Here’s how to decide whether or not to buy bitcoin
By: David Havens
Tags: Cryptocurrency, Blockchain, Ethereum, Bitcoin

Here’s the situation:

A year and a half ago, I bought a friend 7 Ether as a wedding present and sent him the private keys (a $50 value at the time). He’s finally learned how to access it, and sent me an email asking if he should buy more.

Here is what I replied:

Amazing! There are four main elements to consider while deciding whether to buy more bitcoin/ether/alts. Remember, any of these coins could go to zero very quickly, so if you do decide to hop in, diversify and say goodbye.

STORE OF VALUE. This is my most bullish long term argument. If you consider only the market cap of coins (e.g. onchainfx.com or coinmarketcap.com), then you will see BTC is at $100b and ETH at $25b (depending on your methods). Valuing these is not complicated at the moment (# coins times $ of coin), but the market cap of gold is just under $8 trillion using the same method. If a bitcoin is valuable, scarce, and potentially more useful than gold then it’s still a great investment. 8x return still available for it to be just 10% of gold globally, and it’s easier to hide your own BTC than hide your own gold. SPECULATION. This makes me the most bearish, at least in the short term. Speculation is everywhere, and is why a coin you buy today could fall by 90% by tomorrow. People are chasing returns and there are some literal scams with hundreds of millions of dollars of “valuation.” A high price isn’t actually necessary for most of the utilities of the coins, and with supply and demand, when you control the supply, you can very easily manipulate the markets and prices. This market manipulation is a big reason why governments want to regulate the sector. Also, new coins come up all the time and competitors are constantly pushing out other coins by being better/faster/cheaper, another factor that could make your investment useless. CURRENCY. This is one where governments could make or break it. Some coins (maybe even bitcoin) could be an amazing currency. Consider a site like 21.co where you can use their API’s, and every time you call an API (to get data, for example), you have to pay a tiny amount of BTC to the API creator. Amazing. However, some countries are looking into making their own cryptocurrencies and/or regulating exchanges which would remove liquidity make it pretty hard to transact in the currency. UTILITY. This is more like standard tech investing. Ask yourself: does this blockchain provide utility in the real world? And is it better than existing technology? For example, the decentralized approach to data storage might or might not be better on a blockchain…but probably isn’t worth more than Dropbox at the moment (some file sharing prototypes are literally valued higher than Dropbox right now). Meanwhile, using a blockchain to track supply chains, or automate simple contracts/lending agreements, or send money (truly) privately… these might be worth investing in for the technology itself. Then it’s a bit more traditional in terms of valuation and market sizing. Which, of course, is still very complicated.

The main deal with this “bubble” right now is that there’s still more capital interested in the sector than there are opportunities, which means some really bad ideas are getting money and some ideas are getting more money than they deserve. This is already causing some very real problems (ie project-that-got-$250-million-is-having-”founder-issues”-and-doesn’t-even-have-a-working-prototype kind of problems).

Question is…is this still the early capital or not?

Cheers,

David