In Focus: Over A Decade of Bitcoin
Money is determined by a social and legal consensus.
Without much of a second guess, we entered the world, specifically the United States, with the understanding that this greenish cloth paper blend with the 1 on it is worth something. As we got older we developed a better sense of it's value and what we could get in return for one dollar, but again, we never questioned how it came to be, that greenish paper with the numbers on it.
It wasn't an easy road for the dollar. It's been a tough road for paper money in general. Historians have been able to trace the circulation of promissory notes to the Han Dynasty in 118 BC. Others have stated that Carthage issued bank notes on parchment and leather back in 146 BC. The glory days of Carthage and the Han Dynasty both came to end, and so did paper money, at least for a while.
History is filled with nations, dynasties, and societies that dabbled with promissory notes and/or paper money, only to fall and go back to gold and silver pieces.
In the United States the path to the wide use and acceptance of the dollar was not a straight one. "Congress shall have Power…to coin Money, regulate the Value thereof, and of foreign Coin." and "no state…shall make any Thing but gold and silver Coin a Tender in Payment of Debts." both of the previous statements appear in the U.S. Constitution. America wasn't designed by it's forefathers to run on dollar bills, yet here we are.
What the dollar or paper money did more than anything else was it made life easier. As with all inventions and adoptions, it boils down to does it make life easier. From the wheel we got the wheel barrel and carriages and so much more, which made hauling things and getting around easier. Electricity and light made life a little easier as did the telephone.
Carrying paper money and storing paper money is much easier than hauling around a bag of gold and silver, and digital currencies or the ability to digitize money has made life easier today.
One day in the not so distant future, your kid or grand kid will embrace Bitcoin or Ethereum like you did that first dollar. They won't know the history behind it or care, they'll only know that if they have it, they can exchange it for something.
Square's Big Buy
Square's (SQ) decision to purchase $50 million of Bitcoin seemed to surprise and shock people in, on, or around Wall Street. After more than a decade in circulation, people still don't think of Bitcoin as a form of money.
I've said since mid 2018 that Bitcoin is out of the hands of the HODLers and the people with mining rigs in their parents garage, and it is now in the hands of big money and Wall Street. It's been this way since Bitcoin's fall from the $19,000 high in late 2017.
There is Value in a Crash
At $19,000 we saw earlier Bitcoin adopters get out with a bag of cash and the best and brightest Wall Street speculators get out with a bag of cash. But, as usual, those late to the party bought in at $19.000 and higher, and watched Bitcoin's price trade down to less than $5,000 within a few months of the $19,000 high.
But in that time, when the euphoria surrounding Bitcoin and it's massive run had worn off, the major names on Wall Street started setting up shop. Even Jamie Dimon, CEO of JP Morgan Chase (JPM) has changed his stance on Bitcoin over time. For Dimon it became harder to bash something that his firm feels they are capable of exploiting for profit.
The headlines of major U.S. investment banks exposing themselves to cryptocurrencies didn't draw much attention then in 2018, and now it's as if people forgot that it happened. This is probably why Square's announcement caught so many by surprise. Some people haven't realized that Bitcoin and cryptocurrencies isn't a hobby, it isn't nerds on their computer, it's big business with billions maybe trillions of dollars at stake.
We Hate New, We Hate Change
From my understanding of how humans deal with all things new, I imagine that as paper money came about, people ignored it at best, threw it away at worst, said it had no value, said it wasn't gold or silver, and didn't want anything to do with it. Instability of nations and dynasties definitely added to people's skepticism. But as the years passed I'm sure people wished they had collected all of that paper money people were criticizing, throwing away, or stepping over when they perceived it had no value.
I did the same thing in 2009 when Bitcoin was trading for pennies. Silly me, I criticized before I understood, and didn't realize the most valuable aspect of money, which is the first sentence of this post, that money is determined by a social and legal consensus. It's not what the bankers say or the government says, it's what the people say.
If You Haven't, Update Your Thinking
Bitcoin has been with us for over a decade, and what started as funny money made on a computer now commands thousands of dollars per digital coin. The people want cryptocurrencies.
Investors would be wise to not let news like Square's recent purchase of Bitcoin catch them off guard again. Many large companies already have exposure to cryptocurrencies, they just don't advertise it much. More companies will dip a toe into the crypto markets over the next several months.
Investors should have some exposure to Bitcoin or Ethereum, it isn't the worst thing in the world to do with a small portion of your investment dollars.
As I'm writing this one Bitcoin can be traded for $11,400, which is a very long way from 2010 when it traded for less than $1.00 a coin. What will the next 10 years bring for Bitcoin?