The Rational Investor’s Case Against Bitcoin

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I don’t invest in Bitcoin because I am betting on the continuation of Western civilization, not its collapse or decline. If I did believe my government would collapse, I’d invest in guns, ammo, and canned corn. And if I believed that Bitcoin could peacefully replace my country’s currency, I’d still rather own real estate, businesses, stocks, or other alternative assets than a currency like Bitcoin.

At $1.3 trillion in market capitalization as of April 2024 and a price of $65,000 per Bitcoin, enthusiasts of the cryptocurrency, who I will refer to going forward as “Bitcoin Maximalists,” may think that they have another conclusive proof point validating their thesis.

I say not so fast. I’m writing this article because I believe:

• Bitcoin Maximalists are unable to communicate their thesis plainly and simply.
• Bitcoin Maximalists dismiss those who do not invest in Bitcoin as uninformed.

Please note that this article is not about cryptocurrency in a general sense—there are many coins in existence, many with unique and specific theses behind them. This article is only about Bitcoin and the theory and belief set behind those who give it value. 

I have encountered remarkably few well-rationalized challenges to Bitcoin—probably because there are so many problems with Bitcoin as a serious long-term investment that most knowledgeable investors stop learning more about the Bitcoin Maximalist philosophy long before being able to describe it in well-formed detail. Why bother unpacking the whole school of thought over hundreds of hours when they’ve already decided to invest in something that creates value, like property or businesses?

With no challenges to the Bitcoin thesis from people who even know what the thesis is, Bitcoin Maximalists may feel that the only opposition is from the ignorant. 

This, in my view, is a serious problem. 

Could it be that a dangerous echo chamber has developed, where a thesis that literally is grounded in a bet on the collapse or decline of Western Civilization goes unchallenged, simply because most smart opposition never bother to go deep enough down the rabbit hole?

Let’s diffuse this echo chamber. Or pop the bubble. 

Investors: Stop saying that you don’t invest in Bitcoin because you don’t understand it. Read this article, and start saying that you don’t own Bitcoin because you understand it.

I did the research on Bitcoin. I internalized the worldview, and I admire it. Not only that, but I can tie together the Bitcoin Maximalist’s deep-rooted belief in the Austrian School of Economics: skepticism of centralized government power in general, their belief in the value of hard money, Bitcoin as digital cash, and its special symbiosis with the blockchain. 

I admire the thesis and worldview. Bitcoin maximalism isn’t just a pathway to quick riches for adherents—it is literally participation in moving society forward to a better world. 

The Core Bitcoin Thesis: The Ultimate Form of “Hard” (Inflation-Proof) Money 

Bitcoin Maximalists believe that inflation is a prime evil in today’s society. Grounded in the “Austrian School of Economics,” Bitcoin Maximalists believe that inflation is a secret tax on the people that fuels government excess. Inflation steals wealth from workers and savers, forcing people to earn their money twice—once through labor and again by investing.

Inflation has led to the suffering of the people and the overthrow of governments since the dawn of civilization, they will point out. The exceptions, the good times, have been primarily or exclusively when money was hard.

And until the digital age, the best example of hard money was gold. Gold is a good example of hard money because it cannot be printed by a central bank. It cannot be made or unmade, as proven through centuries of failed attempts at alchemy. It has a finite supply and is difficult to mine. Furthermore, it can be easily smelted into small increments, never rusts or corrodes, and can, therefore, store value for eternity.

And, when societies use hard money, like gold, Bitcoin Maximalists and those from the Austrian School of Economics argue, the good times roll. The people flourish, innovation accelerates, and trade prospers.

Recently (in the last 60 years), to their dismay, most of the world has transitioned to fiat currency or “soft” money, like the U.S. dollar. With the money supply controlled by central banks like the Federal Reserve, there is nothing but fallible human judgment preventing government excess and money printing that will destroy wealth and lead to devastating human suffering.

Enter Bitcoin. It’s designed to be the ultimate form of hard money. Digital cash—gold, but better. 

