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**Please refer to our 2020 article: “Why Bitcoin, Why Now” to understand the full history of bitcoin and its importance in the new digital economy. This article is for educational purposes only, please do your own research and consult with a financial professional before making investment decisions.
Context
2020 was a record year for crypto as most coins over-performed other asset classes in the market. In the depths of the pandemic ‘recession’ most cryptos/alt coins saw a significant drop from their previous price. The year ended with Bitcoin jumping more than 400% in price from $6.4K in March 2020 to $28.7k in December of the same year. At the time of the previous article, prices had crashed down to $6k and we urged all of our members to include bitcoin in their portfolio. The price is currently $48,526 and we're making the same recommendation as we did before.
Main Point
Everyone should own Bitcoin due its trajectory in the next 5-15 years. Bitcoin has attracted a lot of corporate and institutional interest in the past few years with some of the biggest names being Square, Tesla, and Microstrategy. It may be news to a lot of people that investment firms such as Fidelity, J.P Morgan, and Goldman Sachs have all started programs to research and invest in Cryptos. This growing interest in the crypto space is a clear indication that institutions see this area being larger than we expect. Our investment strategy is focused around buying the category winners of these sectors that are growing fast; and we believe the category winner of the crypto space is BTC.
A lot of critics are claiming that Bitcoin is not a great payment mechanism and thats why it's doomed to fail. Its important to understand that Bitcoin is a store-of-value comparable to Gold. It is not meant to replace any currency as a payment rail. This perspective makes BTC an attractive investment because it is the single greatest store-of-value the world has ever seen.
Key Terms to Understand:
Network Effect: A phenomenon that explains how viral ideas spread and gain legitimacy. The network effect states that the value of a network strengthens as the users of that network grow. Examples of recent network effects: Amazon, Facebook, Tesla, Bitcoin.
Lindy Effect: This theory states that the longer something has been around, the longer it is likely to survive.
Inflation: The rise in price of goods and services. This impacts the cost of living, cost of doing business, and cost of borrowing. Several things can cause inflation such as the devaluation of a currency. Inflation also describes the decrease in value of a currency.
Scarcity: Being in short supply or shortage.
Store-of-Value: An asset that successfully retains purchasing power in the future.
Unit of account: A standard monetary unit of measurement. Example: 1 Dollar, 1 Bitcoin, 1 Satoshi.
Satoshi Units: The smallest Unit of account for Bitcoin. The 8th decimal place in a Bitcoin transaction. 1 Bitcoin = 100 Million Satoshis. These partial units allow participants to buy pieces of a Bitcoin.
Market Cap: Circulating supply x Current price. Usually used as a measure of size of a company/market.
The Resilience of Bitcoin Can be Credited to 5 Main Factors:
1. Virality (Network effect).- The network of BTC users and holders is so large now that the network is increasingly growing stronger. The fact that so many people believe in its value is one of the key components that makes it superior to other investments.
2. Lindy Effect- The longer that something survives the more likely it is to succeed. When an idea is growing viral then it’s important to watch its life cycle. Things that should’ve killed bitcoin had no effect on the survival of bitcoin, further adding to the Lindy effect. The longer and larger than bitcoin grows, the more likely it is to survive for the long term.
3. Inflation- The U.S. dollars decline in value leading to asset inflation. Making the value of BTC go up over time.
4. Scarcity- Bitcoin's scarcity is one of its most appealing qualities as an investment vehicle. You want to own something that is rare and has a fixed supply. This makes it valuable v.s owning a currency because the currency's value goes down over time as they create more currency units.
5. Decentralization: The fact that BTC is independent of any government/corporation makes it unique to any other asset class which relies on a central agency to issue it. This aspect of Bitcoin makes it resistant to censorship, manipulation, and seizure.
Why Everyone Should Own Bitcoin:
The Inflation Hedge- The decline of the dollar and other central bank currencies has been obvious for the past decade. This decline has been made worse by the excessive money printing activities of the federal reserve, especially in early 2020. As the money printing/stimulus continues we will see a further decline in the value of the dollar over time, leading to asset inflation. Asset inflation is when the prices of investment assets rise as a result to the devaluation of a currency. This phenomenon is how the rich get richer while the poor, who hold mostly cash and no assets, stay poor. Asset inflation makes it hard for the average person to be involved in the growth of the financial system because things like houses, stocks, real estate, and cryptos become too expensive for the average person to buy.
The U.S. dollar has average inflation rate of 2%. This mean that the purchasing power of your dollar is decreasing by 2% every year. If you have $100 today and held that for a year it would only buy you $98 worth of goods the next year. A scarce asset like BTC only becomes more valuable over time v.s the Dollar as the dollar loses its purchasing power. It will take more dollars to buy bitcoin in the future, making it worth more in terms of dollars.
