Why Bitcoin—Purchase Rationale
I recently purchased some Bitcoin. Bitcoin is a controversial
investment—many are calling it a scam and predicting imminent collapse.
I wanted to capture my rationale for purchasing Bitcoin while it is fresh in
my mind. This will allow me to look back at a future date and reflect on
where I was right/wrong in my reasoning.
- Even an investment whose most probable outcome is going to zero
can still be a sound investment, assuming
value. i.e. small probabilities of very large upsides can offset high
probabilities of moderate downsides (including a trip to zero).
- There will only ever be 21 million bitcoins, 2/3rds of which have
already been mined. Thus there is a hard cap on the supply side. In
contrast, I suspect the demand side is going through exponential ramp-up
(see next point).
- Bitcoin is likely to benefit greatly
effects. We're seeing a flywheel effect between price → publicity
→ new users.
- As the total market size grows, more capital will flow to companies
building consumer-friendly experiences on top of the raw technology
This will also play a role in accelerating the flywheel.
- Bitcoin is mainstream enough now that the risk of fizzling out/dying a
lonely death in a small circle of hard-core technologists has gone down.
- In the parlance
of innovations, I suspect Bitcoin is in the early adopters phase.
People outside of technology circles are becoming interested, and the tools
for trading Bitcoin are becoming increasingly user-friendly.
- Bitcoin has been around since 2009, and I haven't seen any "smoking gun"
for why Bitcoin cannot fundamentally work. Even any of the present-day
painpoints, e.g. transaction volume, don't seem like insurmountable
problems. Regular companies split shares, merge, change business structures
all the time. Bitcoin may change over time, perhaps even
rapidly/dramatically. As long as there's a continuous evolution path, I
don't see this as a problem which cannot be overcome.
I must concede I have spent relatively little time thinking deeply through
all the arguments for/against Bitcoin. For example, I haven't extensively
studied the dynamics of deflationary assets, current market size vs potential
market size, or the likelihood of competing cryptocurrencies diluting
Bitcoin's market share. This is partly
ignorance, and partly because I'd rather spend my finite time on Earth
building things instead.
A couple of final thoughts: I can take comfort in good decisions with bad
outcomes, even more so than bad decisions with good outcomes. If Bitcoin goes
to zero, the outcome is bad, though not necessarily the decision that lead to
it, given the available information. This is particularly true in cases where
the outcomes aren't normally distributed around some "indifference" or
expected value of 0, and Bitcoin probably falls into this category. Of
course, in the failure case, determining whether the decision was
good may be hard to determine with a sample size of 1—was it "bad
luck", or can the finger clearly be pointed to faults in one's reasoning?
Even in the success case, it may or may not be easy to isolate whether the
success was because of the reasoning listed above, or in spite
of of it. In any case, I look forward to revisiting these notes in