March 18, 2022.
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This is for whoever wants to understand What is Bitcoin? From a fundamental level. I’m going to try to breakdown exactly what it is in the simplest way possible. We’ll also analyze the question of whether is it halal and if it is a good investment.
So if this interests you, grab yourself a zabiha beverage
If you’re new here, my name is Rakaan Kayali, founder of Practical Islamic Finance where we help people globally build wealth in a halal way. You can follow the crypto and stock portfolios that I manage by becoming a member. Be sure to follow us on social media, including joining our discord group and signing up for our newsletter. You can also see the list of stocks and cryptos we’ve reviewed and assigned a comfort level to, for free, on practicalislamicfinance.com links to everything I’ve just mentioned are in the description.
What is Bitcoin?
In my hand, I have a $1
This piece of paper has value because other people will accept it in exchange for goods and services. Candy, air for my car’s tires, wrapping for a present, all can be exchanged for this dollar in my hand.
The only reason why I value this dollar more than this piece of paper for example is that other people are willing to accept the dollar in exchange for goods and services but they would not accept this piece of paper.
Even though, from a practical perspective, if I had to make use of them myself, this piece of paper is more useful to me than this dollar is. I can write down some notes on this piece of paper, doodle, if I burn it it will probably generate more heat than this dollar would since it has a larger surface area, so the direct usefulness of this piece of paper to me is actually greater than the usefulness of this dollar and yet I value the dollar more because of what other people think about it.
This is how money works. The value of money to its holder is determined by other people’s perceptions of it.
Traditionally, money was issued by governments. A government would mint money, and designate it as legal tender, meaning people under its rule had to accept it as a form of payment.
Since people are compelled, under law, to accept government-issued money it immediately becomes valuable. The problem with this dynamic is that governments don’t always print money for the right reasons and often print too much. When too much money is printed, the value of each singular unit of money drops.
Imagine you and another buyer each want to buy the same car.
You both have $1 dollar to your names. The most either of you will ever be able to bid on the car is $1.
Now assume you’re each given $10,000.
Now the most either of you will ever be able to bid on the car is $10,000.
The price of this car is therefore likely to increase and the value of each dollar in terms of how many cars it can purchase will fall.
Now assume there was a third person in our hypothetical that had $1 when this all started but wasn’t given an additional $10,000 from the government.
This person is going to feel impoverished after having once been able to buy a car and now, after all this new money was introduced into the economy, being completely out of the running for one.
This devaluation of currency is what is called inflation and it tends to impact the poorer segments of society more since they tend to have more fixed incomes that don’t really change much. The rich have more dynamic incomes that rise when profits rise for example.
Here’s where Bitcoin comes in. What Bitcoin proponents realized is that :
We don’t need the government to force us to use a particular currency for us to value it. We just need to feel confident that other people value the currency we are holding.
There needs to be a set of immutable rules controlling the supply of a currency instead of a government-like entity inflating supply based on the whims of its operators.
Bitcoin’s supply is controlled by code, it cannot be altered or corrupted because of decentralization, and has a fixed upper limit on the amount of this currency that can ever be created.
This means people are able to save their money using this currency without fear of their savings being devalued.
Going back to our example, if the third person in our hypothetical economy converted his $1 to Bitcoin, even if $10,000 was distributed to the other two people in the economy, his bitcoin would not be affected, since its supply hasn’t changed. Therefore, it would just be worth more in dollars and he should be able to buy the same amount of car with his savings.
This is what Bitcoin proponents claim that it offers. A safe haven for savings.
Today, more than 100 million people are collectively willing to entrust it with close to $1 trillion dollars.
Is Bitcoin Halal?
To answer this question we start with the sharia rule that:
All matters, with the exception of rituals of worship, are by default permissible unless a violation can be found.
So it follows then that the burden is on whosoever doubts the permissibility of something to provide proof of impermissibility rather than the other way around.
Second, it follows that unless something is explicitly mentioned in Quran or Hadith, you can never really prove something is Halal, you can only prove that a specific violation lobbed against it doesn’t apply. If I ask you to prove that riding a car is halal, you can’t do it because there is no verse in the Quran or hadith that confirms this. The best you can do is point out that there are no sharia violations that can be ascribed to riding a car.
The same with Bitcoin.
As it relates to proving Bitcoin is Halal, the best I can do and the best anyone can do is point out that no sharia violations can be ascribed to its usage.
The most common arguments lobbed against Bitcoin’s permissibility are:
It is used to facilitate crime.
This argument doesn’t really work since you know what else is used to facilitate crime? Cash.
No one argues cash is prohibited for this reason.
Further, speaking of cryptocurrencies in general, of which Bitcoin is by far the largest, “Illicit activities like cybercrime, money laundering and terrorist financing made up only 0.15% of all crypto transactions conducted in 2021, according to a new report from Chainalysis, a blockchain data platform.”
“According to the UN, it is estimated that between 2% and 5% of global GDP ($1.6 to $4 trillion) annually is connected with money laundering and illicit activity. This means that criminal activity using cryptocurrency transactions is much smaller than fiat currency and its use is going down year by year.”
It is volatile.
So what? Since when was volatility in price impermissible in Islam. Risk is not haram, it is an unavoidable aspect of economic activity and investing in general.
People who make this argument are probably confusing high levels of risk with gambling which is an activity related to zero-sum games and has precious little to do with levels of risk.
Betting Lebron James doesn’t score a goal in the soccer world cup is very low risk and yet it is haram since it creates no value while opening a new business is very high risk and yet it is halal since it does.
So volatility is not an argument for something being a form of prohibited gambling or not.
It does not meet the definition of a currency.
Great. Don’t call it a currency then. Call it a bicycle for all I care.
Currencies are not the only thing Muslims are allowed to buy and trade. Something not being a currency is not an argument for its impermissibility.
So in summary, I find none of the commonly used arguments against Bitcoin’s permissibility have any merit. If you can think of any other arguments, then leave them in the comments section below.
Is Bitcoin a good investment?
Certainly, the idea of Bitcoin as a profitable long-term investment seems to have a lot of merit in light of its historical performance. It’s up about 12,000% percent in the past 7 years alone.
Obviously, past performance is no guarantee of future results but if one looks at the potential market for a reliable place to save your money and protect it from inflation, especially in this day and age where inflation is a challenge for most economies, it’s certainly conceivable that Bitcoin still has much more room to grow.
Gold, for example, humanity’s most tested store of value with the longest track record has a market cap close to $10 trillion dollars.
Compared to Gold, Bitcoin’s creation has an upper limit and follows an immutable schedule, Gold is still being mined and whenever the price of Gold goes up, mining activity increases.
Additionally, Bitcoin is easy to store and move around. It's also divisible up to eight decimal places, cannot be counterfeited and can be sent anywhere in the world instantly 24/7.
So compared to Gold, bitcoin has many advantages and I personally don’t see why at minimum, the market cap of Bitcoin can’t reach and indeed exceed the market cap of Gold.
When this happens, how long it takes, no one on Earth can say.
However, I’m confident that eventually, it will happen.
This is why I am personally very bullish on Bitcoin and I hold a lot of it in my personal and retirement accounts, if you’d like to follow my crypto and stock investing journey you can do so by becoming a member.
Until next time take care of yourself. Assalamu ‘alaikum and peace be upon you all.