Bitcoin is up 64% from the start of the year but it is the gravity-defying performance of the stock market that is hogging investor attention. However, there are still good reasons to invest in Bitcoin in 2020. Is the bull run just getting started?
In 2017, Bitcoin had an incredible year, with a bull run that rewarded investors with a 1,350 percent return and an all-time high of $20,000 as an early Christmas present. In 2018, however, the picture was very different. Bitcoin lost over 70 percent of its value, dropping from $14,000 on January 1st to below $4,000 to close the year. The bear market would last throughout 2018 and 2019, and many sector related companies did not survive the extended crypto winter.
At the start of 2020, Bitcoin investors began the year in a bullish mood. The worst of the bear market appeared to have subsided and crypto commentators were looking for Bitcoin’s third halving in May of this year to provide the catalyst for a new bull run. The COVID-19 pandemic was a black swan event that soon poured cold water on bull market hopes. In March, Bitcoin flash-crashed down to just under US $4000, a drop of more than 50% as investors in all markets went to cash as the reality of the pandemic began to set in.
Despite the heavy losses of March, and the chaotic response by governments around the world to the pandemic, global markets have since recovered exceptionally well. Both Gold and the US stock market have hit all time highs this month, and crypto investors are looking to Bitcoin to be next. If you’re asking yourself ‘should I invest in Bitcoin’, here are five reasons why it might make sense..
1. Bitcoin adoption is growing globally
Global adoption of Bitcoin is slow, but it is happening. For example, the number of users of the popular_ Blockchain_ wallet has steadily increased throughout 2020. The company's data shows an increase from 41 million to over 52 million wallets in the past twelve months.
Wallet numbers are just one part of the story. The number of people holding BTC in their own wallets is dwarfed by retail investors happy to leave their Bitcoin with a custodian such as Coinbase or Square's Cash App.
The number of people buying BTC via the Cash App, for example, continues to grow. Square reported a major increase in Bitcoin revenue for Q2 of this year. The company says that its Cash App generated $875 million in revenue, an increase of 600% from the previous year. The company's Bitcoin gross profit jumped 711% - a clear sign of a fast growing user base of Bitcoin buyers.
Meanwhile, trading volumes on peer-to-peer Bitcoin exchange, LocalBitcoins, suggest that Bitcoin adoption is growing in emerging markets. Countries such as Kenya, Mexico, Peru, South Africa and Venezuela have shown an increase in Bitcoin trading volumes throughout 2020.
2. Bitcoin’s value proposition is perfectly suited to the macro climate
There is a growing awareness from both individuals and companies, of Bitcoin’s unique value proposition, and where Bitcoin sits in an uncertain macro environment. Prominent macro investor Paul Tudor Jones has said that Bitcoin in 2020 reminds him of the role gold played in the 1970s. In a report titled The Great Monetary Inflation, he explains why his Tudor BVI fund has invested between 1 and 2% of its assets in Bitcoin futures contracts.
“COVID-19 is a one-of-a-kind virus that has triggered a one-of-a-kind policy response globally,” says Tudor Jones. “It has happened with such speed that even a market veteran like myself was left speechless. Just since February, a global total of$3.9 trillion (6.6% of global GDP) has been magically created through quantitative easing. We are witnessing the Great Monetary Inflation (GMI)—an unprecedented expansion of every form of money unlike anything the developed world has ever seen.”
Satoshi Nakamoto appears to have designed Bitcoin as a possible solution to this scenario. In 2009, shortly after the release of the Bitcoin white paper, the pseudonymous creator of Bitcoin posted to an internet forum. He stated, “The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”
Similarly, Real Vision CEO Raoul Pal says that as central banks adopt quantitative easing, the stage is set for hard assets such as Bitcoin and gold to perform well. “Huge quantitative easing of fiat meets the hardest money that automatically quantitatively tightens. Bitcoin wins. This is one of the best set ups in any asset class I've ever witnessed… technical, fundamental, flow of funds, and plumbing.”
And it’s not just macro investors taking notice of Bitcoin’s role as a potential hedge against the traditional economy. Small nimble companies are increasingly turning to Bitcoin to survive. This month Snappa, a software firm based in Ottawa, said that it had invested a significant amount of its cash reserves into Bitcoin.