Like gold, there is a finite supply (21 million Bitcoins can ever be mined). And like gold, Bitcoin is expensive and difficult to “mine” (more on this later). Bitcoin can be broken down into tiny increments—100 million “satoshis” (named for Bitcoin’s anonymous inventor) make up one Bitcoin.

However, unlike gold, Bitcoin has the added advantages of digital transaction and a remarkably immutable, secure, and transparent ledger called the blockchain, which is a special, purpose-built technology exclusively for Bitcoin (Bitcoin Maximalists typically are not proponents of widespread adoption of blockchain technology – they think it is purpose-built only for practical application as a ledger for Bitcoin transactions – more on this later). Participants in the blockchain compete to solve ever-increasingly complex technical problems that require more and more computing power. These problems are hard to solve but easy to verify as correct once solved. 

Those who solve these challenges, which verify transactions on the blockchain, are rewarded with Bitcoin—hence the term “mining.” This creative system allows for Bitcoin and the blockchain to be decentralized.

This is key to the Bitcoin thesis—there is no Fed chair or government figure verifying transactions and accounting for the currency. Bitcoin and the blockchain don’t need a government or any individual to endure and thrive. This currency can exist independently of any centralized power structure. 

And this leads us to our core thesis: As governments and societies that currently use fiat currencies succumb to the temptation to inflate their way out of their problems one by one, the people will turn to a better form of money. Governments and societies will be forced, one by one, to adopt Bitcoin as money, and in the not-so-distant future, Bitcoin will be money, for all or most, people in the world.

Thus, the long-term future value of Bitcoin is essentially that of all the world’s outstanding currency. It will replace all dollars, yuan, euros, yen, and more. This leads to a long-term market cap that is tens of trillions of dollars—maybe hundreds of trillions of dollars.

And what’s more, Bitcoin Maximalists believe that this is good for society—that the common man will experience unimaginable benefits from this transition, innovation will flourish, the economy will stabilize, and that without inflation to worry about, the common people will consume less, leading to happier, more productive, and more sustainable living. They believe that governments will be forced to enter into sustainable fiscal policy, and those that can’t will dissolve and reform.

That’s the thesis: Invest in Bitcoin, watch “the man” collapse, make a nearly infinite return, do good for society, and watch humans thrive. 

It’s awesome! It’s cool. It’s admirable. I completely respect the Bitcoin Maximalist intention. I admire the thought, detail, and intricacy of Satoshi Nakamoto (inventor of Bitcoin). It’s really fun to learn about and a wonderful exercise in thinking about money from a different perspective. 

I also respect the largely libertarian viewpoint that grounds and drives many of those who subscribe to the maximalist thesis. Too much government is often an issue, and decentralization is often better than centralization. I believe that the realization of their vision could be a great thing for humanity or at least a worthy experiment on the path to progress. 

There is no evil. No mal-intent. No lack of intelligence. Bitcoin maximalists are zealous, yes. But, there is a true belief underlying that eagerness that is grounded in a theory that I can empathize with.

My Rejection of This Thesis 

That said, I reject the thesis. Here are my core issues with it:

