I'm not a lawyer, financial advisor, professional investor, or librarian, so everything on this page is my opinion.
Personally, I do not see Bitcoin as an investment, which may surprise you. You may have heard that you can make money by “investing in bitcoin”, and in fact, some people think of bitcoin is a stock (it's not), but that's only part of the picture of what's going on with bitcoin. I can relate, because the main reason I initially wanted to buy bitcoin is that I wanted to diversify my investments.
Though I bought bitcoin with the idea of investing in mind, as I learned more about bitcoin, my reason for continuing to hold it has changed.
Bitcoin is money, not an investment.
It may seem like I'm splitting hairs here, but the nuance is super interesting, and once you get it, it can help you understand more about why people are so excited about Bitcoin.
Bitcoin Is Not An Investment
What prompted me to write this article was actually a Twitter thread from Lyn Alden, asking how her followers would define the following three terms:
There were a lot of interesting responses, including this one below.
However, I think the most correct answer came from a user with a private account (which I follow). I won't expose the account since he wishes to remain private, but I'll summarize what he said here:
- Saving: storing wealth
- Investing: putting money into a business venture from which you expect to profit
- Speculation: actively trading based on perceived market distortion
The reason I liked this line of thinking is that it explains what's at the heart of “investing” as a concept. With investing, you are putting money into a company that will perform some sort of service or sell some sort of product to earn a profit. As an investor, you expect to earn a certain amount of money for the risk you take.
In this way, buying bitcoin is not investing. There is no bitcoin company to invest in. There's no CEO of bitcoin with a roadmap of how bitcoin will be profitable based on selling products or services. There's no expectation of returns based on specific activities of participants in the bitcoin network. Bitcoin doesn't have a budget and it doesn't have a marketing team. It's open source, with all participation in the network being voluntary.
Colloquially however, investing simply means to put your money into something you think will go up in value.
For example, some people may refer to their classic cars as an investment. They believe that by purchasing a fully restored Shelby Mustang GT500, the dollar value of that car will increase over time. There is no “Classic Car” company pitching investors can get a return of 10% YoY by investing in vehicles. The person who purchased that car saw a dollar amount which he deemed undervalued based on future appreciation of the asset.
The same would apply to gold. There's no single company creating gold and requesting money from investors to produce gold products. Some companies may sell things made of gold, but the purchase of gold ore doesn't fund those companies. Those companies are funded by the utility of products they produce.
The same as you invest in classic cars or gold bars, bitcoin could be considered an investment to some people. Many people buy bitcoin simply because they think it will increase in value over time.
Even under that definition, I'm going to go one step further and say that for me, bitcoin still is not an investment. It's money.
Bitcoin Is Money
Money is a funny thing. It's like the water that fish swim in. They don't think about water much, the same as we don't think about money very much. What is money?
You may say that the dollars in your wallet are money because you buy stuff with them. What about before dollars existed? People used gold. So, is gold money too? What about before gold? Are salt, seashells, and colorful rocks money as well?
There have been many types of money throughout history, and there are many types of money that exist at one time. For example, most countries would consider both paper currency and precious metals as money. Paper currency is the most common of course, but gold has some “moneyness” too.
There are 6 main properties which give something the qualities of money:
- limited supply
Each type of money available at any point in time may have some or all of those qualities and may display them to different degrees. For example, paper currency is very recognizable because it has the number value printed right on it. It's also very fungible, meaning that a dollar bill from the gas station is worth the same value as a dollar bill from the bank.
However, currency isn't very durable. It can burn in a fire or be destroyed when wet. Its value is also not very durable over time because governments tend to print more of it through actual printing, or programs like QE. A dollar today in today's money is not worth the same in 10 years.
Gold, by comparison, is much more durable. It's virtually indestructible and retains its value very well over time. However, it's not very portable because it's heavy, and it's not great at being divisible either. Imagine buying coffee with some gold dust!
At this moment in time, other things may have moneyness to them as well, including stocks and real estate. Because cash is so bad at being a durable store of value, people look towards other vehicles to retain the purchasing power of the money they earned. Since the dollar I earned today will lose value over time, I need to invest in real estate or stocks!
However, real estate is not very fungible. A house in one location will be worth a different amount if it's located across town. It's also not very divisible. Stocks are not very recognizable. In 2021, how many people have actually ever seen a stock certificate?
Now let's look at Bitcoin.
Bitcoin is digital, so it cannot degrade in quality over time. The ledger is maintained by 10,000+ nodes and transactions are mined by competing miners in a wide variety of jurisdictions across the globe. Bitcoin is very durable.
