Bitcoin was one of the best performing assets that you could own during
2016. The price rocketed from $428 to $968, an advance of 126%. It has since
continued higher and just hit its second highest price ever at $1,132
today. In fact, bitcoin has topped $1,000 for the longest stretch
in history over the past two weeks!
The price spike above $1,000 that occurred during the first week of 2017
was the highest price for bitcoin since late 2013. Most mainstream analysts
though that price spike was unjustified and that bitcoin would never reach towards
$1,000 again. The long-term price chart for bitcoin going back to 2012 is
shown below. As you can see the price went from under $5 in 2012 to $1,132
today.
Those that have dismissed the potential of bitcoin have been dead wrong.
Bitcoin continues to thrive, with an increased adoption rate, increased usage
and rising price that has proven all of the skeptics wrong.
After hitting $1,129 on January 4th of this year, news that the Chinese
government was intervening in Bitcoin exchanges led to a sharp correction
back to $775. At that time I suggested to my subscribers that anything under
$800 would be an excellent buying opportunity.
In just over a month, the price has once again rocketed from $775 back
above $1,100. This represents a gain of nearly 50% in just 5 weeks.
Bitcoin’s price volatility has driven many investors to avoid the digital
currency. On the flipside, this volatility creates incredible profit
opportunities for traders. And while it takes a certain type of person to
stomach the swings, long-term investors are undoubtedly very pleased with the
performance of bitcoin over time.
Here is a summary of the returns that you would have realized if you
bought bitcoin on February 21st of each year:
2016: 158% (2.6X)
2015: 361% (4.6X)
2014: 102% (2X)
2013: 3,682% (36X)
2012: 26,247% (262X)
If you would have invested just $10,000 in bitcoin back in February of
2012, it would currently be worth $2.6 million today.
Bitcoin has several benefits over more traditional currencies, some
similarities to gold and even some areas of superiority versus
gold. These qualities are helping to drive the price higher.
Limited Supply / Inflation Hedge
The supply of Bitcoin is limited by to just 21 million that will be
created at a predictable rate. The number of bitcoins generated per block is
set to decrease geometrically, with a 50% reduction every 210,000 blocks, or
approximately four years. In fact, this decreasing-supply algorithm was
chosen because it approximates the rate at which commodities like gold are
mined. Users who use their computers to perform calculations to try and
discover a block are thus called Miners.
However, there will always much less than 21 million Bitcoin available to
be spent. The total spendable supply is always lower than the theoretical
total supply, and is subject to accidental loss, willful destruction, and
technical peculiarities. According to bitcoin’s open source code, only 21
million coins will ever be created. Bitcoin is strictly limited in quantity
and requires actual work/energy in the form of computer hashing power to
create the coins. This stands in stark contrast to central bank money, which
can be created in unlimited quantities instantly as a ledger on a bank’s
balance sheet.
The chart below shows the number of bitcoins in circulation and the
history of bitcoin creation over time. As you can see, just over 16 million
bitcoin have been created thus far, with only another 5 million left to be
created between now and 2024.
Because the monetary base of bitcoins cannot be expanded beyond the predictable
rate gradually slowing until it reaches 21 million, it is likely to serve as
an effective hedge again inflation. When you couple limited supply with
increased usage and demand, it is a recipe for much higher prices over time.
Consider that at the current time less than 1% of the population own bitcoin
and this gives you some indication of the growth potential ahead.
Lack of Government / Banking Control
Bitcoin is a decentralized, free-market currency, outside of the control
of governments or central banks. In China and other places with capital
controls, we are seeing a significant rise in demand for bitcoin. As
governments crack down on cash, limit bank withdrawals or restrict gold
important, bitcoin is a logical alternative.
As currency wars heat up and various central banks around the world race
to debase their currencies, it is causing capital flight. While many people
have moved their funds back into the stocks, bond or real estate, those
markets are all looking overvalued. A portion of these funds are no doubt
rushing into the gold and silver market, with both precious metals up
significantly over the past two years.