1. At the end of the day, Bitcoin is intended to be a store of value, a (digital) currency. I’m an investor. I don’t “invest” in currency—I keep the minimum amount of currency needed to secure short-term liquidity needs and sleep well at night, and invest the rest in cash-flowing assets, including businesses, real estate, or debt/bonds backed by businesses and real estate. Even in a world with “hard” money, I would put my capital to work, trying to create real (inflation-adjusted) wealth, not allow it to collect digital dust.
2. I believe in the United States, its people, economy, government, and military. I do not believe that it or its currency will collapse or decline in a relative sense in my lifetime. I believe that I will earn, spend, and pay taxes with dollars, not Bitcoins, for the duration of my life. Not only that, but I believe that this will be true for everyone I know, for all my children, and for all of their future descendants for many generations. I have and will continue to happily bet against people who believe that the U.S. will fall by investing in low-fee index funds of U.S. publicly traded companies, and will happily and passively continue to absorb the wealth of those who predict doomsday and decide to take other bets.
3. If I believed the United States government and the U.S. dollar would collapse or decline materially on the world’s stage, I would invest in a bunker and a lifetime supply of canned corn, guns, and ammunition, not Bitcoin.
4. If I did believe that the United States government and the U.S. dollar would collapse without ending my way of life as we know it, I’d bet on another government-controlled currency or future cryptocurrency replacing the dollar, and per my first point, would still rather own real estate and businesses than currency.
5. Bitcoin has numerous fatal flaws that I feel make it an extremely unlikely candidate for a future state reserve currency. In the extremely unlikely event that the world adopts something like a Bitcoin Standard (that’s the title of a great book written by a very smart Bitcoin Maximalist named Saifedean Ammous, by the way, and I highly encourage you to read it), I believe that future iterations of Bitcoin, namely future cryptocurrencies that do not exist yet, will resolve those issues.

Many people will disagree with these beliefs. That’s their prerogative. Just know that if you buy Bitcoin, you are betting on America and Western civilization’s collapse or decline. You are betting on world currencies being replaced and that Bitcoin will be the major or only replacement.

Too many people say, “I don’t invest in Bitcoin because I don’t understand it.” 

That’s unhealthy. 

This contributes to the echo chamber. Each time another ignorant person dismisses Bitcoin, it only adds fuel to the Bitcoin Maximalism fire. And that’s unhealthy. We need both people who invest in Bitcoin because they believe the West will fall and those who don’t invest in Bitcoin because they don’t agree with its thesis. 

That’s a healthy dynamic. 

So, don’t say that you don’t invest in Bitcoin because you don’t “get it” anymore. Change your stance to the following:

I don’t invest in Bitcoin because I am betting on the continuation of Western civilization, not its collapse or decline. If I did believe my government would collapse, I’d invest in guns, ammo, and canned corn, not a digital currency. And even if I believed that Bitcoin could peacefully replace my country’s currency, I’d still rather own real estate, businesses, stocks, or other alternative assets than a digital currency like Bitcoin.

And, again there will be plenty of people who will take the opposite stance and think governments will fall one by one and be replaced with Bitcoin. As I said, for me, that means they are not competing with me to purchase real estate or U.S. broad-based index funds, a happy situation for me as I pay a slightly lower price each time I invest.

If you haven’t already stopped, you can stop reading now. My core thesis has been conveyed.

Next, I’ll get into the weeds about Bitcoin, the blockchain, and its technical and other challenges that I feel make it an improbable bet as a future world reserve currency. I will also attempt to debunk some of the commonly used examples of why Bitcoin’s takeover is inevitable and why it is such a good risk-adjusted investment.

Mostly, I write to preemptively combat the inevitable accusations from Bitcoin people that I didn’t do enough homework and don’t understand what’s going on here. I get thinly veiled incredulity from Bitcoin Maximalists when I tell them that I did my research, and because of that research, I don’t invest. They truly just can’t believe it. 

Bitcoin’s Technical Shortcomings and Design Challenges 

Bitcoin is not a perfectly designed future state currency. It has many (in my opinion) fatal flaws that make it, at best, an interesting, thought-provoking experiment on the journey to forming a perfect form of money.  

Bitcoin is not just a potential store of value. It would be deflationary, perhaps significantly so, in a truly long-term sense if the vision of a Bitcoin Maximalist was realized. For example:

• Bitcoin’s supply is ultimately finite. According to Bitcoin optimists, the last Bitcoin will be mined in 2140.
• This deflationary problem would compound as keys are regularly lost, and the actual amount of Bitcoin available for liquidity would gradually shrink in a truly long-term sense.
• Many Bitcoin “investors” store their keys on physical flash drives, which they then secure. These are invariably lost, stolen, or forgotten over time.
• I am not aware of any democratic or capitalist civilization that has endured with a deflationary currency over a long period of time.

