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Bitcoin: Part 2 of 2 - A Fundamental Risk Analysis

Updated: Jan 22


As an investor, accounting for all variables (positive and negative) with objectivity is the most effective means of ensuring effective decisions, To buy or not to buy. To sell of not to sell. With so many risks facing this relatively new asset class, being alert and ready for anything is crucial. This is the best way to minimize our downside risk by openly analyzing the risk factors facing Bitcoin, As these risks expand or regress, we can either go more aggressive into a bitcoin position or secure profit before it turns.

Be objective and read with purpose, put aside any bias and be critical.


Too much irrational psychology is driving this insane price action.

This does not take away the fact that bitcoin can very much continue to see increase price action, but it clearly has many risks not being accounted for and discussed. Being an investor is about knowing the risks and discussing them to keep them on our radar to not be blind sided if the asset price reverses. Adversity for this speculative asset still exists.

1) The psychology


If we look at the psychological component of bitcoin and how it's being driven/portrayed, bitcoin has been piggy backing on the principles and appearance of Gold, unable to stand its own ground with its own identity. I'm trying to compare bitcoin to gold in terms of psychological penetration for value perspective. For bitcoin to claim TO BE digital gold, it has to pass and survive through different economic cycles and markets, as well as attain mass cultural and economic adoption. Until it passes through its tests and cycles to further validate its existence and thesis, it is a speculative ride. More like fools gold until it proves itself to weather all these risks. Once that occurs, then it can emulate the value of gold as being its digital equivalent. It is not there yet, objectively speaking, that cannot be denied. This is a matter of objective analysis, not driven by any desire for a specific price action.


Look also at how it shows itself online as having the appearance of a gold coin. That is validation of the bitcoin ecosystem trying to make bitcoin appear like something it has factually not yet established. It makes bitcoin look like a marketing game more than anything else. Trying to benefit from the physical appearance of Gold, even though it has no physical form, a little conflicting.




Why can't bitcoin have its own identify?

Why does it have to use the subconscious value of gold for it to be validated?

It should find strength on its own. Is that not reasonable of the expectation for an emerging new asset?


Bitcoin is thriving off perceived value, not true value. Bitcoin needs internet connection, implying a dependency on technology and natural resources to allow Bitcoin to exist and be held on devices and so on. There seems to be a human desire to always deviate from natural reality, which in my observations always yields undesirable outcomes.




There is also a huge psychological flaw I am seeing growing, where people are using the adoption of companies allowing bitcoin as a means of payment on their platform as a value booster for bitcoin. The flaw in this is that it would require people to use it as a currency to actually pay for things/buy from companies for this to validate its value. People aren't using it for that, therefore these actions of allowing bitcoin doesn't add value unless it were for that purpose. So if we simply analyze the way bitcoin users engage with it, we then see it more as an asset, not a form of payment. That diminishes the fundamental value proposal of companies allowing it as a form of payment, since no one is going to use it for that, at least not currently since people are hoping to make it rich instead.


2) Political Risk/Centralized planning


Socialism by nature requires centralized planning, which means control over the market to ensure it controls how it sees best to allocate resources, hence centralized. This applies to also having control over the economy which is where the market (the people) have the greatest power to control the collective outcome through collaboration with their accepted means of exchange. If 2020 and still into 2021 has taught hopefully anything enlightening to many, is the clear observation of the amount of control and power over the people and their dynamics the government has. That is centralized planning within the market place, as businesses, workers and consumers should typically produce the desirable dynamics/outcomes, and not the central planner.


Now that we've established this centralized reality of our ecosystem, that risk is also expected with bitcoin or crypto. As they behave with a state knows best and centralized planning framework, they desire to control the pieces on their board, the premise of military framework. That is why they still utilize Keynesian economics to fuel this new modern day theory type of economic philosophy in the central banks and government. This requires them to control the variables in the short term to produce short term monetary confidence; look at their fixation on the utilization of GDP and unemployment as their favorable metrics. Using the printing press, they can subsidize employee salaries of businesses not even operating or give new money supply through welfare, EI, CERB, unemployment. They can create the appearance of strong GDP in the short term by printing, and giving money to people to spend. But this doesn't produce productive expenditure, which is the only true way of expanding the economy efficiently and sustainably.


Having said that, knowing they behave this way all over the world, how can we so naively assume they wont find a way to squeeze their political and regulatory grips all over Bitcoin? How do we know they wont push it back into the dark web, like China is doing to implement its own digital coin?

