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Links 🔗
- Why Does Bitcoin Have Value?
- Modeling Bitcoin Value with Scarcity
If you follow me on Twitter, you will know that I am somewhat of a Bitcoin maximalist. With the price soaring to an all-time high last week, I figured that I would share two well-written articles on Bitcoin to get you started on it. Besides that, I've written a Twitter thread about my bull thesis of Bitcoin and 3 reasons why I'm investing in Bitcoin.
I've been scouring the internet for articles on Bitcoin written by Malaysian bloggers and most say the same two things:
i) it's a hedge against inflation
ii) institutional investors are investing in Bitcoin
and that's why you should be jumping on the bandwagon. Well today, I'm going for a different approach and share with you two fundamental factors that give Bitcoin its value.
Blockchain
- We often think that currency and payment systems are separated, you got the Dollar and you got Paypal.
- Bitcoin is both the currency and the payment systems. The payment system or P2P network is known as Blockchain and that's where the value is.
- Blockchain is a cloud-based ledger that allows property rights to be verified without having to depend on some third-party trust agency, therefore it's decentralised and trustless.
- There's no way I could cover the entire topic of blockchain in this newsletter. The TLDR is that people found this payment system to be useful and pretty much impossible to counterfeit, checking the box for utility and counterfeitability qualities of a successful currency.
Scarcity
- The key to maintaining a currency's value is in its supply which is why the unlimited QE by the feds has drawn attention to Bitcoin as a store of value.
- In the case of commodity, it is based on the mining production of that particular commodity and the stock-to flow-ratio is often used as a metric to determine it's scarcity.
- "Stock" = the amount that has already been mined and currently exists in the marketplace.
- "Flow" = the amount that is mined each year.
- This methodology won't predict precise price movements but it will allow us to understand the scarcity of a commodity and its potential long-term price trajectory.
- For example, if gold is becoming more scarce, then the stock-to-flow ratio should grow larger, which indicates greater scarcity and drive prices.
- A guy named Plan B used the same concept and built a stock-to-flow model for Bitcoin.
- The model has fit past price movements with extreme accuracy and predicted a price of $288k in 2024.
After doing my extensive research on Bitcoin, I believe that Bitcoin has a major asymmetric risk-reward profile and it could very well be a once in a lifetime opportunity.
But should you invest in Bitcoin?
That's totally up to you. You should do your own due diligence and invest in things you're comfortable in.
However, if you do decide to invest in Bitcoin, Luno is a great platform to start buying Bitcoin. Sign up with my invite link and get RM25 when you deposit and buy RM250 in $BTC, an instant 10% return.
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