In 2020 we have seen yet another spectacular bull-run for the cryptocurrency Bitcoin. Starting the year at around $7,100 USD per Bitcoin the asset is trading at $17,643 USD today, an increase of 148%! So we look at why a trillion-dollar Bitcoin market-cap is more than likely.
Although it is considered a type of ‘digital gold’, Bitcoins most recent run is a secular coming of age for the asset as institutions are beginning to rush into it. These have included MicroStrategies Michael Saylor placing their entire treasury – $450 million USD at the time into Bitcoin at an average price of around $11,000. We have also seen endorsements from the great macro-trader Paul-Tudor Jones, who called Bitcoin ‘The Fastest Horse in the Race’ in a paper called ‘The Great Monetary Inflation’. This paper was written to his clients in May 2020, a year that the U.S. expanded their money supply by over 20% – a faster rate than the Ivory Coast, Ghana, Pakistan and Mozambique in the latest figures.
Meanwhile, notable bears of the asset Ray Dalio and Nouriel Roubini have been the latest to recant their messages of doubt in Bitcoin. Warren Buffett, who labelled the asset ‘probably rat poison squared’ is unlikely to recant – though in his career, a poor record on technology assets has always been his kryptonite.
Why Bitcoin is valuable is no secret and can be researched online. To summarise, the value of Bitcoin is derived through a philosophy of monetary value that has been successfully represented in a digital form – the Bitcoin protocol. This protocol includes new technology as well as a new way of looking at systems and the way that we interact with the digital environment. Among these technologies and concepts are the blockchain, de-centralisation and trust-less transactions.
Where the U.S. dollar has ‘In God We Trust’ noted on its paper, an informal slogan exists for Bitcoin, reminiscent of the Cypherpunks it emerged from. This slogan is ‘In Code We Trust’.
And the code is trusted – with an approximate market capitalisation of $323 billion USD at the time of writing the asset turned over $50 billion USD in the last 24 hours. The level of incentive for hacking or compromise of the system has rarely been higher – and yet the principles of the Bitcoin protocol remain unbroken.
What does this mean for investors?
The positioning of Bitcoin in an individual portfolio – as always – depends on the individuals personal characteristics, their risk-tolerance, their view of markets and frankly, preference.
Bitcoin has been volatile at times and traded lower with other assets during the liquidity events of March 2020 but has recovered far stronger than its competitors whether they are gold, equities, commodities or technology assets – over 300% higher from its lows!
The future also looks strong for Bitcoin. 2021 is likely to bring further monetary expansion at a time of policy impotence in markets – interest rates are already near 0%, fixed interest yields threatening to go below 0% and exponentially greater sums of liquidity are required in repo-markets as early as late 2019 as well as the incredible interventions after the coronavirus that may now be a permanent (and exponential) feature of markets – that the risk of not holding the asset quickly outweighs the risk of holding.
So if we can go back to the case for a trillion U.S. dollar market-cap for Bitcoin. To compare to gold with a total $7.5 trillion USD value, as a $330 billion USD asset, Bitcoin is far smaller than that, but also larger than many public companies. But in considering Bitcoin, it is not just digital monetary value.
Bitcoin carries the philosophical underpinnings of a new industry – digital assets – and is the monetary foundation of that industry. Other digital assets are valued at around $160 billion USD at the time of writing and include de-centralised asset-exchanges, data, privacy, smart contracts and other sophisticated product offerings.
Understanding and owning Bitcoin is the first step in being involved with this industry. The industry could be the most exciting set of technologies we have ever seen, promising a revolutionary change in how we interact with our digital environment and especially how we view money, currency and finance. As the risks of central banking increases including moral hazard and systematic risk with policy decisions that create wild, polarised price outcomes, this alternative financial system is maturing, is coming of age.
So our challenge to readers is to consider this – what value would you give to the monetary base of a new financial system that has attracted immense talent, innovation, creativity and ideologically committed individuals and projects. Even if it were speculative as a minor, parallel but secondary system, the monetary base of that system must be at least $1 trillion USD for almost any serious purpose. The liquidity required to transact and do deals requires deeper liquidity – and we submit that even a trillion USD market-cap takes Bitcoin and digital assets from being purely speculative but interesting and promising and promotes them into being speculative but with early results – showing minor functionality.
So when we refer to there being over $11 billion USD value locked in DeFi projects at the time of writing, readers may consider that this number is surprisingly high or still extremely low – but the context is that the number is growing exponentially!
We hope that we can set readers on an interesting path of discovery with some of these assets. For further reading, some key assets worth looking into include (but are not limited to) Bitcoin, Ethereum, Chainlink, Polkadot, Cardano, Aave, Uniswap, yearn.finance, Zcash, Maker, Compound, Algorand – and we wish you the best in researching and discovering this new industry.