Bitcoin is not an investment

Disclaimer: none of the following is financial advice. Please refer to the About page for more information.

The traditional path

I’m a slow learner. I’ve made a lot of silly financial mistakes. What little wisdom I do have has been forged by long, uncomfortable reflection into the pain I have caused myself. After more than a decade decade of falling further and further into debt–five years of university, two volunteer gap years and four years of medical school–I threw myself into building my financial fortress, like a man who had just weathered a hurricane in a lean-to. On reaching residency and a steady job, I was positively eager to start marching toward financial independence.

For the first year, my guide through the wilderness was a blogger whom a classmate and I adored. Dr. Jim Dahle is an emergency physician from Utah who has written for many years at “The White Coat Investor,” his blog for doctor’s and other high-income individuals. I appreciated his non-nonsense approach and long-term perspective. After so many years without any sense of financial accomplishment, I devoured his message to minimize expenses and repay debt as quickly as possible.

I followed his advice, continuing my medical school practice of renting modest apartments. I opted for the cheapest place I could find within walking distance of the hospital where I would spend my most time-intensive months. I bought all of my furniture used from garage sales or off of Craigslist, save for my mattress, which I had bought used from a friend. I signed up for a repayment plan for my federal loans. I signed up for my employer’s mostly useless wellness program to save a measly $15 off each paycheck for health insurance. I enrolled in a Roth IRA to take advantage of the “free money” employer match. I even used a broker that Dr. Dahle recommended for my own personal disability policy. (Funnily enough, I did all of this and still had barely enough to make ends meet.)

For the first year, I also followed Dr. Dahle’s advice to avoid Bitcoin and other cryptocurrencies. I had a friend in medical school who had claimed to have made something like $3,000 trading after the 2021 bull market. Other than that, though, all I knew was of Bitcoin was its volatility. Therefore, I did not want any part of it.

Looking back up from the rabbit hole

Now, a year after starting down the narrow Bitcoin rabbit hole, nudged by a bitcoiner coworker, I find that my perspective has completely changed. Now that I (do my best to) value my wealth in Bitcoin, I consider my previous position taking Dr. Dahle’s advice–before I understood the freedom money for the Knowledge Age.

In a 2019 blog post entitled “Cryptocurrencies like Bitcoin Are Not Investments,” Dr. Dahle reviews his multiple warnings over the years, made across various media, to avoid investing (what I would insist on calling “exchanging to”) Bitcoin. He rounds out the post by restating five reasons why he does not “invest” in Bitcoin. I’d like to visit each reason in turn.

1. Bitcoin isn’t an investment.

In his recommendations against exchanging fiat currency for Bitcoin, Dr. Dahle quotes financial blogger Mr. Money Mustache (MMM): “Investing means buying an asset that actually creates products and services and cashflow for an extended period of time. Like a piece of a profitable business or a rentable piece of real estate. An investment is something that has intrinsic value – that is, it would be worth owning from a financial perspective, even if you could never sell it.”

In the main, I agree with both Dr. Dahle and MMM: Bitcoin is not an asset in which a person might invest. That is, Bitcoin is not similar to capital goods, like businesses or real estate, that may or may not generate a flow of cash. Rather, Bitcoin is the cash itself. Investment may be made using Bitcoin rather than the United States dollar (USD). However, keeping to a strict financial sense of the word, Bitcoin itself is not an investment.

I believe that the world will eventually settle on a Bitcoin standard, allowing people to make investments using Bitcoin. However, I think Bitcoin’s true value now is its use as the greatest savings vehicle available. Despite the modern conflation of the two financial terms, saving is not investing.

“Without question, investments (in financial assets or otherwise) are not the equivalent of savings and there is nothing normal or natural about risk taking induced by central banks which create a disincentive to save. Anyone with common sense and real world experience understands that. Even still, it doesn’t change the fact that money loses its value every year (because it does) and the knowledge of that fact very rationally dictates behavior.”

Parker Lewis

2. Bitcoin isn’t even a currency.

Dr. Dawley rightly pointed out that in 2019, Bitcoin has not served as a unit of account, or a widely used medium of exchange, in the same way that USD did. However, I think considering the potential full adoption process is important. For example, computer scientist and cryptographer Nick Szabo argued for a historical theory of money evolution in a 2002 paper, “Shelling Out: The Origins of Money”. According to this theory, money moves through logical phases, including as a collectible, a long-term store of value and a medium of exchange. A theorized fourth stage is the unit of account: for example, “Mr. Nakamoto’s coffee costs 5 USD.”

The first bitcoins were mined in 2009, 14 years ago, as of this writing. I suppose that widespread adoption of an entirely novel type of digital money in such a short period might be possible, but I think that Bitcoin is simply still quite young at this point. That said, an increasing number of vendors accept Bitcoin. BTCMap.org is a helpful place to find where you can spend Bitcoin locally. (Of course, spending your bitcoin (most likely some satoshis rather than a whole bitcoin) requires that you withdraw your freedom money from all exchanges and into self-custody as soon as reasonably possible. Remember: not your secret keys, not your coins.) And as USD continues to be debased both by the Federal Reserve and by private lenders, Bitcoin’s status as the only impossible-to-inflate money will draw more and more people to store value in Bitcoin, driving wider vendor adoption.

