CryptoPriceExplorers: My View on Bitcoin

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3 years ago

The reason I am writing this article is to clarify my views on Bitcoin. Please pay attention to what I have explained in this article, because these contents do not come from the media, but my own opinions, so I think the content of this article is reliable. I found that most people who want to promote Bitcoin try to find a way of narrative, while those who oppose Bitcoin, those few people who are scared to shrink in the corner use another way of narrative. Like most things I have commented on, in fact, Bitcoin has pros and cons, so I want to express my understanding as accurately as possible.

Before starting the article, I want to reiterate that I am not an expert in Bitcoin and cryptocurrency, so I feel that my views should not have high reference value, and I even feel that I should not publish these ideas. I think that a person must know a lot of information in order to express valuable opinions on the relevant market, so I will not have high expectations for my own opinions. Despite this, people still ask me to evaluate Bitcoin, so I decided to write this article to express my "amateur" views. I think there are some benefits to expressing my views because sometimes the media will distort my ideas, but I I want to remind everyone not to rely too much on my views. My only requirement for you is to read the content of this article instead of paying attention to media reports.

In my opinion, Bitcoin is an amazing invention. It is a new type of currency written by computer system programs. It has been running for about 10 years. People regard it as a means of money and savings. Bitcoin is developing rapidly. It is shocking, the whole process is like creating a traditional currency system based on credit. The creation of Bitcoin is as magical as the creation of alchemy. They both make money from worthless programs. Around 1350 AD, the Medici family launched credit products, which made bankers rich. Similarly, Bitcoin overturned the existing monetary system and made its inventors and those who entered the market very early. Being rich, it is very likely that more people will become symbols in the future. For now, those who created Bitcoin and made this new currency a reality have made this system work very well, and now Bitcoin (including various other competing altcoins) has become a substitute Digital assets of gold.

It is undeniable that the demand for gold has been increasing for a long time in the past, and there are not many assets in the market that can replace gold. This is because the global debt and currency casting are all proceeding simultaneously. I think this trend will also be in the future. continue. In view of the current situation, the global market’s demand for currencies or limited value-preserving assets is increasing. Not only that, but the market’s demand for private assets is also rising. Such assets are actually very similar to gold because they can maintain their value, but The number of issuances is small and the market size is relatively small. Bitcoin and other competing altcoins may be able to meet this demand. In my opinion, investors will no longer treat Bitcoin as a speculative investment, but will hold it for a short period of time. However, from the current point of view, investors will hold it for a long time because it will be held in certain aspects in the future. There is still value. I think the biggest problem is what practical use it has and how much demand it will have in the future. Since the supply of Bitcoin is limited, one must estimate the price by estimating demand.

In addition, the limited supply of Bitcoin must be further explained here. Although the supply of Bitcoin is limited, the supply of other digital currencies is not limited. At present, many new types of digital currencies have emerged. These currencies have triggered competition in the industry, and the supply and competition of these digital currencies will inevitably affect The price of Bitcoin and other cryptocurrencies. To be honest, I think there will be better cryptocurrencies to replace Bitcoin in the future, because things are always evolving in iterative updates. However, due to the immutable characteristics of Bitcoin, it is destined to be unable to evolve, so I think there will be other cryptocurrencies to replace Bitcoin in the future, and Bitcoin will eventually be eliminated, so investing in Bitcoin is also a risk. So for the above reasons, "limited supply" seems to keep Bitcoin at a higher price, but this is not the case. For example, the supply of BlackBerry phones is limited, but it will not have much value because they will be replaced by more advanced competitors. However, I still can't analyze why these competitions are not a threat. I hope that the above immature ideas can be corrected.

At the same time, I admire that Bitcoin has withstood the test of time for 10 years, and the Bitcoin network has been operating well so far and has not been hacked. Nevertheless, for a person with digital assets, current cyber attacks are more terrifying than cyber defenses, and cyber risks are already a risk that cannot be ignored. Even the Department of Defense cannot guarantee that its systems will not be hacked, so under the current circumstances, it is naive to believe that digital assets will not be hacked, and this is the advantage of physical assets like gold One, but also the risk of all financial assets. In fact, I think that most of our financial system in the future is likely to be composed of digital assets, so it is more susceptible to damage or cyber attacks than the current system. Here I would like to remind you that the speed of cyber attacks is getting faster and faster, and it is likely to threaten the value of traditional financial assets. Although Bitcoin can be stored offline through a "cold wallet", it is difficult to do this, and few people will actually do so. So in general, Bitcoin is a networked digital currency that prevents network risks. The level is not up to my requirements. Here I would like to say that if my point of view is wrong, I hope someone can correct me.

Of course, Bitcoin as a digital currency has many other areas worth discussing, such as its degree of privacy and whether its development will be affected by government regulation. In fact, when it comes to privacy, the degree of privacy protection achieved by Bitcoin is not as high as people think. After all, it is a public ledger, and a large number of Bitcoins are held in a non-private manner. Once the government or even hackers want to find out the owner of these bitcoins, then I doubt whether personal privacy can be protected in this case. Not only that, I think that if the government wants to ban the use of Bitcoin, most people will not be able to use it, and the resulting demand will also drop significantly. Although some people think that the government may violate privacy or prevent the use of Bitcoin and altcoins, the view is far-fetched, but in my opinion, the more successful Bitcoin is, the greater the possibility. In 1694, the Bank of England, the first central bank, was established. After that, the government hoped for various reasonable reasons to control the currency and have the power to have the only currency bank and credit in the country. Therefore, if you stand in the position of government officials, it is easy to understand their actions and thoughts. They will never allow Bitcoin (or gold) to surpass the money and credit they provide and become a better choice. Therefore, I think that the biggest risk facing Bitcoin is success, because once it succeeds, the government will spare no effort to try to kill it.