- https://news.bitcoin.com/big-banks-big-troubles-hsbc-deutsche-societe-and-citi-lay-off-thousands-worldwide/


If USA does one of their own, they don't want to have competition. Plus there's a significant possibility that a significant percentage of all bitcoins are owned by a small group of individuals validated by the ledger. That puts the confidence of the markets currency in the hands of unknowns who can easily impact massive volatile swings in the price. That isn't good if we want it as a currency. Again, from a central planning POV, doesn't seem logical to allow this to dominate or thrive the way they want it to. Governments will do whatever it needs to do, to minimize risks within their plans, especially with the geo-political and social-economic issues occurring globally, and growing. With how much debt and fragility that exists in the global economies, they need to be very careful with how they let the market bring unpredictability to attaining their desirable and "controllable" outcome.


Governments can say it doesn't accept it as tax payment. It can also prevent banks from allowing it to be processed or stored with insured protection like regulated fiats. This means the default fiat or form of money will be what it can control and regulate. That is until the very framework changes, which simply the people adopting bitcoin doesn't change that centralized planning reality. This framework currently empowering political power over the market place exists in all 3 major continental economies; North America, Europe, Asia. That is a huge uphill challenge that may not produce the outcome we think, in the face of political and monetary forces. The banking system works on loans, and it is regulated by the government, so yet again another place where most of the money supply comes into the market comes in as regulated fiat. Investing, paying taxes, having a bank account, getting loans; all places of exchange that requires the accepted regulated fiat.


Free market having economic power means no political power, therefore no centralized framework. It's 2021, and all of the world’s major governments are deepening and demonstrating their power over the market, clear as day. So this is a massive risk because to control the outcome especially when it's all about votes in the midst of all sorts of chaos (politically, economically, socially), you can't possibly assume a positive development. There is too much unpredictability, that is asking for more chaos in a already massively chaotic present reality. There is no supporting action to validate that it will certainly turn out as the bitcoin holders desire. We are more likely to see governments try and control the crypto ecosystem, to ensure they minimize their risks, after all they do it with everything else. Therefore it would seem as though it's naïve to assume otherwise, after witnessing 2020 and the start of 2021. I don't know why those who talk about bitcoin being decentralized as such a beautiful value to it when the system is more likely to want to control it, then not, that is centralizing it into a political framework. Doesn't seem very outside the system if it depends so heavily on the system to grow its market cap.


Extra Sources

- “Digital Gold” and Geopolitics: Bitcoin as a Political Risk Haven (forbes.com)

- Effects of the Geopolitical Risks on Bitcoin Returns and Volatility | Request PDF (researchgate.net)

- This Is Who Controls Bitcoin (forbes.com)

- Bitcoin’s Network Operations Are Controlled by Five Companies - Bloomberg

- Regulation of Cryptocurrency Around the World (loc.gov)

- Is Bitcoin the Answer in a Financial Crisis? (thebalance.com)


2) Monetary point of view/ Currency or asset?


From a monetary and economic POV, to allow an asset (since it is being held like an asset not a currency) to be utilized in the ecosystem as a primary currency, is just confusing when trying to observe the intent in relation to what is actually being done with bitcoin. We need to ensure that what we implement is reliable and dependable, or else we are attempting yet again another experiment, which is what the government did when it went off the gold standard and now look at the economic disaster we are in. Human ego and greed allowed to deviate the collective from natural and sustainable progression, seems to cause so much social economic chaos.


Also, as a form of currency, it would be equivalent to a fiat since it is not backed either. Another conflicting argument that is made about it. The hedge against fiats is also a fiat, the only difference is that it is a digital fiat. This is why I believe in bitcoin if it is backed within a monetary framework that makes sense, because things that are not backed in the modern age of monetary theories, are at almost certain risk of greed and/or human ignorance to be abused. Being backed helps to alleviate those psychological risks. How the collective operates should be founded on principles of reality to ensure sustainability, a logical desire to minimize consequences on the collective.


So that is another monetary argument often used that doesn't appear to make much sense to me. It is as thought human desire for price action to make money has taken the purpose of bitcoin on a different route than its original intent. Remember also, for an ecosystem to utilize a standard form of exchange, there needs to be predictability in the price of bitcoin, and it cannot be volatile like it currently is. How do we create a proper system of exchange with something like bitcoin that changes price by multitudes of % on a daily basis? Doesn't seem very logical. The economy cannot exchange goods and services with that volatility. It also has a slow transaction capability which fuels the risk of what happens if there is a better improved version Bitcoin 2.0 that solves that problem? Mass exodus to 2.0?

