Bitcoin — A Random Walk From Skeptic to Evangelist

I was introduced to Bitcoin in passing around 2017 and I have to admit I was very skeptical. I started investing when I was 15 so that means I’ve been investing for over 20 years. The only thing you learn after 20 years of investing is that nobody has a crystal ball. The market will never do what you expect.

When I heard my cousin bought 1 Bitcoin for $8,500 on the dinner table when we were all together for Thanksgiving, it literally blew my mind. I spent like an hour trying to convince her that’s crazy town and pure speculation. The only comfort I had walking away is that she was completely aware it was a gamble, she could afford to lose it all, and that it was fun to ride the wave.

It was the first time Bitcoin was getting serious press and airtime. Everybody was talking about it!

Bitcoin would go on to return over 100% over the following 3 weeks. I ask myself even today, who was the greater fool.

Over the course of the next 12 months, the price of Bitcoin dropped 75%. I suddenly felt vindicated the next year at the same dinner table.

The point I’m trying to make is again nobody has a crystal ball. However…

Nothing is more powerful than an idea whose time has come. — Victor Hugo

Fast forward to today, circa 2021, Bitcoin’s time has come. The current price is hovering around $45k. There are many bullish estimates ranging from 75k-250k by the end of the year.

You might wonder, what the hell happened? A confluence of substantially meaningful events transpired over the course of the last 12 months. Here a some just to name a few:

• COVID-19 Pandemic → US Government Passes Legislation to Print Trillions of Dollars to Stave off Economic Disaster
• Bitcoin Halvening
• MicroStrategy, Tesla, and Square Buy Bitcoin and Put it on the Balance Sheet
• GalaxyDigital Buys Over a $1 Billion in Bitcoin
• Hedge Funds & Institutions Start to Follow Suit
• Elon Musk Laser Eyes
• Prominent & Noteworthy Investors Start Pushing Bitcoin
• Inflation Begins to Pick Up
• China Bitcoin Mining Ban
• El Salvador Adopts Bitcoin as Legal Tender
• On-chain Activity Blowing Up at Exponential Rate
• Lightning Network — Layer 2 & 3 Adoption & Exponential Growth
• Defi — Decentralized Finance
• NFT’s — Non-Fungible Tokens
• Bitcoin has Become a Household Name

Most importantly, in my opinion, the adoption of Bitcoin is growing faster than the rate the internet was adopted:

The narrative has flipped from Bitcoin being an investment risk to potentially being a reputational risk if you don’t seriously consider adding it as a small percentage to your portfolio.

Investing in Bitcoin

I joined the party around January of this year. I’m typically a pretty aggressive investor so I looked for something that would give me a bit more juice if Bitcoin took off.

I learned a lesson from watching the growth of Apple stock and its ecosystem over the past 10 years. You can buy Apple stock or you can buy the components of what goes into an iPhone for exponential growth.

I didn’t want to buy futures or options because going on margin with an asset that has a well-documented history of dropping more than 50% in short order opens me up to potentially sleepless nights. I’ve had enough sleepless nights…

Bitcoin Mining

That lead me to invest in Bitcoin Miners which are another type of leveraged trade on the future growth and adoption of the underlying asset.

For anyone interested in investing in Bitcoin Miners, you should know the underlying fundamentals of why they are a great way to participate in Bitcoin’s future. Miners are the bedrock of what makes Bitcoin’s distributed ledger work. Through a relatively straightforward but incredibly difficult process of validating transactions on the Bitcoin network, they are rewarded coins for their effort.

The rate at which they validate transactions on the network is boiled down to a term called Hashrate. The more miners you have the more hash rate you generate. As a result, you can see there is a clear incentive to build out your infrastructure, continually invest in more miners, lower your input costs (electricity), and optimize your uptime.

Bitcoin Mining Investment Thesis

How is this a leveraged play on Bitcoin? Why wouldn’t it make more sense to just buy and hold coins? As miners produce Bitcoin they typically adopt a HODL (Buy & Hold) balance sheet strategy.

