Why is Bitcoin Soaring?

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Unless you live under a rock you've probably heard Bitcoin's price is soaring.

It’s tripled in the past year, briefly hitting $69,000, which Elon should like. It’s actually up 20-fold since the pandemic, when double-digit inflation was but a twinkle in Joe Biden’s angry eye. 

Incidentally, over that period gold — the other main inflation hedge, and my monetary first love — almost doubled. Meaning Peter Schiff can finally afford nice shirts.

So what’s driving the Bitcoin frenzy?

In short, ETF's, the Bitcoin “halving,” and of course ongoing inflation.

Bitcoin to the Moon

Starting with the ETF's, Bitcoin is getting massive flows thanks to the new Bitcoin ETF's -- over $15 billion so far. An ETF is basically a container -- think of it like owning part of a bag of treasure. Most ETF's toss stocks in the bag or maybe real estate. Bitcoin ETF's contain Bitcoins.

This is a risk, of course -- you're trusting the custodian, the guy holding the bag -- say, Blackrock. 

By the way, my lead sponsor Unchained.com offers an alternative where you retain custody of your Bitcoin. Basically a safety deposit box you can trade, borrow against, and put in an IRA.

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Still, ETF's are easy for people if they're new to Bitcoin and don’t understand the importance of custody.

The ETF's turn around and buy Bitcoin with that money, and presto the price goes up.

The second factor is the so-called halving, where the number of Bitcoin produced per day cuts in half. This happens automatically every 4 years, think of it like half the gold mines in the world suddenly shut down and can never re-open.

This reduces the flow of new Bitcoin, which tends to drive the price up. Historically by a lot: about 2 to 4 times in the past 3 halvenings.

So if that happens again we could be looking at $100,000 Bitcoin.

Inflation on Bitcoin

Finally, the big one: inflation. Bitcoin was created by a programmer -- Satoshi Nakamoto -- who was obsessed with gold's role as a money. So he modeled Bitcoin to work exactly like gold. 

Meaning it's free from government control, it has a limited supply, and its main value is a backup money in case government money dies.

This means that inflation makes Bitcoin act like gold, but a super concentrated version -- the ups are bigger, the downs are bigger. Hence these past couple years, with gold doubling and Bitcoin going up 20-fold.

Conclusion

Bitcoin goes up a lot, it goes down a lot. But the fundamental value is what degree it will replace paper money when that day comes. The other contender, obviously, being gold. 

Gold, of course, has a long track record, but it's also easy for governments to seize, at least on the scale to run a gold-backed money. FDR did it in 1933, it'll happen again.

Meanwhile, Bitcoin cannot be seized, and you can basically email it. On the other hand, many people feel uncomfortable using a money based on software.

Still, if you think paper money will die, you might want to have some of both. 

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Final point: If you're new to Bitcoin go slow -- get like 20 bucks and goof around buying, selling, trading until you understand it enough to hold through the price swings. Otherwise guarantee you'll sell at the wrong time — many others have.

As for me, I generally own both. Because I know on a long enough timeline every paper money dies. This one included

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