Why you shouldn’t buy Bitcoin.
Our football club is intrinsically linked to the currency that is known as Bitcoin, but we want to tell you that you SHOULD NOT invest in it.
Why? Bitcoin is a high-risk volatile asset; its price can drop quickly, leaving new investors with losses. Also, Bitcoin has no customer service; if you make a mistake and lose your Bitcoin, there is no call centre to help.
Anyone investing in Bitcoin without understanding it is taking a significant risk; therefore, if you are reading this and are new to Bitcoin, please do not invest in it. However, we do encourage you to do one thing, which is to learn about Bitcoin. Once you know what it is, how it works and why it was developed, you will understand why it is one of the most important inventions in modern times. Further, you'll see why so many believe that Bitcoin is particularly important in the current situation, as economic chaos threatens to transform society in the coming decade.
Introduction
Bitcoin can at first appear complex as it is money like no other; it comes with trade-offs, new challenges and a required level of technical education. Nobody should be investing in Bitcoin without having spent time understanding it.
Most people only use sovereign currencies, such as the Pound, Euro and Dollar. With these currencies, central banks set the monetary policy; for example, in the UK, this is The Bank of England. In many countries, people only use the domestic currency, but in countries experiencing high inflation, you may find people accepting currencies from other countries. In Venezuela, where the country has experienced many years of high inflation, people often use the Dollar instead of the Bolivar to protect their wealth.
With Bitcoin, it is essential first to understand that it is not a domestic currency but, in fact, a global currency, available for anyone, anywhere in the world. While developed and democratic nations tend to have relatively stable currencies, this is not always the case in other countries; for example, Turkey is currently experiencing an inflation rate of over 70%. Inflation drives down the purchasing power of a currency: 100 Turkish Lira at the current inflation rate would effectively be worth around 30 Lira next year. High inflation can have catastrophic effects on not just the people but the stability of an entire economy.
The Inflation Problem
High inflation is not just a problem of less developed countries; it is currently something the majority of the world is experiencing. We are seeing this in the US and the UK, with inflation rates rising towards 10%. These inflation levels can significantly negatively affect people's wealth if extended over prolonged periods. An inflation rate of 10% over five years would mean £1000 of savings would be worth a little over £600. As you can see, cash can rapidly lose value, which is the root cause of the current cost of living crisis.
Many factors can drive up inflation, but one key factor is the expansion of the money supply, where the central bank creates new money for the government to cover their expenditure. While individuals and companies have to operate with a budget, the government has access to an unlimited supply of money via the central bank.
"Money printing" helps governments when there is a significant reduction in taxable income. This was applied during the Global Financial Crisis of 2008 and was considered an unprecedented once-in-a-generation emergency measure. But it was used again during the pandemic, and, as is the case with any risky activity, central governments have become less concerned about printing even higher amounts of money. In early 2021 the money supply grew by 15%. This additional money then feeds into the economy, driving up inflation.
Inflation harms the poorest in society the most. A research piece by a US thinktank FREOPP highlighted the compounding effects that inflation has on lower and middle-income families. You can read their article Inflation’s Compounding Impact on the Poor here.
Prior to 1971, the world operated on something known as the gold standard, which was designed to ensure currencies were stable as countries fixed the value of their currencies in terms of a specified amount of gold, or linked their currency to that of a country which did so.
Ray Dalio, a respected US investor and Hedge Fund manager, recently made a video to accompany his book Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail. In the video, he explains how nations and currencies rise and why they ultimately fail. You can watch the video here. Experts like Ray Dalio suggest that The United States lead the current world order but this is in decline.
Many observers state that the decline of The United States power started in 1971. Before 1971, the world operated on the gold standard to ensure stable currencies. Under the gold standard, countries fixed the value of their currencies in terms of a specified amount of Gold or that of a country which did so.
In 1971, under President Nixon, the United States ended the gold standard as they could not finance their spending anymore. Instead, the United States pushed the world to use the US dollar as a reserve currency. Whilst ensuring the United States remained the world's leading economic power for the last 50 years, this action set in train a process concentrating the benefits of economic progress into smaller and smaller groups of well-connected people. The website, WTF Happened In 1971? highlights the negative impact this change in monetary policy has had upon income inequality, living standards and a range of other quality of life measures.
There is no single goal for Bitcoin rather than allowing people to transfer value around the world freely, but the protocol's design is such that it will enable the nature of money to be challenged.
One critical benefit of Bitcoin over traditional currencies is the total supply of Bitcoin will never exceed 21m coins. Where we have explained that central banks can issue new money out of thin air, this is not possible with Bitcoin. Some Bitcoiners hope this predictability will make Bitcoin a preferred currency over time, making Bitcoin the global standard.
Why is Bitcoin Volatile?
One key feature of Bitcoin is that it is decentralised, designed so that no individual or group can have too much influence over it and that it can't be turned off. We can save learning about decentralisation for another day, but for now, to have honest money, it must be protected from the influence of dishonest parties.
