We believe we have narrowed down and singled out the one biggest risk and biggest weakness for bitcoin, and it is not the government. Even though we are bullish on bitcoin for the long term, we wanted to share our thoughts in an effort to provide a balanced look at the new currency to those who are interested in informing themselves without bias.
(Source: Bloomberg)
Over the last couple of months, we have written series of articles about bitcoin, generally proclaiming that the cryptocurrency would make a decent small sized addition to any portfolio as a "new school" hedge, alongside of our favorite “old-school" hedge, precious metals. Regardless of what you think about bitcoin, those who have been long, especially since our record-breaking article, "Buy One Bitcoin and Forget About It" (has received 66,000 views so far), have seen substantial appreciation in their investment, which has at one point risen over 300%, and now sits at gains of just under 300%. Bitcoin was about $1400 at the time.
We think the latest correction, which came as a result of the Chinese government putting a scare into bitcoin owners by banning bitcoin exchanges, will be yet another small dip lower that winds up being a buying opportunity for bitcoin over the course of the long term. We have seen similar dips like this in the past, such as when exchanges like Bitfinex and Mt. Gox were hacked. In both circ*mstances, the price of bitcoin ultimately rebounded and moved again to new highs, as we had predicted in a series of articles.
We have no reason to believe that this current move lower is going to be any different and we expect that bitcoin will have reached new highs yet again before the end of this year. But that does not mean that there is no risk. We just happen to think the risks lie in a different area than most bitcoin skeptics and bears. Especially of late, many of the skeptics and bears have been pushing the line that government regulation could be the nail in bitcoin's coffin. We disagree with this vehemently and actually wrote an article just days ago talking about why Bitcoin was actually designed to persevere in the case of government trying to step in and intervene. The peer to peer and decentralized nature of the currency make it relatively immune to government. So, while government may make it illegal to transact in your country, that doesn’t mean bitcoin is going to go away.
Rather, we recognize, on a much larger picture, where bitcoin's weakness truly lies: in the dependency of infrastructure to be in tact in order for bitcoin to both have value and be transacted.
Unlike cash or gold, bitcoin can’t be transacted if internet access is not available. There is no physical tangible way to hold bitcoin in reserve without the aid of both a computer and the internet. You have to have an electronic bitcoin wallet to transact in the digital currency and you must have internet access in order to seek out and use a counterparty to transact bitcoin with.
(Source)
What is the likelihood of infrastructure not being available in the future? It’s probably unlikely, but that doesn’t mean that it can’t happen. After all, if you are going to position bitcoin as a hedge against the system, one would need to be thoroughly and adequately prepared to transact in some type of currency if the entire grid were to go down. This is why central banks hold gold in reserve. It is a tangible financial asset that can physically be stored and held. The commodity is held as a hedge in case the monetary system as we know it goes belly up. Holding bitcoin does you little good if the monetary system goes belly up at the same time internet access or power happens to be lost.
We're aware that the United States has created a relatively redundant grid for power and that such an event is probably only a once in a century, if not a once every thousand years possibility, but that doesn’t mean that it won’t happen and investors in bitcoin as a hedge need to understand that there are still certain scenarios where bitcoin may not be the ultimate hedge.
This is why, in many of our articles about bitcoin, we have advocated for owning it alongside of gold. We think having the two as a hedge together could provide not only safety and security for investments in other asset classes, but could also provide price appreciation in a situation where there is meaningful austerity, recession or some type of unthinkable scenario comes to fruition. In the interim, as more dollars are printed, both should rise in price regardless.
With that said, it is important to us that bitcoin owners understand that their currency does have one simple pressure point. It is not the government and it’s not regulation, as we believe bitcoin will thrive regardless of what the world government will do. Bitcoin owners must know that the very same medium with which you are using to read this article right now must remain intact in order for their digital holdings to have any type of value going forward. We suspect that this major caveat and potential vulnerability becomes more and more pronounced as central governments look to begin implementing digital currency for their respective countries.
We remain long bitcoin and continue to believe that the long term picture will call for price appreciation, barring an unthinkable scenario coming to fruition.