Also, Bitcoin transactions are expensive and impractical for day-to-day uses. For example:

• Transacting Bitcoin currently costs the equivalent of $1-$3 on the blockchain.
• The world does not possess, and will not possess for the foreseeable future, enough computing power for the Bitcoin blockchain to process anywhere near enough transactions to allow Bitcoin to be used as day-to-day currency. If widely adopted, the price to transact Bitcoin on the blockchain would skyrocket.
• Even true Bitcoin maximalists who know what they are talking about admit this. They believe that instead of being used for day-to-day transactions, Bitcoin will back a derivative currency that can actually handle large-scale payment processing—which, in my view, kind of defeats the purpose of avoiding a central agency like a company, individual, or government.
• Playing that out, the world operated on a gold standard for many years. The U.S. government accumulated a huge portion of the world’s gold and then moved off the gold standard. There is no reason that this same scenario couldn’t recur similarly with Bitcoin.

Bitcoin is a poor substitute for currency for most practical purposes going forward. Here’s why:

• Until further notice, Bitcoin will likely be extremely volatile, with huge price fluctuations both in nominal terms relative to the dollar, and in real terms in its ability to purchase real goods and services. Only true believers with iron stomachs would save up for a home down payment or college fund, for example, by buying Bitcoin.
• Bitcoin is not widely accepted as payment for goods or services, and must be converted into another currency first. I do not accept Bitcoin in return for my services at work or as rent, and I cannot easily use Bitcoin to purchase goods and services, nor pay my taxes.
• Those rare individuals or companies who do choose to accept Bitcoin as a form of payment have, in some cases, learned the hard way that the U.S. government requires one to pay taxes on $100,000 in income received via an equivalent amount of Bitcoin in dollars, even if the Bitcoin is worth less (or worthless) when the tax bill comes due in April of the following year.

In addition, Bitcoin is an environmental concern:

• Bitcoin mining consumes an incredible amount of energy. A large portion of the world’s population wouldn’t be aligned with adopting a currency with such large environmental consequences.

Bitcoin’s shortcomings are solvable in future cryptocurrency iterations—a bet on Bitcoin is a bet against innovation, and specifically, a bet against a future cryptocurrency that can solve Bitcoin’s shortcomings:

• Software updates and other variations on the blockchain can mitigate some of these issues, which means that there will be a perpetual flow of better theoretical alternatives to Bitcoin.

There is no such thing as a truly “trustless” marketplace. Even when I transmit Bitcoin to someone, I trust that they will then deliver whatever I am paying them for. A government must enforce contracts. And to enforce contracts, a government must have physical power. 

Bitcoin will not prevent the booms and busts of modern economies nor end fractional reserve banking. One can perform fractional reserve banking on any currency. Cryptocurrency investors learned this the hard way over the last several years as the industry relearned painful lessons that U.S. financial markets experienced in the early 20th century. 

The vision of true decentralization and trustless transactions is unlikely to be realized or necessary. While governments have collapsed and will collapse, the new governments or societies that emerge will not necessarily turn to Bitcoin.

• In the extremely unlikely event that the United States government and civilization crumbles, the most likely new currency is another fiat currency, not Bitcoin.
• Militaries or large majorities determine who holds power, not minority groups with grand visions (unless they obtain military power).
• A collapse of Western Civilization might well mean the end of globalization. The blockchain is dependent on peer to peer connection. Could Bitcoin mining infrastructue survive a true deglobalization event?

Additional Considerations and Common Talking Points Related to Bitcoin 

There are lots of arguments and talking points Bitcoin enthusiasts bring up. Here is my rebuttal to many of them.

According to Bitcoin Maximalists, the blockchain is single-use technology that powers only Bitcoin 

The blockchain is essentially a ledger—an accounting record of all Bitcoin transactions from the beginning of time. Anyone can, at any time, go into the blockchain and see who currently holds Bitcoin and the entire history of transactions. Anyone who joins the Bitcoin network gets a public address and private key—people send Bitcoin to someone’s public address, and one can use their private key (password) to send Bitcoin to someone else. 

