Nov 22, 2020
Bitcoin : It’s happening.
The hangover cure from the 3-year bear market seems to have been remediated. Bitcoin has matured from a speculative retail asset to an institutional hedging tool against widespread fiat currency devaluation. Companies such as Square and Microstrategy have committed $50m and $425m of their reserves to bitcoin, with CEO of MicroStrategy (a Nasdaq listed company) stating bitcoin as being ‘the best treasury asset’ of the world. This is a short snippet of what’s happening with a nascent asset that is on the cusp of achieving mainstream adoption.
In my blog from Dec 2018, I wrote about the retail market being in complete dismay after bitcoin had dropped from $20,000 to $3,100. Subsequently, this turned out to be the bottom of the bitcoin bear market. Besides the element of tooting my own horn, I made a point in that blog that the groundwork was being laid out to onboard institutions. Recently, we’ve witnessed a run from $10k to $16k (and still going) and this in large part is NOT down to retail investors, but rather, institutional money.
Why does this matter?
Well, it matters because it gives us an indication of how bitcoin has matured as an asset, and how the narrative of a ‘store of value’ is coming to fruition. For years, crypto fanatics (including me) have lauded the incoming institutional investment that would propel bitcoin into a multi-trillion-dollar asset — and now, it’s happening.
The beauty of researching the crypto market is that data is readily available on transparent blockchains. Take Grayscale for example, they are the largest cryptocurrency fund that markets to institutional investors. They offer a ‘safer’ way of onboarding traditional investors who find the technicalities of bitcoin daunting. One thing these investors don’t seem to find daunting is their growing position size; Grayscale has significantly increased their BTC position size in the past 5 months. The rate of increase has snowballed in the past month, this explains why the price of bitcoin has been increasing with little signs of weakness.
Golden boy
Many have described bitcoin as this black hole that sucks up value from all other assets, especially as we are witnessing the biggest stock market bubble in our lifetime, but it’s not the equity market that's feeling the bitcoin pinch — it’s gold. As highlighted by JP Morgan in a recent report, investors are ditching Gold ETFs for bitcoin. Lol. This does feel as surreal writing it, as it may do reading it. But, without digressing, this is huge.
Countries around the world are conducting a synchronized devaluation of their currencies in order to fill the hole left by national lockdowns. This has created a fitting backdrop of ‘drop cash, buy gold’ in order to preserve investor wealth. What we’re seeing here is an asset (gold) that has a market cap of over $9 trillion starting to lose market share to an asset worth a measly $300 billion (bitcoin). We’re talking about a 30x disparity in value, that would put one bitcoin at $480,000. These numbers are more a symbol of how undervalued bitcoin is as opposed to what bitcoin could really be, although I’m of the opinion that it should reach that number in the next decade. (not investment advice though :)
Fundamentally sound
If the gold news wasn’t exciting enough, bitcoin is about to be opened up to 340m+ new users in the next 6–12 months, all in the name of Paypal. Yes, it pains me to celebrate a company like Paypal getting involved in bitcoin, it represents the antithesis of what bitcoin is all about. Politics aside, PayPal has hundreds of millions of users that will have the opportunity to purchase Bitcoin and a number of other cryptocurrencies at the touch of a button. They’ve already opened it up to US users this past week. There are hopes that this will be opened up to all their users early next year.
Whilst Paypal is clearly using bitcoin as a way to boost their balance sheet, we should appreciate the due diligence a multi-billion dollar corporation has taken in order to make this move. As reported by Glassnode, the number of BTC addresses holding 0.1BTC reached an all-time-high recently, with this number on the rise as bitcoin starts to get more media attention. Paypal and other corporations are following the trend, and the trend suggests that people are buying bitcoin. A trend that seems to be gaining more momentum.
One really interesting thing about the recent run by BTC is that the number of bitcoin on exchanges is rapidly decreasing. Normally, when a run has gone on for long we tend to see a rise in bitcoins on exchanges as investors look to cash in their profits. Bizarelly, we are not seeing that, infact, we’re seeing the opposite. This could have something to do with the fact that this run is largely an institutional fuelled run. The more sophisticated investor tends to have a higher-time preference when investing. In addition to the change in investor profile, we’re also seeing billion dollar corporations announce their large positions in bitcoin (here, and here).
What we are witnessing with this current run is a supply-side liquidity crisis — in layman terms it means there are not enough bitcoins to supplythe current demand, hence why the price keeps going up.
Couple the soundbite above with the reality of the daily bitcoin supply rate being cut by 50% earlier in May (bitcoin halving) then its safe to assume that bitcoin heads a lot higher (with bumps in the road, ofcourse).
Technically gifted
On the higher-time frame, the bitcoin chart is a thing of beauty. Once we pass $20,000 (post-correction) then bitcoin will essentially be in price discovery mode.
The btc run from 2016–2017 saw a 95x return from $210 to $20,000. History suggests that the bitcoin bull cycles are lengthening in time whilst also becoming less volatile. Considering that bitcoin is eating up the market share of gold, equities and pretty much all markets that have money parked in them, there is substantial upside left to come.
Bitcoin is eating the world up. Whilst fiat currencies around the world are going to shit, bitcoin is gobbling up their market share. More and more people everyday are exchanging their nation sponsored currency for an autonomous currency in the form of bitcoin, this is reflected in the fact that bitcoin has increased by 385% this year alone. Investors are becoming increasingly frightened by the monetary policies adopted by their governments, putting into question the preservation of their wealth should they simply hold cash. On the flip side, you have a generation of millennials that have finally been able to put a halt to their frivolous spending habits during the lockdown and have had the chance to finally save. Not being able to earn any sort of interest on their saved money, bitcoins headline-making price action is acting a sort of enticing vortex that is slowly peaking everyone’s interest. Put these two investor profiles together and you have a recipe for significant market growth in the crypto sector.
Please don’t use this blog as a catalyst for your FOMO purchase. Bitcoin and crypto is a very volatile market, you need to respect that it’s price is extremely sensitive to human emotions. If you buy in the hope of quick riches you’ll be broke quicker than you can say XRP. It would not surprise me if bitcoin corrects by 20–30% in the next month or so, that's why you should enter the market with a low-time-preference.