Your dollars will lose value over time, Bitcoin will not.
Bitcoin Fears Explained:
1) Q: "What if someone hacks the Bitcoin system?"
A: The Bitcoin network cannot be hacked. Any changes to the Bitcoin protocol needs unanimous consent from the Bitcoin Miners. If suspicious activity is detected then the Miners will reject this change and it will have no effect on the Bitcoin network. Exchanges can get hacked because they're owned by people who build the security framework. These exchange hacks have happened before and have had no significant impact on the value of BTC. Make sure to keep your keys off of the exchanges and in a privately held wallet.
2) Q: "Bitcoin will never be a payment mechanism."
A: This is partially true. Bitcoin is a slow and ineffective way to transact money because it is limited to 6-8 transactions per second. Bitcoin's value comes from it being a Store-of-value asset, which typically benefits from it being hard to move around.
3) Q: "What if governments make Bitcoin illegal?"
A: The Government cannot regulate Bitcoin the same way that it has trouble regulating the internet. As long as an individual has access to a computer they they can access their Bitcoin wallet. All an individual needs is internet connection to be able to send and receive the bitcoins. The only government effort that could take down BTC is a global coordinated effort by all governments (Very unlikely). The world could barely agree on climate change and pandemic control, very unlikely that they all agree against Bitcoin.
4) Q: "What if they print more Bitcoins?"
A: Unlike modern currencies, Bitcoin has a fixed supply. Bitcoins supply of 21 Million is fixed and will not change. Since Bitcoin is not owned by any individual, the supply was pre-set into the algorithm and is mathematically controlled by the Bitcoin protocol. There is no oFederal reserve Bank of Bitcoin that can just create more.
5) Q: "What if I lose my information and my money is lost forever?"
A: Although this was a genuine fear in the early days of Bitcoin is has become much less of a worry today. There are websites that will allow you to back up your information (Private keys) to their server in case you ever lose them. These back ups are important to making sure you don't lose your wallet information.
6) Q: "Bitcoin uses too much energy and will be bad for the environment."
A: This is a valid concern for Bitcoin and will need to be addressed by the mining community. We believe that technology advances we will be able to build computing systems that can mine BTC at a more energy efficient rate and reduce the carbon output of mining. The only positive thing that can be said here is that it is less harmful to the environment than mining Gold so hopefully the trade-off is net positive.
7) Q: "What if the government makes their own Bitcoin?"
A; This is not an "if" question. Governments are currently building their own digital currencies referred to as 'Central Bank Digital Currencies (CBDC's)'. The issue with these CBDC's is that they are still centralized (owned by an individual party) who can control how you use, store, spend, and invest your currency. The value of Bitcoin comes from the fact that it is decentralized (no central party owns or controls it). This means that the currency is controlled by the users and not some 3rd party.
8) Q: "My parents don't know how to use this stuff, so it will never work."
A; The current method of buying and selling Bitcoin has only gotten easier. Eventually there will exist applications that will make buying bitcoin as easy as shopping on Amazon. It takes time for adoption to reach the point where we have apps that everyone can use, but they're coming within the next 3-7 years. Paypal, Cashapp, and other electronic payment apps have already adopted BTC and are likely to lead this race.
9) Q: "Okay so then what is the biggest threat to Bitcoin today?"
A: The biggest threat to BTC is a globally coordinated simultaneous attack on every Mining pool in the world. The problem with these types of attacks is that they demand some very unlikely cooperation. Every government in the world would have to attack every mining facility in the world at the same time in order to shut down the Bitcoin network. The issue with these attacks is that if even some miners remain operational they can simply move to another country that allows mining and continue their operation. BTC is like a virus that cannot be killed, and trying to do so only makes it stronger. The best chance that governments have to make it expensive, difficult, or illegal to own BTC, driving its popularity down. This doesn't kill Bitcoin but it will significantly reduce its ability/ attractiveness to be used.
Major Corporations that Own Bitcoin on their Balance sheet:
* The list is much bigger but we decided to narrow it down to the top 7. The publicly disclosed corporate holdings list is $64 Billion in total holdings making up almost 6.5% of the total Bitcoin market cap.
- Grayscale Bitcoin Trust: One of the largest investment firms in silicon valley. They own the only S.E.C. registered Crypto investment product called the Grayscale Bitcoin Trust. The trust allows investors to buy shares in the trust as an alternative to buying actual bitcoin. Grayscale currently owns $36.4 Billion in cryptos and is the largest public holder of Bitcoin. Grayscale's Bitcoin holding totals almost $6.58 Billion.
- Microstrategy: Publicly traded, fortune 500 business analytics firm. They own roughly 90,859 coins worth nearly $4.3 billion. They are buying BTC as a treasury asset.
