Bitcoin – The Relevance and Value of Digital Scarcity

 

Author: Matthew Harry – CIO Cloudbreak Asset Management

 

It is fair to say that by now every investor worth his or her salt has heard of Bitcoin, the digital currency that has taken the world by storm over the past 10 years. What you may not know is that while many have been searching for yield in more traditional pastures, digital gold as it is often referred to, has staged an astounding 164% (as of 02/10/2019) recovery from its December 2018 lows.

Having originally been designed as a peer to peer cash payments network back in 2009, Bitcoin is increasingly becoming a store of value (SOV) or “digital gold” if you like.  With Bloomberg recently referring to Bitcoin as a “safe haven asset”* during times of global macro-economic uncertainty, it is clearly not only digital asset market insiders who are aware of its potential of filling such a role in the global investment landscape.  While recent evidence shows periodic negative correlation to global markets during extreme global risk events, on the whole Bitcoin remains a non-correlated asset over higher time frames (see diversification benefit discussed in our Powerwrap Post August edition article).  The case for it being a “digital gold” or a reliable SOV, however is an easy one to make at this point in its life cycle.

With citizens in countries such as Venezuela, Argentina, Iran and Zimbabwe (among others) looking for a reliable SOV as they struggle with extreme levels of inflation in their domestic economies it is easy to see why they are increasingly choosing Bitcoin over gold. With Bitcoin’s scarcity being mathematically pre-determined (there will only ever be 21million Bitcoin in existence) and its stock to flow ratio set to overtake that of gold by 2022, it also possesses many other qualities that make it far superior to gold in many ways.  Bitcoin is not only more divisible than gold (divisible to 1/100 million of a Bitcoin); it is also far more portable (it can be sent over the internet), verifiable, unable to be counterfeited and secure than gold.  Let’s face it, border authorities would have a hell of a time confiscating something they cannot see or touch, more so than they would gold. In many parts of the world, this is an important consideration as is the ability to easily circumnavigate capital controls, another thing that Bitcoin does extremely well.

Granted the volatility of Bitcoin at this stage in its maturity is high.  But if you zoom out a little, its performance since inception far outweighs its shorter-term volatility.

F.Y.DateYearly Low BTCYear to Year Increase (Yearly Lows)Compound Annual Increase (To Q1 2019 Close)*
201217-October-2011$2.22165.32%
201302-June-2012$6.36186.49%152.01%
201401-July-2013$63.00890.57%100.52%
201512-January-2015$175.00177.78%102.58%
201617-August-2015$221.119.47%112.55%
201708-August-2016$556.24151.57%99.37%
201810-July-2017$1,830.00228.99%50.43%
201915-December-2018$3,122.0070.60%65.31%

 

An important thing to note at this point is that Bitcoin also has a known inflation schedule.  You see the issuance rate of Bitcoin (or number of new Bitcoin “minted” with each block mined) is halved every three to four years, making it a deflationary asset unlike traditional currencies which continue to devalue and race toward an ultimate bottom.  Bitcoin’s next “halving” will happen sometime around May of 2020, with previous “halvings” having acted as a base level for Bitcoin’s continued appreciation.  That it is to say that the price of Bitcoin has at no point in its existence fallen below the price established at the point of a “halving”. Likewise, the six-month period leading into, and the 12-month period subsequent to previous “halvings” have seen extremely impressive bull runs.

With central bankers around the world cutting rates to zero or in some cases below ($USD17 trillion in negative yielding debt globally) and “turning on the printing presses” with renewed programs of Quantitative Easing, effectively devaluing their sovereign currencies right at the time Bitcoin is undergoing a halving, it is really not difficult to see the case for holding (or HODLing as industry insiders call it) at least a small amount of Bitcoin as an inflation hedge. Not to mention it’s out-performance over all other asset classes during the past ten years.

The unique properties of Bitcoin that allow it to be an effective inflation hedge as well as a strong store of value or digital gold have attracted the attention and participation of some of the largest traditional markets’ players. Fidelity now provides custody for it, Goldman has released a short-term price target over 50% above current market, the NYSE parent company now trades it, Microsoft is building on top of it and JPMorgan and Facebook are developing their own versions of it.  It must be clear at this point, to anyone that is paying attention, that this is no tulip.

Given the current challenges with acquiring and more importantly securely storing Bitcoin, the team at Cloudbreak Asset Management (CBAM) have established a new fund that takes care of all of that for you.  The Cloudbreak Bitcoin Investment Trust is a single asset, long only passive Bitcoin tracker with institutional grade cold storage (or custody for those of you unfamiliar with the concept of cold storage).  Our custody provider maintains an insurance policy with Lloyds of London. There are zero performance fees and a 2% annual management fee, providing a cheap, simplified and secure means through which to gain exposure to the digital asset markets and Bitcoin more specifically.

 

The Fund is on Powerwrap’s approved product list and appears on platform. Please contact our CIO, Matthew Harry on 0431 308 676 to find out more.

**https://www.bloomberg.com/news/articles/2019-08-05/bitcoin-morphs-into-unlikely-sanctuary-as-market-turmoil-rises)