Transfer Funds Around the Globe Instantly and Free
Capital is also fleeing to bitcoin, a place where the Chinese (and others)
can hide their assets from their government and easily transfer the assets
across borders without any suspicion. In fact, you can send or receive
millions worth of bitcoin from anywhere around the world, basically for free
and instantly. With a bit of effort, you can also do this with near
anonymity. Try doing that with funds in your bank account, stocks or even
precious metals.
Ease of Use in Everyday Transactions
Bitcoin is also infinitely divisible and easy to use in everyday transactions
via a computer or smartphone. I have on multiple occasions paid for computer
hardware, Amazon.com purchases, business services and even lunch at a
restaurant in California using bitcoin. You can spend bitcoin at a growing
number of places directly, including Microsoft, Dell, Overstock.com, DISH
Network, Newegg.com, Subway and plenty more. It is as simple as using a
credit card but without the hefty credit card fees.
Risks of Using Bitcoin
Investing in bitcoin and storing them doesn’t come without risks. It takes
a bit of technical knowledge if you want to store them on your computer or in
cold storage. There are many horror stories of people losing thousands worth
of bitcoin that they could not recover form their computer, erased from their
hard drives or had stolen via hackers. Leaving them on an exchange seems like
a better option for technology novices, but introduces third party risk.
Lastly, governments may find a way to intervene, lock up or limit access
to your bitcoin or introduce legislation that adversely impacts the value of
bitcoin.
How to Buy Bitcoin
Overall, I believe these risks are manageable and minor in relation to the
bitcoin’s potential as a currency and the level of returns it has generated
for investors. Despite the remarkable returns over the past five years, I
still believe there is plenty of upside ahead and that bitcoin deserves a
place in your overall asset allocation.
One of the cheapest and easiest ways to acquire bitcoin in the United
States is using coinbase.com (I
get $10 in bitcoin if you use this affiliate link). Coinbase allows you to
easily deposit funds directly from your bank account for free. You can then
purchase bitcoins on their website and either leave them with coinbase or
transfer them to a software or hardware wallet in your control.
You can also purchase bitcoin from a growing number of bitcoin ATMs
located around the country. Although the fees are relatively high, you can
acquire bitcoin anonymously using this method. Coinatmradar.com offers
a map and you can search via your zip code.
You can also purchase bitcoin directly from private parties using localbitcions.com. Set
up a safe, public meeting place, show the funds, provide the seller with your
bitcoin wallet address and that person can then transfer them to you via a
computer or smartphone. You may want to wait a few minutes to get
confirmation of the transfer, particularly with large purchases.
If you prefer to get exposure via your brokerage account, you can buy the
Bitcoin Investment Trust (GBTC)
on the OTC/Pink sheets.
Lastly, the SEC will be deciding on whether to approve the first bitcoin
ETF on March 11th. The Winklevoss Bitcoin Trust (COIN), developed by the
venture capitalist twins who were involved in a long-running legal battle
over the ownership of Facebook (FB),
might be approved as the first exchange-traded fund to track a digital
currency by the U.S. Securities and Exchange Commission.
Approval of this trust may also be a catalyst for higher bitcoin prices,
as it would increase access for more investors. Winklevoss celebrity status
may also help to draw attention and geneate additional mainstream media
coverage for bitcoin.
Summary
I believe that bitcoin deserves a place in every investor’s portfolio,
even if you only take a small position. With the limited supply and
increasing popularity, the price is likely to head much higher over time. I
believe we could see the price of bitcoin double during 2017 and climb well
above $5,000 by 2020. It is getting close to parity with the gold
price. At some point, we will likely see one bitcoin worth more than one
ounce of gold. But the two currencies need to compete and indeed are
complimentary to one another. I think it makes sense to own both.
The Gold Stock Bull portfolio has been on fire lately. In addition to
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uranium miners, lithium miners, energy, agriculture and cannabis plays. We also
cover cryptocurrencies, including Bitcoin, Ethereum and Monero in our monthly newsletter. I
believe you will find it a steal for less than $1 per day and if it doesn’t
pay for itself many times over, simply request a refund.
