Bitcoin: The Phoenix That Keeps on Rising
Unless you have been living under a rock, you will be familiar with the fact that the world’s first and most dominant digital asset, Bitcoin has been putting in an amazing performance during 2020. The BTCUSD price opened the year at $7,160USD and as of time of writing has achieved a high point of just shy of $16,000USD, much to the surprise of many investment professionals who wrote the asset off as a curiosity or bubble during the blow-off top in late 2017. The write-off was understandable given most people’s understanding of both the asset and its performance history, but what many have failed to recognise is that despite Bitcoin having had three corrections of the same order of magnitude as that of early 2018; on a financial year lows basis, every year has seen positive growth. That is uncommon resilience and there is a reason for it. So, let’s have a look at what the buyers of those corrections have been watching that many others haven’t.
Bitcoin was created in 2009 in response to the GFC as a way that individuals could regain control of their financial sovereignty. As a form of money, external to the traditional financial system that individuals could use as an alternative store of value asset that couldn’t be taken from them or debased by central bankers with their modus operandi of over-supply of traditional currencies to support flailing economies and markets. Bitcoin’s hard capped (finite) supply and known and decreasing issuance rate over time is the perfect panacea to an age-old problem of centrally issued money ultimately failing due to this very problem of over-supply. If you look back through the ages this is a cycle that regularly repeats throughout history; as soon as money loses its hardness, the holders of that money suffer significant wealth erosion; which ultimately undermines the very survival of that monetary system. As it shall be in the current day, as the house of cards built on unsustainable debts and extreme monetary growth starts to topple. It seems now, after eleven years of outperformance that the world is migrating to Bitcoin as individuals demand hard money that is beyond the hands of central bankers and their ability to inflate away its value. Individuals across the globe have seen the writing on the wall and have reclaimed their financial sovereignty, no longer content to sit by and watch this happen for want of a better alternative. As too have the institutions and larger public companies, who have now started holding Bitcoin on balance sheet as part of their treasury strategy and a hedge against inflation.
The hardness of Bitcoin, that is to say it’s lack of any mechanism by which any authority can increase its supply is a large part of its attraction in the current macro environment. As mentioned, Bitcoin’s supply is finite; it is hard capped at 21million. Further, it has a known and decreasing rate of supply over time. It is true, of course that gold is scarce and has traditionally been used as an inflation hedge and safe haven during global risk events, the likes of which, it is arguable that the world has never seen a better example of than the current situation. Gold’s store of value properties are well known. So, let’s take a breather for a minute and compare the properties of gold that make it a strong store of value to those of Bitcoin.
Scarcity: Gold is scarce, Bitcoin is finite. Gold 0 / BTC 1
Portability: Gold is heavy and as a result, difficult and expensive to transport. Bitcoin has zero weight and can be sent over the internet. Gold 0 / BTC 2
Divisibility: Gold is difficult to divide into smaller amounts. Difficult and expensive. Bitcoin, on the other hand is divisible to 100 million places, or “satoshis” as they are referred to. This makes Bitcoin infinitely more suited to transactional use than gold. Gold 0 / BTC 3
Verifiable: Bitcoin can be verified simply by querying the Bitcoin blockchain. In fact, a Bitcoin’s entire lifespan can be traced all the way back to the block from which it was created. There is no counterfeiting. Gold can indeed be counterfeited, as we saw earlier in 2020 with NASDAQ listed Kingold, which was holding $4.2billion USD “worth” of gold-plated copper, as gold holdings. Gold 0 / BTC 4
Acceptance and History of Use: Gold has been used for hundreds of years as a store of value form of money. Bitcoin has only been around for 11years but is rapidly gaining acceptance at the highest levels. Gold 1 / BTC 4
Physical Applications: Gold is corrosion resistant and a fantastic conductor of both heat and electricity. Bitcoin is neither of these things but the argument we would make is that these properties are not important in considering which is a superior form of money or store of value.