There is no fair way to distribute a new currency, only more honest ways than others and Bitcoin's distribution is complicated by its decentralisation. Bitcoin's distribution is by mining, a process that allows people to use computers to solve complex puzzles to get rewarded with new coins; all they have to do is to run a programme and expend energy. The cost of undertaking this work ensures the process is honest, but we can explain mining in more detail another day.
It is also important for Bitcoin to have a market price; therefore, Bitcoin must be available to trade on what is known as an exchange, where people can buy and sell Bitcoin in their local currency.
With these factors and Bitcoin being relatively new, it is still not widely used, and its market price can be volatile. Whilst the long-term trend is for Bitcoin to be volatile to the upside, we do not encourage people to invest in it without fully understanding what it is and the risks involved. Instead, we promote education because we believe the benefits of Bitcoin far outweigh the negatives.
Many consider the volatile price of Bitcoin unfavourable for two main reasons:
People who buy high can lose money if the price falls
It isn't easy to use Bitcoin as a currency when the value fluctuates
These are fair criticisms, although expected, given the age of innovation. Over time, the volatility of Bitcoin is likely to decrease as more people use it; this is known as liquidity. Still, we may be many years away from it being stable enough to be used as an everyday currency for some people.
In the meantime, Bitcoin will see large percentage swings in its value. Bitcoin certainly has never gone up in a straight line, and it is currently in what is called a 'bear market', where it has lost 70% of its value in the last seven months. Bitcoin has been through four of these cycles in the past 13 years, where its value has risen sharply and then dropped. The market capitalisation of Bitcoin is currently just under $400bn, a long way off Gold, which is presently over $11tr. Many observers and advocates anticipate Bitcoin could reach Gold's market value within the coming decade, but nothing is guaranteed.
Nevertheless, we encourage people not to dismiss Bitcoin because of its price volatility. We highly advise people to spend time understanding Bitcoin and the benefits it can bring to the world. Such a journey of discovery involves education on the principles of money and the technical aspects of Bitcoin. Such a process is called "going down the rabbit hole", as each new piece of acquired knowledge raises further questions and searches for information. Most of you who will go through this experience will find they will slowly and then suddenly understand the importance of Bitcoin. We call this being "orange pilled", and it enables you to see beyond Bitcoin as merely a financial investment. Be advised that most of the world is yet to start this process.
Other Benefits of Bitcoin
There are many other benefits of Bitcoin, a few of which we will discuss here.
Instant global settlement: the current financial rails for settling payments are controlled by a few small companies. There are many intermediaries when someone wants to make a payment, extracting value from each transaction. If these transactions are international, they can also sometimes take days. With Bitcoin, a transaction can be settled from person to person globally and within an hour. Using the Lightning Network, a Bitcoin layer 2 (again, a subject we can discuss later), payments can be settled globally, instantly and at near-zero cost.
Censorship resistance: with Bitcoin, anyone can send anyone a transaction. No middle-men, bankers or government policies can block a transaction. For someone living in a Western Liberal Democracy, this might feel unnecessary, "The Bank won't stop me from buying a cup of coffee," we can hear you say. Not everyone lives in a Western Liberal Democracy; in China, under the social credit score system, the CCP can block anyone's access to money for breaking any government rule.
So much more: from global payments to fraud prevention to crowdfunding, Bitcoin, as good money, offers so many advantages over traditional payment rails. You can read all about these at bitcoin.org.
Further, experts and developers are finding new and innovative ways Bitcoin can help society, from stabilising energy grids to enabling oil extraction to reduce carbon emissions to providing a means for people to protect and keep private their data off the Internet. The comparison that is made is that Facebook was founded 14 years after the launch of the World Wide Web. We're roughly at the same stage now concerning Bitcoin (it launched in 2009). So, we're still very early regarding its development and potential.
Please Do Not Buy Bitcoin
As we said, please do not buy Bitcoin; please learn about Bitcoin instead. There are so many out there to help you; we have listed a few below:
Books:
Podcasts:
What Bitcoin Did (Peter McCormack’s podcast)
Articles:
The Bullish Case for Bitcoin by Vijay Boyapati
A most peaceful revolution by Nic Carter
A Human Rights Activist’s Response to Bitcoin Critics by Alex Gladstein
Why Bitcoin Really Does Represent the Democratization of Money by Aaron Van Wirdum
Bitcoin is Hope by Robert Breedlove
Other resources:
The Bitcoin White Paper by Satoshi Nakamoto
People to follow on Twitter (a list compiled by Peter McCormack)
There is a lot to read here but please take your time to understand Bitcoin.
If, after reading this, you do decide that you would like to invest in Bitcoin, please remember to be careful on the technical side. We have a saying in Bitcoin “Not Your Keys, Not Your Bitcoin”. With Bitcoin, you can take complete control of your coins; this is something you should spend time understanding. You can read more about this on the Ledger website, and Ledger supplies hardware wallets, a device you can use to store your Bitcoin.