Why One of the Smartest Investors Bought Bitcoin and Thinks You Should Too
On the What Bitcoin has done podcast, ARK Invest Chairman and CEO Cathy Wood shed some light on Bitcoin (BTC -0.31%). Perhaps the most intriguing, but not the most important, part of the interview is that she finally revealed for the first time when she originally bought Bitcoin. In 2015, Wood bought $100,000 worth of Bitcoin as its price hovered around $250. This investment is worth approximately $7.5 million today.
Wood’s faith in bitcoin has only grown since 2015. When her company began researching the world’s first cryptocurrency, she said she quickly realized that bitcoin had the potential to be “one of the most profound innovations of our time”.
Gold, Dollar and Bitcoin
During the initial Bitcoin research, Wood and his team worked with one of the world’s foremost monetary policy economists, Art Laffer. Laffer served under President Ronald Reagan on the Economic Policy Advisory Council and has been active in economic policy on the national and international stage ever since.
Wood said it was Laffer’s analysis of Bitcoin that led her to make her first purchase. She said Laffer was impressed with the dynamics behind Bitcoin. As she put it, Laffer said he has been looking for a currency like Bitcoin “since we left the gold exchange standard.”
Before the United States abandoned the gold standard in 1973, the value of the dollar was fixed relative to the price of gold. It is considered by many that the gold standard dampened the issuance of money and subsequently suppressed inflation because the amount of physical gold held by a government acted as a limit to the creation of new money.
After the abandonment of the gold standard, there was little to deter the government from printing more money or manipulate monetary policy. When a government can control the money supply, it can fund any program or project, whether popular or not. This is simplified to keep it short, but theoretically all he has to do is print more money and he can find the funding. Today, the dollar lacks the intrinsic value traits it had when it was on the gold standard and is almost constantly inflated to fund government budgets.
As the government takes on additional costs, it subsequently increases its debt burden. To get a better idea, we can take a look at the US national debt, which has grown over 6,500% since 1973. Some debt is considered healthy, but a balance sheet with an exorbitant amount of liabilities compared to assets can cause problems for savings when these debts eventually have to be paid.
Like gold, but better
Laffer was not a big fan of the current monetary standard and once he discovered that Bitcoin had many superior characteristics to gold, he was sold on its potential. Bitcoin one-upped gold. Unlike gold, Bitcoin is private, digital, easily divisible, and rules-based.
Let’s unpack this one by one because Wood believes each of these characteristics makes Bitcoin even more valuable than gold. First, because Bitcoin runs on a blockchain, which means all transactions are encrypted and pseudonymous. Transactions on its blockchain cannot be modified and they can only be interrupted if the user does not have sufficient funds.
Second, Bitcoin is digital. This makes it much more portable than gold and even the dollar. Bitcoin holders only need a digital wallet on their phone or computer to hold or transfer value. If you lose your phone, the funds are protected and you can access the funds by entering your unique password on another device. Moreover, digital money plays a vital role in the age of the Internet that gold or the dollar does not reach.
Bitcoin is also easily divisible. Even though its price is around $20,000 today, users can send and receive fractions of Bitcoin with just the press of a button. No need to carry spare change, find larger or smaller bills in your wallet, or carry gold bars (although, of course, hardly anyone does).
Finally, Bitcoin works according to specific rules. There is a limited supply that cannot be inflated or manipulated. This means that no government can interfere with its operation or even block transactions.
More importantly, it does all of this without any centralized authority supervising it. Instead of one person or agency running it, computers, called nodes, around the world run the Bitcoin blockchain to ensure that it remains decentralized and operates without any interference.
The Potential of Bitcoin
Considering all this, Wood needed no further convincing. She made her initial purchase and continues to keep that initial investment. But since 2015, a lot has changed. Bitcoin peaked at nearly $70,000 in November 2021 and its rise to prominence has even led to publicly traded companies like You’re here by holding some on their balance sheet as an alternative to cash, further legitimizing it as a viable asset.
This is nothing less than an astronomical increase. Still, Wood believes Bitcoin has more in store. According to her and Laffer, Bitcoin could be roughly equal in value to the entire US monetary base. During their research in 2015, when they originally postulated this, that figure was around $4.25 trillion. If the market capitalization of Bitcoin reached this value, it would mean that one Bitcoin would be worth almost $215,000, which is a far cry from its current price of $20,000.
So what’s Wood’s best advice? To be patient. She said that by investing with a time horizon on 10 years and ignoring price fluctuations “you will win.”