It needs to be stable as a means of value for it to be utilized as desired.


Why isn't the focus on how to actually implement it and make it a relevant currency that can be utilized? Shouldn't we focus more on the actual utility of it rather than the price action? Greed appears to be driving this more than anything else.


Forking bitcoin into new branches can easily be done and centralized, basically replicating the dilution of money supply. So even if bitcoin itself is finite to 21 million, the crypto ecosystem can expand and fork in countless possible ways. So, theoretically, that finite component can be circumvented, by constantly forking bitcoin into new forms, which would only devalue bitcoin itself. The entire crypto space is at heavy risk of this possibility since there are limitless possible new coins that can be created. And would be insane to back a digital fiat by another fiat. That's absolutely redundant. This does not solve the fiat issue.


When you look at social media, the very community also mocks and laughs at those who use and or used bitcoin as a means of exchange (like its supposed purpose) for payment. Isn't that the whole purpose of it? Yet they create a sense of don't ever sell just hold, well then when will anyone actually use it as a currency when using it as a currency seems wrong within the crypto community. Seems more like greed for price action than about the beauty of its utility. That also expands the negative gap within the fundamental framework of bitcoin. People want it to be an asset while arguing monetary purposes. Its conflicting logic and only brings more unknown to the outcome of this asset. And I call it an asset because people treat it that way.


Is bitcoin and what it is currently versus its original purpose a risk we are yet again willing to take? If you say yes, is that an objective stance or a desire?

Does it make sense for the collective when we already have so many problems?


Extra Sources

- (PDF) Bitcoin - Asset or currency? Revealing users' hidden intentions (researchgate.net)

- Bitcoin Is An Asset, Not A Currency (forbes.com)

- BitcoinAsset?.pptx (nyu.edu)


3) Storage of Value (SoV) Proposal


For this section we will utilize references directly from Bitcoin.com to highlight the very plausible argument for this value proposal:


"Over the last few years, many have claimed that bitcoin core (BTC) has turned into, or will soon become, a store of value (SoV). Proponents of the BTC-based SoV theory seem to think that money can somehow store value and if it’s held long enough, the price will be higher or predictably useful when spent at a later date. This is an economic fallacy however because money cannot store value and, as innovative as bitcoin is, it will never be immune to market influences.

There are a ton of people who believe that BTC is a store of value and that if they keep hodling someday they might be super wealthy and protected from the world’s turbulent economy. Except this couldn’t be further from the truth. BTC is not an SoV currently, and never will be due to the fact that money itself cannot be an SoV. The idea that money cannot serve as a store of value has been written about by many economists over the years including Carl Menger, Murray Rothbard, and Ludwig von Mises. Carl Menger (1840-1921) was the founder of the Austrian school of economics proper. Menger was one of the first economists to explain in detail about the relationship of value and money to market prices. Menger writes in Principles of Economics:

Value is … nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs … and in consequence carry over to economic goods as the … causes of the satisfaction of our needs."


- https://news.bitcoin.com/putting-an-end-to-the-bitcoin-store-of-value-fallacy/


3) Sustainability Risk


“Currently, the tool estimates that Bitcoin is using around seven gigawatts of electricity, equal to 0.21% of the world's supply. That is as much power as would be generated by seven Dungeness nuclear power plants at once. Over the course of a year, this equates to roughly the same power consumption as Switzerland.”

“Mr de Vries said that Bitcoin still appears to use far more energy per transaction than all the world's banks put together, when considering the amount of energy used by data centres. The electricity used for Bitcoin produces about 22 megatons of CO2 annually, a study in the scientific journal Joule estimated. That is as much as Kansas City in the US.”


- Bitcoin's energy consumption 'equals that of Switzerland' - BBC News

  • Published 3 July 2019

Cambridge Bitcoin Electricity Consumption Index

- https://cbeci.org/

- https://digiconomist.net/bitcoin-energy-consumption



As of Jan 14, 2021

Theoretical lower bound: 4.86 GW - 39.39 TWh

Estimated 13.73 GW - Annualised consumption 111.27TWh

Theoretical upper bound: 32.58 GW - 263.97TWh