In a blog post, Snappa co-founder Christopher Gimmer explains why he thinks bitcoin is a good investment. "Would you rather save money in a currency whose supply is inflating each year? Or would you rather save in a currency whose terminal supply is programmatically fixed? This is a question we’ve had to start taking seriously as Snappa continues to scale and produce growing amounts of free cash flow. It became even more important when our bank slashed the interest rate on our “high interest” savings account to 0.45% earlier this year. This means that the purchasing power of our Canadian and U.S. dollars is actually decreasing after adjusting for inflation. Fortunately, I believe we now have a far superior savings technology available to us. That technology is Bitcoin."
3. What if the Bitcoin Stock to Flow model holds?
An investing concept called 'stock to flow' can be used to quantify the scarcity of a good. Stock represents the total supply in circulation and flow represents the amount of new supply per year.
Because Bitcoin is open-source software with a fixed supply schedule, it is possible to measure Bitcoin’s S2F with 100% accuracy. Following Bitcoin's third halving in May, the current S2F of Bitcoin is 56 which is roughly the same as gold. However, after the next halving, Bitcoin will be twice as scarce as gold.
A pseudonymous quant trader calling himself PlanB created the Bitcoin Stock-to-Flow (S2F) model. He argues that Bitcoin’s growing scarcity will increase its value. PlanB has since updated his original model to a cross asset price model. In terms of a Bitcoin price prediction, this model says that the Bitcoin price could reach $288k in this cycle if the model continues to hold. While nobody knows if it will, given the possibility of such high returns, perhaps it would be prudent to have a small amount of Bitcoin, just in case?
igh stock-to-flow ratios such as Bitcoin, gold, and silver have historically been utilized as stores of value."
4. Wall Street is going crypto
Fidelity and the Intercontinental Exchange (ICE) successfully launched cryptocurrency trading offerings for institutional investors in 2019.
In May, America’s largest retail bank, JPMorgan (which has a history of opposing Bitcoin) announced that it had begun processing crypto transactions and had offered banking services to leading U.S. crypto exchanges Gemini and Coinbase. The bank also plans to create JPM Coin, a digital currency tied to the U.S. dollar.
Also in May, the Goldman Sachs Wealth Management division (GSWM) hosted an investment advisory call titled “US Economic Outlook & Implications of Current Policies for Inflation, Gold and Bitcoin.” In that call, GSWM issued a markedly negative view on crypto assets. Most of the claims were either inaccurate or outdated and it appears that this view was not representative of the entire firm. In fact, it has since emerged that Goldman is considering its own crypto asset, most likely a stablecoin. The firm has also appointed Mathew McDermott to the new position of global head of digital assets, a sign that the firm views blockchain as an increasingly important part of the finance industry.
While the relationship between U.S. banks and the blockchain industry has always been difficult, that appears to be changing as crypto markets mature. Last month the Office of the Comptroller of the Currency said in an interpretive letter that American national banks and federal savings associations are now authorized to provide cryptocurrency custody services for customers.
5. Bitcoin has always surpassed its all-time highs after a price crash
Finally, for anyone asking ‘should i buy bitcoin’, it never hurts to look at historical price data. Bitcoin has seen many peaks and troughs in the last 10 years and has been reported "dead" over 381 times in mainstream media. However, it has always managed to surpass its most recent all-time highs so there is no reason to think that the same will not happen again.
In mid-2011, the price of Bitcoin hit $30 on the most popular exchange at the time, Mt.Gox. Following a hack of the exchange, the price collapsed to a low of only $2 by November 2011 before recovering again in 2012.
In April 2013, Bitcoin briefly hit the $260 mark, before tanking by over 50 percent within hours as Mt.Gox was unable to handle the increase in trading volumes and was hit with a DDoS attack. Despite a drop in investor confidence in the Bitcoin trading ecosystem, it only took Bitcoin seven months to surpass its most recent high again.
In late 2013, Bitcoin hit the symbolic $1,000 mark for the first time, but the price gradually collapsed to a low of $175 in the two years to follow. Two years after that, at the start of 2017, Bitcoin hit the $1,000 mark once again and surpassed its previous all-time high to hit its famous December 2017 all-time high of $20,000 per coin.
Historical price data suggest that Bitcoin is poised to exceed its most recent all-time high again, even though it may take a few years. Whether or not the stock to flow model holds is beside the point, there may already be enough interest in Bitcoin to sustain a slow and steady price increase. In the meantime, quantitative easing and increasing government debt levels will contribute to asset price inflation, and currency debasement. With gold already at an all time high, Bitcoin may yet prove itself the ultimate hedge. How long will you stay on the sidelines?