It is well known at this point in the game that many of the world’s largest financial institutions and well-regarded investors have taken a deep dive into Bitcoin’s attributes as a digital store of value. Most have found it either superior to gold or at the very least likely to accrue value faster and in greater magnitude than gold over the coming years, given the current macro tailwinds. Famed investor, Paul Tudor Jones referred to it as “likely the fastest horse” in its ability to increase in value over coming years as a store of value asset. JPMorgan, previously one of Bitcoin’s most vocal detractors, have stated that they believe Bitcoin can make significant ground on gold in terms of market cap; releasing a target market cap of $1.2-1.5trillion USD on the shorter-term macro horizon. It is currently around $250billion USD and may challenge gold for superiority over time. And Fidelity have advocated for a 1-5% portfolio allocation to Bitcoin, stating that the risk of not owning Bitcoin now outweighs the risk of owning it. We are seeing acceptance of and participation in Bitcoin at the highest levels.
A large part of the narrative around BTC outperforming, or at the very least competing with gold on a market cap basis as a digital store of value, is centered not only around its superior store of value attributes but also on its relative scarcity. This scarcity can be measured using the stock to flow ratio (S2F) which measures the global stockpiles of each asset against their annual production. Gold’s current S2F is around 64, BTC approximately 26, silver 23 and non-monetary metals like palladium and platinum around 1. However, with BTC’s known and decreasing issuance rate over time, its S2F is set to surpass that of gold in 2024. That is to say that on a relative scarcity basis Bitcoin will be more scarce than gold within the next 3-4 years. Given that it also outranks gold on the important measures of store of value utility and is currently trading at around 2.5% of golds market cap, we see this as an immediate and significant opportunity for high levels of growth over coming years. A well-known analyst within the digital asset world known as PlanB has done some work on what the increase in S2F might mean for Bitcoin’s price. The model has been validated by Fidelity. Here is a reproduction of that work from “Greyscale”, a digital asset investment company based in the US.
Without placing too much weight on exact targets in terms of price, it is clear that many of the world’s shrewdest investment minds place the value of Bitcoin significantly higher than current market over the coming years. In fact Raoul Pal, whom many of you will know as a hedge fund manager of Goldman Sacks fame recently stated that based on the conversations he is having with the world’s largest allocators, he believes that a “wall of money” is coming that will drive Bitcoin to beyond $1mio USD per coin over the next five years. Your author is not sure that we move that far, that quickly but the fact that individuals with as much to lose as RP are publicly making these calls, should tell you something about the types of conversations that are being had at the highest levels.
A cursory study of the S2F model should provide enough inspiration for you as an investment professional to take another look here and begin, if you haven’t already, educating yourself to the amazing potential this asset has, particularly given the current macro tailwinds. If it does not however, then perhaps the news that well known public companies have recently been transparent about accumulating and holding BTC on balance sheet (an entirely new type of investor behaviour) or the fact that groups like Pay Pal are instituting support for the purchase and use of digital currencies for payments by their 346mio user base and 26mio merchants, should provide enough impetus to get you across the line. You don’t need to buy into the narrative immediately but at the very least, we would suggest, it is time to reopen the book and read a few more pages.
Bitcoin is no longer a curiosity; it is a highly investable asset. An asset that has provided a strong improvement in risk adjusted returns when held in small allocations within more traditional portfolios. Here is some work released recently from Fidelity Digital Assets that demonstrates annualised return comparisons of various allocations to BTC within a global 60/40 portfolio. Digitalx can also quantify this on a risk adjusted basis.
Despite all of these points of utility and the strong track record of performance, it is still true that there are some challenges for investors looking to obtain exposure to this asset class. This is a good thing because if the challenges had already been addressed, your author suspects that the price of Bitcoin would be significantly higher. Challenges mean opportunity. The challenges of safe acquisition and storage that exist today mean that it is still early enough for forward thinking investors to obtain a seat at the table as this asset undergoes a significant price mark-up over the coming years.
Digitalx has done a lot of work to provide a simple, cost effective and highly secure way to obtain exposure to Bitcoin and digital assets more broadly. We provide titled and audited ownership of Bitcoin via a familiar vehicle – there is no uncertainty around tax treatment, estate planning or safe storage, and all within a low-fee vehicle. Our custodian maintains an insurance policy over Bitcoin holdings with Lloyds of London. The fact that we have developed Australia’s only truly institutional grade offering in this space has been a large part of the fact that our Funds have been the first in achieving listing on any of the Australian wealth management platforms; Powerwrap being one. If you would like to know more about our offering please contact myself at email@example.com or reach out to the team at Powerwrap.
To new frontiers and new ways of thinking!
Matt Harry: Fund Manager – Digitalx (ASX: DCC)