The difference between Bitcoin and the Stock Market
We’ve all seen the shocking roller-coaster that Bitcoin’s price has been riding for quite some time now. Graphed on paper, it has a striking resemblance to equity in the stock market. Bitcoin, however, is not the stock market and over the past few days I have been debating about these fundamental differences with a number people.
Of course, the price of Bitcoin is largely driven by speculation, but there is much more to it than that. First of all, Bitcoin does not have a central issuer or controller like any normal financial product. You can own some of it, but you can never be its CEO, govern it, or control its’ protocol; no one can. Bitcoin can never “go bust” or have bad governance. It’s true that there is some small degree of influence from the miners and their adoption of protocol changes, but at the end of the day it is a completely decentralized consensus-based mechanism.
Another difference is that there is no backing whatsoever, no physical or digital standard that Bitcoin is pegged to; nobody can truly guarantee its value. This isn’t big news though. Many, if not most, financial products nowadays are not backed by anything other than hope and wishful thinking. But Bitcoin never claimed to be backed by anything or be pegged to real world assets. Equity, on the other hand, is based on “something.” Even if the company you own stock in does not have a value there is, or has been, initial capital, regardless of how small it was. Most jurisdictions require you to make a minimum deposit of something between 10k and 250k. Stocks are based on capital. Bitcoin is not.
The next difference is pretty simple: you can use Bitcoin as a means of payment since it is a (digital) currency. You can’t use a stock certificate to pay for a meal, but you can with Bitcoin.
Then there’s the motivation behind the purchase. The initial owners of Bitcoin were mostly nerds and computer scientists, and many of them still hold large amounts of Bitcoin. Back in the day, very few of these early holders regarded Bitcoin as a form of investment, and certainly nobody could have predicted that the price would one day go through the roof (or “to the moon”) the way it has over the past few years. These early holders simply got into it by mining or purchased it out of curiosity, just to see what happened. Many of these Bitcoin owners are very different folks than the usual speculators in the stock market and they behave differently too. The miners can be especially unpredictable. Those who play the stock market are, as shocking as it may sound, much more consistent.
Another difference is what has happened to the total number of Bitcoins over time. A large portion, somewhere around 20%, is believed to be lost forever, untouchable and not replaceable. One major, but incredibly silly, reason for this is that people often lose their private keys, the only way to access their Bitcoins. Once lost, the coins are forever locked away in their wallets, completely unrecoverable. This is virtually impossible with stocks. Even if somebody dies or becomes mentally incapable of administering their assets, there are always legal ways to manage stock certificates. Not so with Bitcoin. What is lost is gone forever. And since this number is just an estimation, because nobody can really know for certain how many Bitcoins are actually missing, the market cap is largely meaningless.
Finally, Bitcoin is a technology-driven title. It lives on the continuous and seamless propagation of its history, the public chain of “blocks.” This process is called mining, and it is comparable with the daily operational business of a company. But the similarity stops there. Without the internet, without the existence of clients to connect and process transactions, there is no Bitcoin. Sure, most internet companies would cease to exist, too, if the internet goes down. The big difference, however, is that the entire life of Bitcoin is online and it lacks any form of central governance. If it ever goes offline, there is no contingency plan, or even a way to bring it back online. All the mining power (aka “hash-rate“) would be diverted to some other use. Ultimately, this means, that the only protection Bitcoin has against malicious actions, the combined computing power used to mine blocks, would be absent when Bitcoin comes back online after an outage. Meanwhile, if you have to restart some company servers, it’s easy to control the process from beginning to end, without any lasting repercussions. That’s a risk almost no one seems to factor in.
When the price of Bitcoin recently hit its latest all-time-high, hordes of internet trolls came out of their caves again, regurgitating the old mantra of hot air, bubble, and Ponzi. Candidly, no-one can tell for sure if this whole thing is not a bubble; there just hasn’t been anything like it before. Some say it can be the new digital gold, replacing the physical metal all together. Others claim it is a fraud, made by the CIA, or worse, so that gullible fools will tie their existence to it and be subjugated once the “New World Order” arrives.
But technicians and engineers such as myself praise Bitcoin as a new technology that can remove the counter-party problem from value transfers, making those transfers a completely decentralized process that cannot be intercepted or reversed by a third party. Then there are the speculators who love its volatility, and exchanges and brokers who like the fact that everyone and his aunt wants to invest right now.
Whatever your intention or feeling towards Bitcoin, it is just important to keep one thing in mind: Bitcoin is not equity, and so cannot be forecasted by standard stock-market models. Whether these differences are good or bad, one thing’s for certain; Bitcoin and stocks are entirely different things.