You can also send bitcoin anywhere in the world in a few seconds, then have it verified within 10-60 minutes. Bitcoin is very portable!
You can divide bitcoin into 100,000 units called satoshis (sats), and it can be divided even further into millisatoshis on lightning. That's a hundred-billionth of a bitcoin. Yes, bitcoin is very divisible too.
Though you can't physically hold a bitcoin, you can use your node to verify it. For about $200 and an hour of your time to learn how, you can verify that your bitcoins exist on the network and are “real bitcoin”. If you are accepting bitcoin payments through BTCPay Server or a bitcoin wallet, these wallets will only accept real bitcoin. If you don't trust them to do so, you can connect them to your own node which is running the bitcoin protocol and verify that the transaction is legit.
It requires that you are interested and dedicate a little time to learn, but bitcoin is very recognizable. There's no way to create “fake bitcoin”.
Regarding fungibility, we do hit a bit of a snag. Because Bitcoin is an open ledger, it's possible to view all transactions on the timechain. Although bitcoin is fungible in the sense that the network views all bitcoins equally, humans viewing the timechain can make judgments about certain bitcoin.
For example, you might hesitate to use bitcoin which was previously owned by a criminal, or you may feel pressure to only use bitcoin which was mined using renewable energy.
It's a little unfair to Bitcoin to make these judgments because we don't do the same with anything else. I don't care if my dollars were previously used by drug dealers, and I don't look up the financial transaction history of someone who sold me their $AAPL stock. Despite this unfairness, the fact is that it's possible to see that information on the timechain through chain analytics.
Technically, Bitcoin is very fungible. Socially, its fungibility could be improved, and Bitcoin Core developers, as well as wallet software developers, are actively working on making it more fungible through privacy-enhancing mechanisms.
In terms of limited supply, Bitcoin is perfect. There will only ever be 21 million coins, and they will be issued at a predetermined schedule, which everyone knows ahead of time. Thanks to the difficulty adjustment, it's not possible to just fire up more computer power and mine more bitcoin.
Bitcoin contains all the properties of money and excels in all but one category, which is a known issue and currently being worked on. That's why adoption is growing fast. Although bitcoin is not widely adopted right now, it's catching on.
Bitcoin Is Savings
How did the idea of saving start? At one point in history, way back, there was no such thing as savings. Animals don't save. They use what they have, and they hope they can find more the next day. Maybe a few species actually save for the winter, but you get the point. Humans had to develop this idea over time and have built a thriving society because of their ability (in part) to save resources for a future date.
The original savings technology was simply saving food for the future. It was a way to hedge against the uncertainty of what might happen tomorrow.
The more durable and reliable your savings is, the more you're able to reduce future uncertainty. That's why we moved from using salt as money, to gold, which is more durable and reliable. Gold stores our excess wealth better so we can access it more confidently in the future.
These days, most people don't save very much. There are many possible reasons why, but in a really cool episode of the Stephan Livera Podcast with Pierre Rochard and Saifedean Ammous, they talk about how debasing fiat currency is reducing people's natural instinct to save. Though your grandparents might have squirreled away cash throughout their life in order to retire, for the modern generation, that doesn't make sense. In 50 years, if you save money in cash, the value of your money will be reduced to almost nothing.
My grandparents bought their first house for about $10,000 USD. Imagine if they had saved $10k for me to buy my first house! It just wouldn't work.
Nowadays most people use the stock market as a savings account. They call it “investing”, but they aren't doing the research and aren't buying into companies for any specific reason. They just dump cash into an index fund and expect 7% growth. They don't realize this then puts their savings at risk because they are now dependent on the profitability of larger corporations and the health of the US economy to preserve the value of their money.
Bitcoin is a great savings technology because it can't be debased by governments or misallocated by corporations. The Fed can print as many dollars as they want. The stock market can make or lose money. It doesn't affect Bitcoin.
Bitcoin Is An Asset
Bitcoin is often compared to gold or real estate. The similarities are clear.
Bitcoin is like digital gold because it must be mined with energy. Gold is mined with trucks and explosives and human labor, while Bitcoin is mined with ASICs and electricity. It takes work to extract gold from the ground, and it takes work to extract Bitcoin from the Bitcoin protocol. That's why it's called “proof of work” mining.
Bitcoin is like digital real estate because there's a limited amount of it, and by purchasing bitcoin, you are laying your claim on a piece of that limited resource. Real estate is valuable (in part) because it's limited. Two people can't buy the same plot of land, and two people can't own the same bitcoin.
Bitcoin is an asset because it doesn't “produce” anything. It just exists. You can buy and own it, but there's no expectation of Bitcoin to produce a profit. There's no expectation of selling a product and having cash flows. Like gold, bitcoin is the asset.
