A Bitcoin guide for Muslim investors

Consider the $1 bill.

This piece of paper has value because other people will accept it in exchange for goods and services.

The only reason why I value a dollar more than a random piece of paper is that other people are willing to accept a dollar in exchange for goods and services but won’t accept just any piece of paper.

From a practical perspective, the piece of paper may be more useful to me than the dollar is. I can write notes on the piece of paper, doodle and when burned will probably generate more heat than the dollar if it has a larger surface area.

Therefore, the direct usefulness of a piece of paper to me is greater than the usefulness of a 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 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 change much.

The rich tend to have more dynamic incomes that rise when profits rise for example.

Here’s where Bitcoin comes in.

What Bitcoin proponents realized is that:

1) 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.

2) 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 can 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 haven for savings. Today, more than 100 million people are collectively willing to entrust Bitcoin with close to $1 trillion.

Is Bitcoin Halal?

To answer this question we start with the sharia rule that states:  

All matters, except rituals of worship, are by default permissible unless a violation can be found

So it follows then that the burden is on whoever 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 really 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 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:

1- It is used to facilitate crime

This argument doesn’t really work since cash is also used to facilitate crime. 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.”[1]

Illicit share of all cryptocurrency transactions, by year

“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.” [2]

2- It is volatile

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 relates to zero-sum games and has 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. 

Therefore, volatility is not an argument for something being a form of prohibited gambling or not.

3- It does not meet the definition of a currency

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. 

Is Bitcoin a good investment? 

The idea of Bitcoin as a profitable long-term investment seems to have a lot of merit in light of its historical performance. After all, this is an asset that has gone from being worth less than a penny to $40,000 in just around a decade. It’s up about 12,000% percent in the past 7 years alone.

Price chart of Bitcoin in USD

Past performance is no guarantee of future results but if one looks at the potential market for a reliable place to save 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.

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. 

Therefore, 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.

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.

Sources:

[1] https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/

[2] https://www.forbes.com/sites/haileylennon/2021/01/19/the-false-narrative-of-bitcoins-role-in-illicit-activity/?sh=53a8fb343432

Disclaimer: This article is not meant to be personalized investment advice. Be sure to do your own due diligence before making any investment decisions.

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