Before you look at the extraordinary chart below, ask yourself – if you could go back to any point in history and buy any one thing, what would you choose?
One good option would be a famous relic. Find the Buddha, Mohammed, Cleopatra or Shakespeare, and swipe something from their house or cut off a lock of hair. That kind of thing will always be highly prized. It’s difficult to prove the authenticity of such artifacts, though, and they tend to wither over time.
Perhaps you would like to purchase the work of a renowned artist, before they became widely recognized. Vincent van Gogh, famously, only ever sold one painting for money–about $2,000, in today’s terms–and most of his works were barely worth the materials used to create them. (In fact, that’s exactly how much they were worth: in his younger years, at least, he’d often trade his finished paintings for more painting supplies.) To date, the most expensive sale of a van Gogh–“Portrait of Dr. Gachet”–was for 82.5 million dollars. Dr. Gachet is estimated to be worth twice as much today, and one can only imagine how many more multiples it would require to purchase “The Starry Night.”
The most ridiculously underpriced investment in history was made by a man named Peter Minuit, of the Dutch West India Company. His wasn’t exactly a fair deal, though. As noted by researchers at the National Library of the Netherlands:
The original inhabitants of [Manhattan] were unfamiliar with the European notions and definitions of ownership rights. For the Indians, water, air and land could not be traded. Such exchanges would also be difficult in practical terms because many groups migrated between their summer and winter quarters. It can be concluded that both parties probably went home with totally different interpretations of the sales agreement.
The Lenape “sold” Manhattan to Minuit in 1626 for, reportedly, around 60 Dutch guilders worth of trinkets. Converted to 2021 USD: that’s a bit over $1,000. Today, in large swaths of the island, a single square foot of land is worth more than $1,000. In certain neighborhoods, a square foot is worth over $10,000. Altogether, Minuit paid around two trillion dollars. (For context, that’s about equal to the annual gross domestic product of Italy.)
Investing in Manhattan in the 1600s, or a van Gogh in the 1800s, or stealing from Jesus in 20 C.E. would’ve turned out to be quite profitable. But there’s another, very modern investment worthy of a place in this discussion. In fact, this asset has one definitive advantage that Jesus’ socks, van Gogh’s paintings and Manhattan don’t. With this asset, you could’ve enjoyed the fruits of your time travel investment without waiting hundreds of years.
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As of this writing, the price of one Bitcoin is approximately $46,400. Earlier this year, at its all-time high, the price was nearly $20,000 higher. It was only a few years ago, though, when such valuations would’ve been considered utterly impossible.
Set your time machine back a decade–to, say, 2010. 33 Chileans are trapped in a mine, BP spilled some oil, and President Obama is signing The Affordable Care Act into law. Almost nobody is concerned with, or even knows about, a fringe technical project called “Bitcoin.” But a small community of cryptologists, criminals and libertarians are “mining,” accumulating and trading these so-called computer “coins” for about $0.0008 a pop.
Some of these folks are getting rich, actually. By year’s end, each of their Bitcoin will be worth approximately eight cents. A 100x gain in just one year! Could it get any better?!
In history, you can find examples of assets appreciating 100x or more, in a few years’ or even a single year’s time. And some things–like van Gogh paintings and land in Manhattan–have, over centuries, multiplied in value by many exponents. But has anything in history ever had the kind of value appreciation of a van Gogh painting in the span of a few years’ time, without crashing back down shortly thereafter? To date, the only example you can find is Bitcoin.
That would make Bitcoin the most successful investment asset in history.
Unfortunately, you don’t have a time machine. You can’t go back and turn this knowledge into a personal fortune. So what exactly can you do? What are we supposed to learn from the history of Bitcoin that applies to our lives now?
Let’s consider a few lessons you should, and should definitely not, learn from Bitcoin’s success:
TRUE: Buying and holding Bitcoin has almost always been profitable
As mentioned, the price of BTC sits today around $46,400. It has only ever been that expensive once before in history, during the period between mid-February and mid-May of this year (with a very brief dip below this level at the end of February). Therefore, we can say that:
If you obtained Bitcoin at any point between its inception, in January 2009, and today–with the exception of a brief period earlier this year–you would’ve made a positive return on your investment.
You might reasonably infer, from this conclusion, that Bitcoin is not done going up. After all, if it’s gone up for over a decade, and only drops for shorter periods of time, that’s a pretty good sign for the future. However…
FALSE: Past performance guarantees future returns
It is a time-honored principle among investors, that past performance does not guarantee future returns.
Whether you’re talking about stocks, gold, cryptocurrencies, or anything else of the sort, this statement is always true. It may as well be a law of the universe, alongside gravity. Some of the most promising cryptocurrencies of the early 2010s have withered away already. Anything that goes up can come down and given enough time, must do so.
Most of the successful companies in the world today are relatively new; very few can count themselves even a century old. The richest people in the world are new tech entrepreneurs, whose fortunes were made displacing old businesses that were once themselves high flyers.
This doesn’t mean Bitcoin will fail any time soon, it’s only that nothing about Bitcoin’s past gains guarantee similar gains in the future. Anything can happen and, according to Murphy’s Law…
FALSE: Bitcoin can replicate the scale of its past gains
Bitcoin’s price has risen from nearly $0 to over $60,000. There’s nothing preventing it from growing by another $60,000, or more, in the future.