A bitcoin miner, however, can be a company. If you buy shares in a bitcoin mining company like $BITF or $RIOT, you would expect them to buy hardware, perform a service (i.e. mining bitcoin), and earn money that exceeds the amount invested in the mining hardware and the cost of the service performed. Buying shares in these types of companies would be considered an investment.
This is a great way to understand the difference between buying bitcoin as an asset and investing.
Bitcoin Is Wealth
One of my favorite frameworks for understanding Bitcoin is thinking about it like a battery for energy storage.
Why do we work to earn money? At the most basic, since the beginning of time, we worked to survive. Over the centuries, thanks to technology, were started to be able to produce more than was necessary. The smart humans figured out that if we preserve a certain amount of stuff for an uncertain future, we can survive better. Saving is something people do to survive.
This storage of “work” originally took the form of things like grain or salted meat, things which we could consume ourselves in the future. As abundance continued to grow and trade escalated, we started to use goods like salt, seashells, or even gold as a kind of “middleman” to store wealth and trade for future use.
Since I know everyone wants gold, I'll keep a stash of it in case I need important something later.
Soon enough, more gold meant more future optionality. A “wealth” of choices.
Like gold, bitcoin cannot be printed out of thin air. In fact, bitcoin is superior to gold in this manner because no amount of infrastructure investment could mine more bitcoins faster than the mining schedule allows, thanks to the difficulty adjustment.
These days, there's not a lot of interest in trading gold for goods, so not many people in The West use gold to store value (it's more popular in India & Asia). Most people use fiat currency via paper cash, or by proxy, i.e. credit cards. Instead, we think of being wealthy as meaning you have lots of cash in the bank.
The trouble with using cash for storing wealth is that it loses value over time. It doesn't have to, but due to the nature of paper being easy to print, it's pretty irresistible for governments to print money to pay for social programs and support the military. Printing causes inflation of the money supply, and then the purchasing power of your currency goes down.
The verifiable assurance of Bitcoin's limited supply (like gold), and the utility of being able to instantly send it anywhere in the world in a few minutes (like digital dollars) are just two reasons Bitcoin has value. Unlike dollars, its value won't degrade over time. Unlike gold, it's not cumbersome to exchange in small amounts or across long distances. This makes Bitcoin a great way to store wealth.
Bitcoin Is Definitely Not A Security
The legal framework of how to define a security relies on the Howie Test, which lays out some parameters on how to decide if an investment contract is actually a security. What it boils down to is whether or not there is an investment of money into “common enterprise” with the expectation of future profits based on someone else's work.
Again, I'm not a lawyer so I'm just summarizing as I understand it, but when you look at Bitcoin through the Howie Test, it fails to meet the requirements, in my opinion.
Firstly, there is no central “bitcoin authority” which is promoting or requesting that users buy into the network. Bitcoin is not a company or organization.
Secondly, there is no contract. Users can participate in or leave the network at will.
Thirdly, although many people buy bitcoin with the expectation that it will gain purchasing power over time (i.e. Number Go Up), that is not explicitly the point of bitcoin as outlined in the white paper. The purpose of bitcoin is peer-to-peer electronic cash without trusted third parties. The goal is to facilitate the transfer of value across space and time. The increase in price is a result of the utility of the network, but not the purpose of the network.
Fourth, when you consider making money “derived from the efforts of others”, I guess you could make a case that by purchasing bitcoin and then doing nothing else to contribute to the network, if bitcoin rises in price, you did in fact make money while others were working to make bitcoin better. Perhaps you could make an argument there.
However, there would be a lot of counterarguments to consider. For example, Bitcoin developers are not under any obligation to write and ship code. Also, it's not clear that “working on bitcoin” is what is making the price go up. There would probably be no correlation between the implementation of new code and a jump in price. It may be simply that more people are discovering an already existing and useful asset. On top of that, perhaps buying and holding is actually participating, so maybe this is more of a joint venture.
So according to me, a pleb without any credentials worth considering, bitcoin is not a security. You can do with that as you please.
Bitcoin Is Investing In The Future
Though I don't consider bitcoin as an investment, I do think that buying, holding, and being involved in the Bitcoin community as investing in something non-tangible.
Bitcoin Is Investing In Myself
There's a saying in Bitcoin Land: I came to get rich but stayed for the revolution. Like most people, I started buying bitcoin because I thought I could make some good money from it. Afterward, I figured I should actually understand what I'm buying, so started to learn some basics, and I was hooked. The Bitcoin rabbit hole goes deep.
