I was well aware that we were in the final phase of a mania and the crash was near. Still, in December 2017 I made the bet that bitcoin would outperform gold on a five-year horizon. In this article series, I describe what I based my opinion on. In Part 1, I presented the background of my bet. In Part 2, I argued that there is a need for digital gold. This part and the next will explore why bitcoin has the best chance to fulfill this purpose.
Satoshi Nakamoto, the anonymous inventor of Bitcoin originally hoped to create a payment system with radically cheap (even free) transactions, which therefore could also be used for micropayments. We can declare that bitcoin has not been fulfilling this promise for years: at times, a single transaction can cost multiple dollars. This is certainly not how I would buy my coffee. Still, at the peak of the mania in December 2017, I made a bet that bitcoin would outperform gold on a five-year horizon. I did so despite clearly seeing that we were in the final phase of a bubble soon to pop. Moreover, it was doubtful whether bitcoin would ever be able to serve the purpose it was dedicated to by its creator. So what did I base my bet on?
In December 2017, some of us received a spot-on group mail, as we routinely do, from our colleague Viktor Zsiday. He used the results of Ron Paul’s Twitter poll to demonstrate the completion of the bitcoin mania at the time. The American politician asked people about which asset would perform best on a 10-year time horizon. Bitcoin won with a landslide. Only gold got a noteworthy amount of votes from the rest of the options.
The last year has seen a lot of bloodshed in the Bitcoin market. After the bubble burst, many predicted the death, or at least the depreciation, of Bitcoin. It seems worthwhile, however, to examine recent events from a different perspective and review the history of the Bitcoin market at its tenth anniversary.
Somewhere in the middle of the Pacific Ocean is a tiny tropical group of islands called The Yap Islands. They’ve been inhabited by a native tribe since ancient times, and this remote community provides us with an interesting episode in the history of money: they used money made from limestone, i.e. they paid each other in stone money for centuries.
Bitcoin’s technology is a revolutionary invention because previously the reliable operation of a virtual monetary system without a central institution couldn’t be guaranteed. Bitcoin has proved over the last eight years that this is possible. Despite its innovation, however, it has a number of weak points.
One of the most interesting innovations of the past years has been the creation of the “world computer”, the Ethereum, which enables the signing of smart contracts. By further developing bitcoin’s technology, it creates a virtual interface on which participants who want to do business with each other can enter into contracts. The contracts are then implemented automatically; there are no options for subsequent tricks or manipulation.