This is similar to companies like Apple, Google, or Facebook that accumulate insane amounts of cash from their business. In the stock market, we sometimes reference how much of the share price is literally in cash. Every incremental coin a miner is rewarded and adds to the balance sheet, essentially adds a floor to their share price. Furthermore, unlike cash which is a depreciating asset given inflation, Bitcoin is historically an appreciating asset with over 200% annualized returns over its lifetime.

I hope this starts to paint a picture of how a Bitcoin Miner can deliver astonishing share price appreciation over time. As the share price appreciates, miners leverage cheap debt or sell shares to fund the growth in their infrastructure and the underlying asset they produce is growing in value.

Picking a Miner to Invest In

One of the miners I have invested in for various reasons, Argo Blockchain, has returned over 1,000% in the last 12 months. Other miners such as Marathon Digital Holdings and Riot Blockchain have delivered similar results. To be honest, there are subtle differences in each miner's operational strategy but in short, they all have the same business model so you can achieve similar results by investing in any of them.

The main difference in choosing a miner to invest in boils down to how much they pay in electricity costs, the price they pay per ASIC miner, and their operational costs. This essentially boils down to a breakeven price of Bitcoin which is the threshold for which they are profitable for mining coins. More recently, ESG concerns have also presented themselves as a meaningful issue in the long-term value of the company due to regulatory scrutiny and PR.

A Not So Impossible Future for Clean Energy

As mentioned, electricity costs are a major variable cost in calculating the profitability of mining. As a result, there is a strong incentive to build out infrastructure around cheap and plentiful energy sources.

After the substantial upfront investment, clean renewable energy sources such as Hydroelectricity, Wind, Solar, and Nuclear are some of the cheapest forms of energy. They are unfortunately not always located in ideal locations which presents an issue when trying to deliver that energy to city centers for consumption so much of that capacity goes underutilized.

Miners are also largely agnostic to location because all they need is an internet connection and electricity to get the operation going. We are also not too far off from Starlink being fully operational which is Elon Musk’s effort to bring cheap, fast, and globally accessible internet access so that pretty much eliminates concerns of being located in the middle of nowhere.

In terms of access to cheap electricity, Bitcoin Miners could potentially play a once-in-a-generation opportunity to transform the world. Since miners are agnostic to location, they could locate near underutilized power sources and provide sorely needed revenues to make up for the heavy investments made in building out the infrastructure.

All of a sudden an underwater multi-billion dollar Hydroelectric Damn could potentially be profitable which would create incentives for additional investments in clean renewable energy sources around the world. This is game-changing!

El Salvadore — Bitcoin Bringing Freedom & Prosperity Around the World

Nobody has a monopoly on where you can mine Bitcoin. You could mine Bitcoin next to a geothermal volcano in the middle of nowhere El Salvadore if you really wanted to. Sounds far-fetched but that’s exactly what El Salvadore plans to do.

Bitcoin converts seamlessly into any local currency. In El Salvadore’s situation, they also passed a law to make Bitcoin legal tender. Why is this insanely transformative? The IMF, which issues loans and financial assistance to countries that go through challenging economic situations has the mandate to accept a countries legal tender as payment for a debt. In short, instead of relying on your local currency which is most likely depreciating in value due to inflation, or using dollars that could be in short supply in your country, you could mine Bitcoin and pay down debts with an asset that is appreciating in value.

This completely flips the equation from being a country that is no more than an indentured servant to a global banking organization to potentially charting your own path and paving a path of freedom and prosperity for your people. It gives me goosebumps and hope for humanity…

Conclusion

If you’ve come this far, I hope you’re at the very least a little bit interested in doing your own research into Bitcoin and seeing it for the potential it really has to transform the world. We didn’t get into a lot of things like decentralized finance, the lightning network, the political implications, and the potential tectonic shifts in power and freedom that could come about as the dream of Bitcoin becomes a reality.