I don't think it's possible to understand everything there is to know about Bitcoin. Maybe in the early years you could, but now, it would be so incredibly time-consuming to become an expert in one area that you just have to pick and choose where your interest is and go for it. For me, my interests are focused on the history of money and how Bitcoin will change society in the near future. I'm also interested in privacy and digital freedom.
To me, investing time into learning this stuff is an investment in myself.
Learning how money works has become somewhat of a superpower. It's interesting to see people's eyes glaze over when I start talking about Bitcoin and how the global monetary system works. Most people just don't care. They just go work, earn some money, and maybe stick some extra into an index fund and hope for the best. It's been a surprising journey how much the average person doesn't care why they work how they store their monetary energy.
As a result of being confident about where I store my wealth, I have become more confident in my future. When I can see that the work I do today is being properly stored and preserved for later use, it frees up more space in my mind to focus on the present.
Bitcoin Is Investing In Global Prosperity
When I was in high school, we learned that inflation was necessary. It was baked into the economic formula for the good of society. What I've come to understand is that inflation manufactured by The Fed and other central banks is a form of time theft. Work takes time and energy. People work to earn money. Central banks print money out of thin air, therefore they are siphoning wealth produced by the labor of citizens of the world.
Printing money is stealing time.
The money printed is then distributed for use by a central authority, i.e. governments, who claim to know how to best use the money to serve society. Rather than letting people keep the wealth generated by their labor and letting them decide what's best for themselves, their family, and their community, the money is stolen and redistributed by politicians.
Money printing, QE, or whatever you want to call it extracting wealth from people is an often-overlooked form of taxation. That's why they call inflation a hidden tax.
Inflation is beneficial to debtors. If I have $100,000 in debt, but in 10 years that $100k now has the purchasing power of $80k, a newly printed $100k of purchasing power (now with the nominal value of $120k) more easily pays off the loan. Who is the biggest debtor anywhere in the world? The government. Inflation helps those in debt, which is why the government loves inflation so much.
Unfortunately, inflation hurts savers. That $100k you saved in the bank is now worth only $80k in purchasing power.
You can't print more bitcoin, which means the only way to extract wealth from people is to tax it.
With the inflation dynamic gone, the government cannot borrow excessively without taxing the people to pay off its loans. Nobody likes taxes, so there's an upper bound to what any government can borrow without pissing people off. The people keep more money in their pockets, and the government borrows more responsibly.
Bitcoin also increases the velocity of money by removing barriers to global commerce. By using a globally agreed-upon form of money that settles in less than an hour, everyone in the world can trade goods and services at a faster pace. Instead of waiting days for your ACH transfer to settle, or more than a week for your SWIFT transfer to settle, you can have a final settlement within the hour.
Plus, although we aren't there now, in the future, if Bitcoin becomes a more widely accepted medium of exchange and unit of account, there wouldn't be a need for currency trading in the process. Dollars for Yen? Not necessary! We'll just do international trade in bitcoin, and each company, person, or nation can then convert bitcoin to their local currency if they want.
With money exchanging hands faster and everyone agreeing on a single global money, it's likely that we, as a global community, would be generating more wealth and prosperity.
Bitcoin Is Investing In Digital Freedom
I've almost forgotten what it was like to live in a cash-based economy. Nowadays, I use my credit card for everything. It's convenient and you get rewards, so it seems like a pretty good deal, right? As usual, there are always tradeoffs.
What most people don't think about (including myself), is that each time you use your credit card, it's a data point. Visa knows what you bought, where, and what time of day. The bank knows too. Your government can then get access to that information, such as when Australia started tracing credit card history to track the spread of Covid. While you might agree with that action because it could potentially save lives, the point is that they can access that data, and you might not agree to the reasoning next time.
Cash is quickly being phased out for most people in their daily lives, and in a future, cashless society, your every movement could be tracked, recorded, and sold to the highest bidder. Even if that information isn't actively being sold, it could be hacked and then sold on the dark web, like when Equifax was hacked.
Maybe some people don't mind the tradeoffs because they really like those airline miles, but Bitcoin provides an alternative system.
Bitcoin allows users to make purchases with a pseudonymous wallet, meaning their purchases, online or IRL, can be private. Combined with other privacy-preserving tools like privacy-enhanced operating systems (CalyxOS) and browsers (DuckDuckGo), we can recreate a “cash-based society” in the online world. You could actually buy something online privately!
Private online shopping begins with digital cash, AKA bitcoin.
Bitcoin isn't an investment. Bitcoin is digital money. Bitcoin is private money. Bitcoin is global money. Bitcoin is freedom money. Bitcoin is better money.