3. Cryptocurrency volatility exceeds reasonable risk tolerance.

Bitcoin >>> shitcoin

It’s important to note that Dr. Dahle, at least in the past, did not not seem to differentiate between Bitcoin and “shitcoins”. For example, that we could hope to havehe tweeted in November 2017 that “there doesn’t appear to be anything special about Bitcoin compared to a hundred other cryptocurrencies.” Similarly, when I first spoke with my bitcoiner coworker, I did not understand what made Bitcoin special, other than it seemed to be the most popular cryptocurrency around. I have learned quite a bit since then.

Bitcoin is different because it was the first mover and because its ideological core community cares deeply about network decentralization. As far as I can tell, Bitcoin was in many ways the first real cryptocurrency, borrowing elements from Nick Szabo’s proposal for bit gold, an earlier attempt at a decentralized virtual currency. (I realize that I might be double-dipping here by over-relying on Mr. Szabo’s expertise, but you’ll have to read Shelling Out and more about bit gold to come to your own conclusions.) Bitcoin has had a vital head-start in producing a network effect. What’s more, I am staggered that Bitcoin survived its first decade, given the target on its back. It’s just about a miracle. Bitcoin not only works beautifully for what it was designed to do, it also appears to be unstoppable. Ideological users like me would never jump ship for a Bitcoin 2.0 (of which there have been plenty of misguided attempts). Given the confidence users have in Bitcoin, complementary technology, including layer 2 systems like the Lightning network, continue to fortify and diversify the Bitcoin ecosystem.

I am convinced that decentralization is the most important feature that a cryptocurrency can have. For example, I am sympathetic to the importance of privacy to Monero users, but I believe that the cost of that privacy, represented by an excessive block size on the Monero blockchain, has doomed Monero to unsustainable centralization. Meanwhile, ideological bitcoiners like me use our own nodes to verify each block of encrypted transactions on the Bitcoin blockchain. Our full nodes follow the longest chain, which represents the greatest proof of work performed to verify said blocks. A greater block size would disincentivize such widespread distribution. Centralization tends to cause to corruption of a money supply, as when gold was locked away in bank vaults during the days of the gold standard and banks were able to loan more value than they held.

Elasticity and market capitalization

It seems clear to me that Bitcoin’s volatility thus far has been an inverse function of its market capitalization (often shortened to “market cap”). In other words, the smaller the market size, the more subject to price volatility. The markets that use USD, including the stock and real estate markets, have been so much greater than the markets that use Bitcoin, that value moving in between those two markets alone have caused Bitcoin’s exchange rate to fluctuate wildly. Borrowing from Bitcoin University’s Matthew Kratter, we might imagine that USD markets form an ocean, while Bitcoin is a former rain drop that rapidly grew to a large lake, shrinking and expanding in fits and starts. The larger our Bitcoin lake is, the less vulnerable.

Again borrowing from Mr. Kratter, a person’s understanding of Bitcoin’s volatility changes depending on whether they view the BTC:USD exchange rate through the lens of either (an oversimplification) Austrian or Keynesian economics. Bitcoin’s volatility is due in large part to its monetary inelasticity, or inability to expand in response to increased demand. Bitcoin’s public open-source code limits the number of bitcoins to just under 21 million, and anyone who increases this number would simply be using a different form of money, as his blockchain would not be reliably verified by the distributed Bitcoin network. As demand for essentially every other commodity increases, rising prices incentivize producers to provide more of said commodity, thus increasing the supply and, in turn, decreasing prices. On the other hand, Bitcoin is mined, or produced at a steady rate, and will eventually stop being produced at all. The exchange rate volatility reliably and favorably indicates Bitcoin’s inelasticity.

But do not fear. The volatility will continue to decrease. Bitcoiners who have a deep understanding have diamond hands.

4. Cryptocurrency markets have more than their share of scams and scammers.

Dr. Dahle’s point in 2019 was that the US Securities and Exchange Commission (SEC), a federal agency that regulates financial markets, has yet to approve a Bitcoin exchange-traded fund (ETF). It’s less important that as of this writing, the SEC is currently considering an application for the first Bitcoin ETF, submitted by BlackRock, the world’s largest asset manager. More importantly, I suspect that the SEC had not approved such a fund by 2019 for several reasons: the astonishing robustness of the network, the novelty of blockchain technology, the inherent slowness of federal bureaucracy and, finally, Bitcoin’s radical departure from commonly accepted but fundamentally incorrect Keynesian economic theory. The thing broke brains.