Once someone tries to send Bitcoin, the rest of the network collectively verifies the transaction. Instead of having a person, like a banker, accountant, or central government official, verify that the sender does indeed have the Bitcoin they are trying to send, the rest of the network does this through a technical process called proof of work. Essentially, the network competes to solve very difficult problems that require a lot of computing power to prove, but once proven, can be verified easily by the rest of the network. 

And why does the rest of the network compete to verify transactions? Because they are rewarded with Bitcoin. This process of expending ever-increasing amounts of computing power to verify Bitcoin transactions on the blockchain is what makes Bitcoin so secure. To “hack” the blockchain, someone would need unimaginable computing power—more than at least 50% of the computing power currently being devoted to mining Bitcoin. 

As a result, transactions on the blockchain involving Bitcoin are as secure as almost anything you can imagine in the digital world. This is also why Bitcoin mining consumes so much energy output—more than 27,400 Terawatt hours, which is more than many small countries.

A true Bitcoin Maximalist is not also a proponent of the myriad applications of blockchain technology that you may have heard floating in the annals of Reddit subs or tech forums. The immense computing power that goes into mining (and thereby securing) the blockchain is, in their view, wasteful and insecure in all applications outside securing the Bitcoin blockchain.

In any application of blockchain technology, there is always a risk that overwhelming brute force can take over the blockchain and rewrite history. This situation – called a “51% attack” is when miners get control of more than half the blockchain’s mining power and manipulate the ledger. This is possible in any true blockchain, but unlikely when so much computing power is devoted to Bitcoin from so many different global locations.

One can imagine, for example, why a true decentralized blockchain would be an extremely costly or extremely vulnerable way to keep medical records or title records—a massive amount of computing power would be needed to ward off potential 51% attacks, and there is no true profit motive to incent long-term, perpetual defense.

Incidentally, this is one of the key convictions of a Bitcoin maximalist that I agree with. I do not think that true decentralized blockchain technology has a long-term application, at least as a secure way to record transactions, apart from Bitcoin or another dominant future digital currency. 

Bitcoin’s Sharpe ratio is not proof it is a good investment 

A Sharpe ratio is a way of measuring the returns of an investment relative to its risk. Bitcoin maximalists will point to Bitcoin’s Sharpe ratio from inception to today as an incredible risk-adjusted return.

Don’t let someone use this gem of an argument and get away with it.

Any asset that goes from a value of 0 to 1 has an infinite Sharpe ratio. Because Bitcoin went from $0 to $65,000 following a more or less geometric curve over the past 15 years, Bitcoiners are able to conveniently point to any five-year-plus timeline and point out an absurd Sharpe ratio. Come on.

The El Salvador experiment 

In September 2021, El Salvador became the first, and still the only, country on Earth to make Bitcoin legal tender. This was a great victory at the time for Bitcoin enthusiasts—a clear point that the future of a world dominated by Bitcoin as the form of digital currency was on its way.

Two years later, less than 1% of Central Bank remittances were in Bitcoin. Turns out the locals don’t really accept Bitcoin, and you will absolutely need alternative forms of currency to enjoy a visit to the country—though in some places, folks (mostly tourists) can enjoy the experience of using Bitcoin to pay for highly marked-up goods and services.

This experience has been widely documented, including by Bitcoin enthusiasts. The experiment isn’t exactly a shining example of how an economy thrives once Bitcoin is adopted as legal tender. I’ll bet El Salvador will adopt a different currency for its people within the next five years. 

Its current valuation is not proof that it has made it and is inevitably on its way to global domination as money itself 

Related to the previous point, Bitcoin is currently trading at close to all-time highs. A single Bitcoin at the time of this writing will trade for $65,000, implying a market cap of close to $1.3 trillion. Many Bitcoin people will respond to challenges with the snarky and aloof comment that their investment is up some XXXX% in a few years. 

“Number go up” is not a compelling argument, and investors should roll their eyes in return. The question is what to do today about Bitcoin. 

