otherwise. We might entertain a discussion about the possible role of cryptocurrency in the context of some sort of debt jubilee.

The more immediate question is how one might value this Bitcoin ecosystem as a potential refuge from a world of ever-depreciating currency. Bets on its valuation can be taken through one of the publicly traded bitcoin-holding trusts that are treated as a security (one with the convenient symbol HODL) that can even be held in a tax-free account. These are useful only as a valuation play on this new financial ecosystem and not to be confused with the purchase of bitcoin as a means for secure and anonymous transfer.

Detractors scoff at the notion of Bitcoin as a store of value saying that such artificial scarcity is an oxymoron given that, while Bitcoin alone may be a resolutely closed system, what's to stop the proliferation of similar “manufactured scarcity” products? By what logic can a virtual platform command a value at the current “market cap” of almost twenty million bitcoins at $60k a pop or about $1.2 trillion?

There certainly is an article of faith when it comes to the search for something of absolute value. Warren Buffett labeled gold a pet rock. Perhaps bitcoin is but a pet algorithm. Or the dollar is but a pet “full faith and credit.”

Due Diligence: Bitcoin remains the predominant finite-supply platform in a burgeoning barter universe and the bitcoin price goes to the moon; or, the bitcoin demand fades on either count and they are dust in the wind.

Choose wisely.