Bitcoin affinity scams

I’ll have to expand further than Dr. Dahle on this point because I agree that there are sadly plenty of scams involving Bitcoin. For example, leading up to 2021, some “bitcoiner” influencers recommended that their Twitter followers surrender their secret keys (and thus control of their Bitcoin) to digital asset lender BlockFi. The stated goal was to earn interest on their Bitcoin. Then, cryptocurrency exchange FTX collapsed, leading to close partner BlockFi declaring Chapter 11 bankruptcy in November 2021. Followers of those Twitter influencers lost a tremendous amount of value as BlockFi investors. and the US Internal Revenue Service stepped in line ahead of them to stake their claims among the BlockFi rubble.

Outright theft

Any new technology is by definition on the margin, where risk is highest. There have been plenty of scams involving people who seek to exploit others’ lack of either common sense or Bitcoin knowledge. I have heard horror stories of people sending their life savings to strangers who promised to double their Bitcoin. Meanwhile, spearphishers trick unsuspecting bitcoiners into sending their private keys (ie, access to their Bitcoin) by posing as inquiring hardware wallet manufacturers.

Privacy and distribution

There are controversies among the Bitcoin community, such as the decision of zkSNACKs (parent company of Wasabi Wallet) to ban some Bitcoin UTXOs (analogous to dollar bills of various denominations) from joining coin-joins, joint transactions that help to break ties between bitcoiners’ identities and their satoshis. It’s important to note that Bitcoin is terrible for criminals, as the Bitcoin blockchain does not provide anonymity, rather only pseudonymity. Cryptocurrencies like Monero are much better suited for blockchain anonymity. Bitcoin privacy continues to evolve, and I am excited by developments, such as Lightning network splicing, that are expected to improve privacy and ease of use of Bitcoin for daily transactions.

That said, there are no Bitcoin salespeople. There are entities that Bitcoin and others that sell goods and services of the greater Bitcoin ecosystem, but there no central power controlling Bitcoin exists. (I realize that such as statement would be painfully ironic to a reader who found me to be more of a salesperson than an educator.) Nobody knows the identity of Satoshi Nakamoto, Bitcoin’s pseudonymous founder(s). The funds that are commonly believed to belong to Satoshi have not moved, causing many to believe that Satoshi is a single person, they are dead. However, even if Satoshi came back from the dead, the network is too strong now. If Satoshi changed the code to give himself more power, the community would simply continue to use the harder, more distributed version of Bitcoin. Bitcoin grows organically because more and more people simply recognize its usefulness as money.

Ugly alternatives

On the other hand, fiat currencies are by nature centralized because they are issued by a government (almost always nation-states) and are not tied to any commodity, such as gold or silver. Rather, the money is backed by confidence in the issuing government. This confidence may be derived from a strong record of credit or violence—sometimes both.

Likewise, every other cryptocurrency over the last decade has had a small centralized group of marketers rabidly shilling. These marketers prey on fiat-oriented temptations to turn a quick buck or naive hopes that cryptography and blockchain technology can solve all problems of all sizes. The controllers of many other fiat currencies misuse and even abuse their customers. The controllers often debase their own currencies or reverse transactions via hard forks, changes in the software that are not backward-compatible. Meanwhile, Bitcoin has passed through soft forks, and even these have been rare. Daughter cryptocurrencies that have hard-forked off of Bitcoin, such as Bitcoin Cash and Bitcoin Gold, have struggled relative to their parent, and I expect they will fail altogether in the coming years.

In short, “crypto” is both soft money and soft fiat.

5. High-income individuals do not need to speculate to reach their goals.

I agree that certain investment vehicles, such as index funds, present a relatively low-risk method for high-income individuals to grow their wealth. However, as Parker Lewis points out, risk is already inherent in building human capital:

“Risk comes in the form of investing time and energy in some pursuit that others value (and must continue to value) in order to be paid (and continue to be paid). It starts with education, training and ultimately perfecting a craft over time that others value.”

Parker Lewis

Devaluation of a soft money via expansion of the supply forces users to bear the risks inherent in investing, rather than saving in a hard money that reliably holds value over time. Beyond being gross theft, monetary devaluation represents a totally maladaptive strategy for a society. Forcing people to take risks with their money distorts markets. Thinking mechanistically, we may anticipate that such distortions (1) increase the scarcity of goods used as replacement long-term stores of value, such as real estate, (2) provide more funds for excessively risky investing and (3) worst of all, increase people’s preference for present satisfaction over riskier future reward–thus unraveling the very process of civilization itself.

This is insanity.

Escaping Clownworld

I admire Dr. Dahle and the business that he has built. I am very grateful for his advice, two recommendations in particular: (1) keeping my own personal disability insurance policy and (2) living like a resident as an attending, at least for the first five years. I appreciate that he makes time for his audience; he personally responded to a cold email I wrote him last year soliciting career advice. Overall, I believe that his core message is consistent with the deep nature of Bitcoin: low time-preference and self-sovereignty.

Dr. Dahle writes that the purpose of investing is to “reach your financial goals while taking as little risk as possible.” I agree that Bitcoin is not an investment tool in the narrow financial sense. However, I firmly believe that Bitcoin is the truest investment–using the broadest sense of the word–in our future. Slow learner or not, failing to understanding Bitcoin is among the riskiest moves you could make.