Three Things You Can Do With Bitcoin (and One You Can't)

Assets are not created equal. Depending on the asset class in which you invest, the asset itself, much like a Pokémon, boasts different special abilities. Here is a quick primer on several common asset classes and their various benefits:

1. Equities (Stocks)
   • Buying and selling shares in companies to gain ownership interests.
   • Receiving dividends if the company distributes profits to shareholders.
   • Capital appreciation as the value of the company grows over time.
2. Fixed Income (Bonds)
   • Earning regular interest payments over the life of the bond.
   • Getting the principal amount back at maturity, assuming the issuer does not default.
   • Trading bonds in the secondary market for potential capital gains or to adjust portfolio risk.
3. Real Estate
   • Generating rental income from leasing property to tenants.
   • Appreciation in property value over time.
   • Developing or improving properties to increase their value or rental income potential.
   • Personal use, such as living in residential property.
   • Commercial use, such as using a warehouse to store and ship products.
4. Commodities
   • Direct investment in physical goods, like gold, oil, or agricultural products, for potential price appreciation.
   • Hedging against inflation as some commodities, especially precious metals, tend to retain value.
   • Producing goods or services if the commodity is used in business operations (e.g., a farmer growing crops).
5. Cash and Cash Equivalents
   • Earning interest in savings accounts or money market funds.
   • Preserving capital with low-risk, highly liquid investments.
   • Ready availability for transactions or emergencies.
6. Collectibles (Art, Wine, Antiques)
   • Appreciation in value over time due to rarity, demand, and other factors.
   • Personal enjoyment from ownership.
   • Rental to institutions or exhibitions.
7. Derivatives (Options, Futures)
   • Hedging against price movements in other investments or commodities.
   • Speculation for potentially high returns from changes in the price of the underlying asset.
   • Leveraging investments to control large amounts of the underlying asset with a relatively small investment.

One asset class conspicuously missing from this list is cryptocurrency, which I'll cover now, using Bitcoin as an example. One can perform exactly three actions with a Bitcoin, one of which is a non-action.

1. Hold: Bitcoin can be held in a virtual wallet.
2. Transfer: Bitcoin can be transferred to another virtual wallet.
3. Sell: Bitcoin can be sold in exchange for other currencies, or for goods and services available for Bitcoin.

That's the end of the list.

At this point, Bitcoin apologists might scoff, citing Bitcoin's blockchain technology and decentralised nature. Those are all features of the platform, not of the asset itself. If I were to sell you a house, I wouldn't need to tell you that houses can be listed on the Multiple Listing Service, or MLS. You'd evaluate the asset based on how many bedrooms there were, and how close it is to your work. If I were to interest you in a stock, I wouldn't start by telling you that you can easily trade stocks with a secure Fidelity account. You'd be far more interested to hear that the stock vests dividends, and therefore will help your portfolio survive fluctuations in the market. Finally, if I were to sell you a valuable painting, I wouldn't start by telling you that paintings can be kept securely in decentralised vaults. You'd want to know if it would match your sofa.

Why is it, then, that when asked what a Bitcoin can do, enthusiasts invariably tout what they view as, right or wrong, the laudable security of the platform? This is an observation they are making about the platform, rather than about the asset itself, but let's humour them for a moment.

Let's ignore double-spending and 51% control arguments around Bitcoin for the time being as well. We'd have to dedicate an entire article to those security problems. Let's avoid contesting the claim that the Blockchain is perfectly secure, and imagine that it is. Regardless, here are some ways in which your Bitcoin can be stolen that your money, stored in a bank, cannot:

1. Wallet software hacks: Several million dollars in Bitcoin were stolen from the Electrum Wallet, over the course of several years, without successful remediation by the makers of the software.
2. Exchange hacks: Since Bitcoin's inception, hundreds of millions of dollars in Bitcoin are stolen every year by hackers who exploit vulnerabilities in the actual exchanges on which Bitcoin is traded. There have been multiple incidents where sums in excess of a half a billion dollars were stolen in a single event. Keep in mind that, when you buy Bitcoin on an exchange, the exchange wallet id is what holds the Bitcoin. Your ability to prove ownership after theft relies on the breached entity's record-keeping and honesty.
3. Physical theft: For those understandably wary of exchanges, where frequent breaches result in massive theft, it is possible to store one's own Bitcoin, for example on a USB drive or hard drive. Bitcoin stored this way can be much more conveniently stolen than equivalent amounts of cash.

What if there is no theft at all, but an exchange simply goes out of business? As almost all Bitcoin is traded on exchanges, this is a potential problem for the vast majority of Bitcoin enthusiasts. In 2019, QuadrigaCX, a Canadian exchange, ceased operations and went into bankruptcy after the death of its founder, Gerald Cotten, who was reportedly the only person with access to the exchange's cold wallets. Investigations revealed mismanagement and fraudulent operations, with millions in customer funds unaccounted for.

To provide some contrast, let's explore would happen if your bank were to be robbed, or to go out of business.

In the United States, as in many countries, bank account holders are protected through a combination of federal insurance, regulatory safeguards, and legal frameworks designed to secure depositors' money in the event of bank robberies or bank failures.

Bank Robberies

1. Insurance: U.S. banks are insured and regulated entities that have comprehensive insurance coverage, including protection against theft and robberies. This ensures that customers' deposits are not affected by the theft of physical assets from the bank. The loss from a robbery would be absorbed by the bank's insurance, not by the account holders.
2. Regulatory Protections: Banks in the U.S. are subject to strict security requirements and oversight by regulatory bodies like the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). These regulations help ensure that banks have robust security measures in place to minimise the risk of robberies and other security breaches.

Bank Failures

1. Deposit Insurance: The Federal Deposit Insurance Corporation (FDIC) insures deposits at FDIC-insured banks and savings associations. Each depositor is insured to at least $250,000 per insured bank, for each account ownership category. This means that if a bank fails, the FDIC will protect depositors up to the insured amount, minimising the risk of loss for the majority of account holders.
2. Resolution Mechanisms: The FDIC also has authority to resolve failed banks by using a variety of methods, including facilitating the sale of a failed bank to a healthier institution, setting up a bridge bank to operate the failed bank until a buyer can be found, or liquidating the bank's assets and using the proceeds to pay back depositors up to the insured limit.
3. Central Bank and Government Support: In some situations, the U.S. government or the Federal Reserve might provide additional support to prevent the failure of a bank deemed "too big to fail," due to its size or importance to the overall economy. This support could come in the form of loans, asset purchases, or other financial assistance to stabilise the bank.

No such protections exist for Bitcoin. So, even though I have used banks for my entire life, and my balance has never been incorrect by even a cent, let's assume that the Bitcoin community is correct, and that the flat file they call the Blockchain is more secure than the technology implemented by financial entities entrusted with multiple trillions of dollars. That observation is irrelevant, given that the bank account holder is protected in cases of theft or bankruptcy, and the Bitcoin owner or exchange customer is not.

The one thing absolutely impossible to do with a Bitcoin is to sleep soundly.