Hi,
First of all, thank you for responding to me as quickly as you did today. All of you know how involved I am with Bitcoin, which has led me to learn about other forms of money, financial assets, markets, the economy, and monetary policy. I was recently inspired by Pomp, Bryce Hall, and Marc Cuban in the new podcast “Capital University” to start building a network by writing to you. I don’t believe you’re automatically subscribed, so please click the “Subscribe now” link when you’re done reading, it’s free, and you won’t be spammed. Also, if you learn anything, please share with your people.
People have recently been asking me if Bitcoin is like stocks. In most ways, no, but there are some similarities. If you’re interested in investing, it’s important that you understand the similarities and differences. The more information you have, the more you can minimize your risk, and hopefully make some money. I'll cover some similarities and differences, those which are obvious to me.
Bitcoin, in simplest terms, is electronic cash. You can think of Bitcoin as digital gold if it helps you understand. When you buy gold, you’re trading your U.S. Dollars for gold. You're exchanging one form of money for another. When you buy Bitcoin, you're doing the same thing, exchanging one form of money for another.
Stocks, in simplest terms, are a representation of ownership of a company, usually a publicly traded company. Most people will never have an opportunity to buy stocks from private companies. For the sake of this letter, stocks represent ownership of publicly traded companies. For example, if you buy shares of Google, you own a piece of Google.
Similarities
Bitcoin and stocks are similar in a way that both are purchased as a store of value. For the most part, a store of value is an asset where people invest their money to protect from inflation. The U.S. Dollar is constantly being inflated by the Federal Reserve, the annual average is around 2%. This doesn't mean that your $100 bill will be $98 next year. Inflation means your spending power becomes lower over time. For example, if you spend $100 for 100 days worth of groceries this year, next year you would spend $100 for about 98 days worth of groceries. People have learned this over time, incentivizing them to seek “safe-haven assets” such as gold, stocks, Bitcoin, real estate, etc.
Not only are Bitcoin and stocks used as a store of value, they are also treated as long-term investments. People buy both of them with the intent to make sizable profits. The following example is not an indicator of future performance, it is simply what would have happened if you had made the following investments 5 years ago.
On October 6, 2015, Bitcoin was worth $240 per coin. If you invested $10,000 into Bitcoin on that day, you would have purchased 41.67 Bitcoins. If you held onto those 41.67 Bitcoins, those same 41.67 Bitcoins would be worth $439,750 today (October 3, 2020 at 7:37AM). Similarly, on October 9, 2015, Amazon stock was worth $539 per share. If you invested $10,000 into Amazon stock that day, you would have purchased 18.53 shares. If you held onto those 18.53 shares, those same 18.53 shares of Amazon stock would be worth $57,891 today (October 3, 2020 at 7:44AM).
Differences
Bitcoin is not only an investment, it's also money. Stocks are definitely an investment, but stocks are not typically used as money, simply because they were not designed that way. Money is a medium of exchange. Although anything can be used as money, not everything is. Bitcoin was designed to be used as money (peer to peer electronic cash). I've seen housing rentals listed online in New York City, where the landlord accepted Bitcoin as payment for rent. I was in Las Vegas in 2018, and there was a popular casino that was advertising the fact that they accepted Bitcoin. JM Bullion, a popular website that sells precious metals such as gold and silver, accepts Bitcoin.
Lastly, stocks can be frozen. A well-known type of stock freeze is called a circuit breaker, it happened multiple times earlier this year. Basically, stock market trades are temporarily halted to prevent extreme panic selling. Since Bitcoin was created in January 2009, it’s been running fully operational, 24/7/365, without being frozen, not one time.
Correction (21 March 2022) — click here for a short article about the one time Bitcoin was hacked. Problem was resolved within about 5 hours.
If you're interested in learning more, please reply to this email, and let me know what questions you have. If you have feedback, feel free to let me know.
Thank you,
Salvatore Norge
This is not financial advice. I encourage you to do your own research.