Why "NOT buying Bitcoin" is completely irrational

in #bitcoin6 years ago (edited)

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Bitcoin (or rather the “bitcoin’s exchange rate against classical currencies (a.k.a. fiat)” is booming (and has been doing so since more than a year, although the media used to care less than they do nowadays). Some people around you might dismiss this news with an air of superiority: “Ah, all this is a fad and it will end badly!” and “Stay away or you might lose your shirt!” The Economist has dedicated several columns lately to the Bitcoin (BTC) phenomenon. In its September 22nd issue, the “Free Exchange” columnist for instance refers its readers to a classic: “Manias, Panics and Crashes” by Charles Kindleberger. “Read your Kindleberger” is how financiers with PhDs remind each other that this has all happened before – and it has invariably ended up in tears and ruin. In its Nov. 1st issue, Buttonwood’s notebook explains that currently, the main reason why people are buying BTC is … because its price is rising! Or, to put it differently, those buying BTC (and other “cryptocurrencies”) are applying the “Greater fool theory” by believing that tomorrow, a “greater fool” will buy their BTC off their hands for an even higher price than they have paid today. Implicit here is that buying BTC is foolish in the first place as there is a clear risk you’ll end up being the greatest fool who bought BTC at its very peak … Indeed “History instructs that […] humans are reliably awful.”

Yet here I am telling you that NOT buying Bitcoin is completely irrational! And what’s more, regardless of its dollar (or euro) price! Have I also succumbed to the “Bitcoin mania” and became unable to assess the risk?

Quite the contrary: my argument relies on a careful assessment of the expected “return on investment”. Here are my assumptions:

  1. As Marc Andreessen once said, “Software is eating the world”. Nobody is disputing nowadays the huge disruptive potential of, for instance AI or IoT.
  2. I am not alone in thinking that blockchain technologies will be, alongside AI, among the technologies having a hugely transformative influence on human society. I might be wrong here but I also suspect that blockchain’s impact will be felt rather before that of AI (which will need a tad longer to mature)
  3. Blockchain technology (as well as its potential impact on society) is a difficult, complex topic, which has many people scratching their heads. As a famous quote would have it, “thinking is the hardest work there is …” and most humans need motivation to engage in hard work.
  4. Bitcoin is not only the best known application of the blockchain technology, but it is also, admit it, looking a bit enticing … How wouldn’t it, when you see your money in the bank earning almost no interest while this “funny money” has increased more than 12x (twelve times) in the past year!?

Given these assumptions, I would like to submit to your consideration another angle for assessing the situation.

You might be open to my second assumption above and curious to learn more. If that is the case, I’m pretty sure you’ll soon come to agree with my third assumption. Then suddenly you’ll see Bitcoin buying as … gamified learning! Imagine indeed that among the different ways of exploring and learning about blockchain the most playful one (and possibly the most effective too) does not come free. You need to stump up money but … you get to pick your price! Your own personified learning experience “Introduction to blockchain technologies and their impact on society” awaits you, but you’ll need to pay for it. How much? While the BTC has recently surpassed $10000, its lesser-known fraction, the “satoshi” (10-8 BTC) is worth barely more than 0.01 cent! So you could buy 1 Million satoshis for little more than $100. Choose a sum that you think is both fair for a training course on the topic and that you can easily afford. Whether that sum is $10 or $1000 is of secondary importance as long as it’s a sum you could have realistically spent on training. In the process of actually buying those satoshis, you are likely to learn a lot about crypto-exchanges, wallets, keys, the bitcoin blockchain and possibly be enticed to investigate further. And your motivation to learn will be all the greater for having “skin in the game”. For your peace of mind though, I suggest you assume that you spent those $100 (or $10 or $1000) on a training and not worry too much about the daily fluctuations in value of the BTC fraction you acquired in the exchange. And yet I’m sure that, as a reliable human, you’ll find that very hard. You’ll want to find out more: why is the BTC rate appreciating or possibly depreciating, who buys into cryptocurrencies and why? If you have been curious enough to spend $100 in the first place, you’ll probably want to learn more. There are few things that motivate us better than having our own money at stake!

Assume you won’t be able to sell at the right moment and then, a morning upon waking up, you’ll discover that while you were asleep the Chinese government has decided to crack down on Bitcoin mining. This triggered a generalized sell-off and, with 80% of the network hashing power off-line no orders are being fulfilled anymore by any of the big crypto-exchanges. You lost! You turned up to have been the greater fool! You are devastated! At least until you realize that all you’ve lost was … $100 (or another sum that you could afford to lose). And while that money might prove hard to recoup, you would have gotten, by yourself, several times that value in knowledge about a fascinating technology that is on the cusp of changing the world.

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