Key Points

  • Always know what you are investing in.

  • Bitcoin is not a capital asset or a store of value.

  • The price of BTC is nearly certainly a bubble and likely manipulated.

“Know what you are investing in” is a steadfast, uncontroversial investing adage. Unfortunately, when it comes to bitcoin, this advice is being dangerously overlooked by both novice and seasoned investors. In this article I seek to set the record straight on what bitcoin was and has become, and what I believe is the biggest risk associated with bitcoin today.

Bitcoin's Early Days

When I bought my first bitcoin (BTC) in 2013 at 25 years of age, it was a small investment appropriate for my risk tolerance and stage of life. Not knowing much about it at first, I began learning all I could. My conviction grew, and in 2015 I invested much more, between $400 and $700 a coin. Little did I know I was about to go down a rabbit hole that would ultimately take me to a small town in central Washington state, building rudimentary data centers in garages to cash in on the bitcoin mining craze.

Bitcoin was designed to be a digital cash system. Unfortunately, the first real use case was Silk Road, an online marketplace for buying and selling illegal drugs. Although this gave bitcoin a bad name, the potential for its use in legal commerce was obvious. I liked the fact that a limited supply of bitcoins (21 million) was built into the protocol. It was a currency, not backed by a government but by computing power and law,1 so its value could not be inflated away. Bitcoin as a cash system was a very attractive investment in my view.

In the early days of bitcoin, because few people really understood how it worked,2 investors would send and receive units of bitcoin to gain a better understanding of the investment they had made. They saw their BTC leave one wallet and enter another wallet within seconds.3 In the early 2010s, instantaneous payment tools such as Venmo, Cash App, Apple Cash, and Zelle did not exist. Options for sending money were limited. An ACH transfer took several days and wiring money could take several hours at a cost of around $25, whereas bitcoin fees were less than a cent. Bitcoin had a magical feel to it.