However, Bitcoin cannot rise by that same proportion in the future.
The relative price of one Bitcoin today, compared to its earliest months, is just silly to think about. $60,000 is 7,499,999,900% of $0.0008. $60,000 is infinity percent of what Bitcoin was worth in its first days and months: essentially nothing. There isn’t nearly enough money in the world to where, even if all of it were converted to Bitcoin, its price could increase in such proportions.
(In case you’re interested:last year, Visual Capitalist estimated that the total of every bit of every kind of value that exists in the world–including investments, derivatives, real estate, military spending and so on–comes to around 2.7 quadrillion dollars, or 4,575,531,666,566% of $60,000. Basically, for Bitcoin to increase like it has in the past, the whole world would have to convert nearly every existing financial instrument into Bitcoin.)
The point here is this:
As Bitcoin matures, and becomes more expensive, its growth (or, more accurately, its volatility, measured on a long-term scale) has to slow down. By the very laws of mathematics.
What’s even more interesting is how this might affect our investing decisions right now.
Just think about it. The opportunity for giant profits was far greater in 2010 than in 2015, and 2015 as compared with 2020. If you believe Bitcoin will rise in the future then, according to this principle, you will be able to make more money now than your children or grandchildren will ever have a shot at.
FALSE: There are people today who know what Bitcoin will be worth in the future
From day one, nobody has had any idea what Bitcoin would be worth even in the near future.
Let’s go back to the beginning. We can reasonably assume that, when Bitcoin was worthless, nobody–not even its most ardent fans–thought it could ever be worth $60,000. How can we know what they were thinking back then? Well, think about it like this:
Anybody who knew about Bitcoin in 2009/10, and believed it would one day be worth tens of thousands of dollars, would’ve bought as much of it as possible. Right? At $0.0008 or even $0.08 a piece, they could have purchased tens of thousands, or millions, capped only by the total amount of Bitcoin that existed at the time and who was willing to sell it. Nobody did this, though. Nobody owns that much Bitcoin today.
There’s only one person (or persons) in existence who may own at least one million Bitcoin. That would be the creator of the system itself, Satoshi Nakamoto. The next largest “whales”–who each own hundreds of thousands of Bitcoin–are all entrepreneurs who founded cryptocurrency-related businesses in the early 2010s.
In recent years, people have gotten more accurate at predicting Bitcoin’s future. That’s simply because, as we just mentioned, the sheer range of possibilities is more limited. Still, if you surf the web right now, you’ll find extremely wide-ranging guesses. You’ll find a Nobel-prize winning economist describing Bitcoin as a bubble, and a Ponzi scheme, destined for $0.00. You’ll find experts predicting prices of $1,000,000 per coin, and bona fide investment managers saying that’ll happen next year.
You’ll also find research papers, mathematical models and analyses with all kinds of other educated guesses, but the fact remains: nobody really knows. And that brings us to one more, crucial point…
TRUE: It is impossible to know what Bitcoin is truly worth
When stock market investors are deciding whether to buy a company, they look at all kinds of real, tangible things: what the company sells, for example, and what it owns. That allows them to estimate the value of the company as a whole.
Bitcoin has no real value apart from its intangibles.
Bitcoin has a price, just like a company’s stock, but it isn’t valuable in any conventional sense. You can’t build things with it. You can’t eat it. You can’t use it to defend yourself. It’s just computer code: specifically, a list of every Bitcoin payment ever made, and some machine logic that keeps the system running.
Bitcoin was, in the beginning, created with a real purpose in mind. Satoshi Nakamoto, the founder, wanted to allow people to pay one another without going through a traditional financial institution. His computer money would be fraud-proof, government-proof, and self-empowering. Today, though, very few people actually pay one another with Bitcoin (rare exceptions include countries where inflation is rampant; yet, even in those cases, “stablecoins”–cryptocurrencies that don’t sharply rise or fall in price–are the more viable alternative).
So why does Bitcoin cost $46,400, instead of $0? There are two reasons:
- People think that other people will pay more for the Bitcoin they buy today, in the future. We call this speculation.
- Some people think that Bitcoin will one day be useful–if not integral–to society.
Bitcoin enthusiasts believe in a future where, in place of paper money printed by governments, everybody will use Bitcoin. If that day ever comes, Bitcoin will be, truly, valuable. Incalculably valuable.
Until then, Bitcoin remains a speculative asset. A thing people make guesses about, with no underlying utility. That doesn’t mean its price won’t continue to go up; only that, unlike with corporate stocks, it has no “correct” price to begin with.
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If you reached this point in the article, you now know quite a bit about the history of Bitcoin, and what we can–and should definitely not–learn from it.
But don’t take this as investment advice. Nobody can tell you how to use your money. That decision is squarely on your shoulders. It’s your duty to do the research necessary to understand your options, and make an informed decision. Bitcoin is one way you might invest your money, but there are plenty of viable alternatives like stocks, bonds, precious metals, even other cryptocurrencies.
No matter what you choose, make sure to keep an open mind and think for yourself. Like the early investors in Bitcoin did. Those people didn’t care what anybody else had to say. If they did, they wouldn’t have bought a silly, little made-up coin that nobody had ever heard of or cared about.
Independent thinking is the most valuable asset you can own. Even more valuable than Bitcoin.