That a digital asset that generates no cash flow is trading at all-time highs is not an endorsement of value—it is, in fact, the opposite, an indication of risk. 

One point for Bitcoin: Contrary to popular belief, Bitcoin is not ideal for criminal activity 

Many people who are uneducated on cryptocurrency associate Bitcoin with the dark web, illegal activity, guns, and drugs. While this may have been the case several years ago, Bitcoin is, in practice, not a very good tool for criminals.

Because the blockchain is so secure and such a good public record for transactions involving Bitcoin, it has proven to be a relatively easy way to track money related to criminal activity. While you can’t necessarily identify someone based on their public address, authorities can use pattern matching and flows of funds to zero in on criminals. 

There are numerous documented cases of authorities tracking down drug dealers by using patterns and movements of Bitcoin through the blockchain.

So, while there will always be illegal activity with any currency, Bitcoin is not the supposed safe haven for criminals and drug lords that many who are not familiar with it may assume. 

Final Thoughts 

I believe I thoroughly understand the core of the Bitcoin thesis, and that I not only understand it, but deeply empathize with it. And I believe that I can get inside the mind of a Bitcoin Maximalist and not only understand, but agree with the rationale behind it and even admire them for the purity of their vision and true passion behind their beliefs. 

Bitcoin isn’t dumb. It’s deeply sophisticated. And adherents to Bitcoin Maximalism really believe that the adoption of Bitcoin is both profitable for them and good for society as a whole.

That said, I still reject their thesis. And I will admit—I did own a single Bitcoin for a time. I held it for a period in 2020-2021 while going through the first iterations of learning about Bitcoin and cryptocurrency. And I did make a cool profit on my brief —perhaps six months—period of ownership. I also felt kind of cool. 

I have since sold my entire position and now own zero.

For most people, I believe there is no reason to allocate any percentage of one’s portfolio to Bitcoin. But there will be those who truly believe or the “just-in-case” people who, due to FOMO or empathy with the Bitcoin Maximalist vision, will ascribe a non-zero probability to not just the collapse of world governments and currencies one by one but to Bitcoin, and not a future or alternative cryptocurrency being the replacement currency.

And to those, I offer only this: Treat Bitcoin like a currency, not an investment. It’s intended to be a store of value.

The logical thing to do, if you believe in Bitcoin Maximalism, as I don’t, is to reallocate a portion of the cash position you are comfortable with among various currencies or stores of value. 

For example, if you had $120,000 in cash, you might allocate $40,000 to USD, $40,000 to gold, and $40,000 to BTC. This might achieve the goal of preserving wealth. But, again, I believe it is more likely that it runs the risk of a near or complete wipeout in value in the long run and extreme volatility in the short run. 

I can admire the Bitcoin Maximalist vision and argument while dismissing it as a literal bet on the collapse of Western civilization. I can admire the Bitcoin Maximalist vision and cleverness of Satoshi Nakamoto’s invention while also soberly contemplating the technical challenges of Bitcoin. 

I believe that Bitcoin’s long-term value is $0. 

I do not believe there is a 1% chance, or a 0.1% chance, that it will become a world reserve currency and, therefore, will not multiply the future value of all currency by that probability to justify the current or even a small market capitalization for Bitcoin. 

Again, even if I turn out to be dead wrong and the Bitcoin takeover does happen without the collapse of my way of life as I know it, I’ll just start collecting my dividends and rental income in satoshis instead of dollars. The real value (in terms of the ability of that collected rent and dividends to purchase food, clothing, and shelter) of those income streams will remain relatively constant, regardless of which currency is flowing through the underlying assets. 

If you’ve read this far, I thank you for taking the time. And remember:

I don’t invest in Bitcoin because I am betting on the continuation of Western civilization, not its collapse or decline. If I did believe my government would collapse, I’d invest in guns, ammo, and canned corn. And if I believed that Bitcoin could peacefully replace my country’s currency, I’d still rather own real estate, businesses, stocks, or other alternative assets than a currency like Bitcoin.

Now, let’s discuss in the comments section.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.