How Should We Think About Bitcoin?

Is it a speculation or an investment?

Is it an Investment?

Bitcoin is most certainly not an investment. Investments can be valued based on a current or expected cash flow stream. Think CDs, bonds, stocks, or real estate. Bitcoin generates no cash flow. Yes, there are businesses that currently do not generate positive cash flow (think Tesla or Uber) but investors expect them to be cash flow positive in the future (even if the logic seems far-fetched and ultimately turns out to be wrong).

Since Bitcoin is not an investment we must then analyze it as a form of payment or currency.

Is it a Form of Payment or Currency?

Since Bitcoin generates no cash flows it’s best thought of as a form of currency or payment. In this scenario its ultimate value depends on its utility and potential for mainstream adoption.

For mainstream adoption, it’s unclear what problem Bitcoin currently (this is key, the operative word is CURRENTLY, as things can change) solves and why using it would be faster, safer, or easier than using traditional means of payment.

Bitcoin is not widely accepted by merchants (consumer spending makes up almost 70% of the US economy so wide acceptance is critical). It is currently not cheaper or easier than other forms of payment. For merchants that do accept Bitcoin they almost always contract with a third party to process payments or converted the Bitcoins received into a local currency. At present using Bitcoin does not offer consumers or merchants any advantages over other forms of payment.

There is also the issue of Bitcoins being lost forever, either intentionally or unintentionally. If a user forgets or misplaces the private key to their wallet their Bitcoins are lost forever. About a third of Bitcoins in existence haven’t been involved in transactions for the past five or six years and a substantial portion of those are believed to be permanently lost. Not something you have to worry about with a traditional bank account.