- Tesla Motors: Tesla made headlines in early 2021 when they converted $1.5 Billion of their corporate balance sheet to buy bitcoin. They bought nearly 48,000 BTC at $44k which means they've made over $150 Million from that purchase in less than one month.
- Galaxy Digital Holdings: A firm started by Mike Novogratz to publicly manage crypto holdings. The Canada based firm owns 16,402 BTC, totaling close to $804 Million.
- Square: The beloved company behind CashApp is one of the largest public owners of BTC. Square's publicly disclosed holdings is roughly 8,030 BTC totaling $390 Million.
- Marathon Patent Group: Not well known but it is a $3 Billion company that trades on the NASDAQ. This company owns nearly 4,800 BTC totaling $330 Million.
- Hut 8 Mining Group: A Canada based publicly traded company that specializes in mining Bitcoin. Current holdings are 3,012 BTC totaling almost $146 Million.
The Wall of Money
As Bitcoin continues to gain institutional interest it will attract more money to flow in, pushing the price parabolic. The $1 Trillion benchmark for Bitcoin when it broke $56K per/BTC signaled to all the largest financial institutions, endowment funds, and pension funds that they should be paying attention to this asset class. As custody, security, and legal issues get figured out we will see more large money buyers come into the market which will push BTC to new heights.
The reason for this phenomenon is that the longer that BTC survives and the bigger the market cap the more likely it is to survive, making it a safer investment at $1 Trillion than it was at $1 Billion. The Trillion $ Dollar market cap puts BTC among the largest asset classes in the world and attracts a whole new set of players who have much larger pools of money than the current players.
Here are the prices that Bitcoin needs to reach to break the barriers:
Current Price: $48,700 (03/01/2021)
Current circulating supply: About 18.62 Million Bitcoins in circulation (18,618,081 BTC)
$53,711.23 Per/BTC = $1 Trillion Market Cap
$107,422.46 Per/BTC = $2 Trillion Market Cap
$159,574 Per/ BTC = $3 Trillion Market Cap (Assuming an 18.8M supply)
Extreme case (best case scenario for BTC).
$1,000,000 Per/BTC = $19.2 Trillion Market Cap Required
*While it's unlikely that BTC reaches the 19.2 Trillion Market Cap level we believe it can take a significant portion of the Gold market cap. BTC's market cap currently represents about 9% of the total Gold market cap ($10.2 Trillion). If BTC were to take even 25% or 50% of the Gold market cap it would add an extra $5 Trillion to the BTC MC.
Other sectors of Crypto/Blockchain that you should pay attention to:
(More details about these sectors will be presented in later articles, for now we encourage everyone to look into these areas).
DeFi: (Decentralized Finance) or DeFi will be the single biggest disruption to the financial industry that we've ever seen. This sector will make it easier, faster, and cheaper to transact. This space is evolving rapidly and will be one of the largest areas of focus in the blockchain space. Names to consider: ChainLink, UniSwap, Aave, REN. These platforms mostly rely on ETH so we are major proponents of the ETH network.
NFT: Non-Fungible Tokens. Unique Ownership, digital tokenizable assets that can be resold. You can also monetize certain brands and intellectual property in ways that creators couldn't before. This space will be massive in terms of art, collectibles, and viral sensations. Where you can exchange 1 bitcoin for another 1 bitcoin, NFT are non exchangeable, meaning your token is unique from any other token in the world, giving it scarcity value.
DApps: Decentralized Applications (DApps). Imagine a world where your favorite music player, social media, and photo sharing app are all operated by code and not by a company. This means that you may not need facebook or Instagram to run this exchange of ideas and information between users, and that it can be done automatically through an application that exists on a decentralized platform.
Conclusion
A wall of money is coming into Bitcoin sooner than we think. There will be a lot of negative news from these companies as a strategy to push the price down so they can buy at a discount. We are personally, and would encourage all readers of this article to employ the corporate strategy of dollar cost averaging into BTC. BTC will have reached $80,000 by January 2022, potentially higher.
As the largest investment institutions int he world rush into BTC at these late prices they will continue to push the price higher until it stabilizes like Gold did. Although BTC is not the only game in town, it will be the category winner of this revolution and will be the only investment that actually has inherent value because of its scarcity and decentralized nature. BTC to the moon!
Disclaimer: This article is the result of the analysis carried out by analysts associated with ChartAddicts. The article does not purport to represent the views or the official policy of ChartAddicts. This is not investment advice.
Pipstradamus
ChartAddicts Analysis Team
03/01/2021
“Bitcoin Treasuries.” Bitcoin Treasuries in Publicly Traded and Private Companies - List of Large Holders, bitcointreasuries.org/.