Among the several reasons I mentioned above, in terms of supply and demand, although the supply of Bitcoin is limited, it is difficult to predict its corresponding long-term demand because it is a long-term asset. Suppose I regard Bitcoin as an asset that can replace gold, then convert part of the privately held gold assets into Bitcoin for diversified investment. In this hypothesis, if 10% or 20%, 30%, 40% or even 50% of the value is transferred to Bitcoin for diversified investment, or Bitcoin holders want to diversify their investment in other assets such as gold or For stocks, if the government issues a ban at this time, what impact will it have? The results are clearly unpredictable. So to me, Bitcoin is like a long-term option that is difficult to predict in the future. I can invest in it, but even a loss of 80% will have no effect on me.

This is my non-professional's impression of Bitcoin. If there is something wrong, please correct it. Only in this way can we learn more. At the same time, me and some of my colleagues are still focusing on researching other hedging assets.

It is worth noting that Bitcoin in this article refers to the sum of Bitcoin and other altcoins.

With bond yields in the current market approaching zero, most central banks in the world are trying to depreciate their currencies, so it is reasonable to look for other hedging assets at this time. As of now, Bitcoin is still the leader among cryptocurrencies and has also received the most attention in the United States. Since October last year, the price of Bitcoin has soared by nearly 200%. The unit price once rushed to 40,000 US dollars, and finally stabilized at around 30,000 US dollars. I have to admit that Bitcoin does have some attractive properties, such as limited supply and the ability to be exchanged on a global scale, and it is in a stage of rapid development. However, for the moment, for large institutional investors in the market, we do not think it can be used as a viable means of value preservation. This is due to the high volatility of currency prices, regulatory uncertainty and difficulty in operation. On the contrary, we think that Bitcoin is more like an option and hope that it can become digital gold. Therefore, among the various development results in the future, one of them will surely become a hedge asset that is truly accepted by institutions.

Not only that, when we studied Bitcoin, we also believed that it has some of the characteristics that we believe to be a value-preserving asset, although it is not yet a value-preserving asset. Of course, Bitcoin has similar advantages to gold. For example, due to its limited supply, it will not depreciate due to central bank issuance. In addition, Bitcoin has the advantages of being convenient to carry and enabling global transactions, especially for individuals. Not only that, it can also become an option for diversified investment. Although up to now, more of the above statements are purely theoretical and have not been verified in practice.

At the same time, Bitcoin still faces many challenges, and it will take some time to gain more institutional investors’ approval. The three most prominent challenges are listed below:

1. The price of Bitcoin is still extremely unstable, which means that its future purchasing power is still full of speculation. Compared with existing hedging assets such as gold, real estate or legal safe-haven currencies, Bitcoin will have greater fluctuations in its value in the future.

2. Bitcoin still has major regulatory risks because it does not have any potential government endorsements and has no long historical background, so it cannot provide a baseline for future demand. Although stricter supervision may cause more institutions to accept bitcoin, it may also cause some giant whales to sell bitcoin, because government supervision is their most concern.

3. Although Bitcoin's liquidity has now accelerated, the current level will still bring structural challenges that hinder large traditional institutions such as Bridgewater and their customers from holding Bitcoin.

For future development, we predict that the infrastructure of Bitcoin and other cryptocurrencies will continue to mature. Not only that, but the environment we live in will also undergo new changes. Many government-issued bonds have fallen in return and will no longer be an option for investors to diversify their investments. Currency will face greater risks of depreciation. All of these Can promote the development of other value-preserving assets faster. From the current point of view, although we want to predict the future more comprehensively, it is undeniable that there will be many factors affecting Bitcoin in the future, so we cannot say that we are full of confidence in the future of Bitcoin.

This article will analyze Bitcoin from the following three aspects:

  • The first is its position in cryptocurrencies and the reasons for the recent bull market.

  • The second is the various characteristics that make Bitcoin a hedge asset.

  • Finally, there are various problems and challenges that Bitcoin will face in the future.

This article will analyze the above three points in detail.

As the price rose sharply, the market was reinvigorated

Hot debate about whether Bitcoin can become a hedge asset

The price of Bitcoin has soared by 400% in 2020, which has once again attracted market attention. This depends largely on people's belief that it has the potential to become a "digital gold" and that it can become a value-preserving asset and investment portfolio. Potential hedge against inflation assets. Although there are multiple cryptocurrencies on the market, Bitcoin is still dominating the market. Therefore, we still focus on Bitcoin and discuss whether it can become a potential "digital gold".

Looking back at the bull market in 2017, investors were interested in Bitcoin at that time mainly due to the speculative nature of Bitcoin, which resulted in a sharp decline in the rate of return on investment and the market share of Bitcoin cryptocurrency. The reason behind this is probably due to the ICO wave at that time. Attracting a large part of speculation fever, speculators buy new tokens issued by cryptocurrency startups that promise to provide revolutionary decentralized technology and business models. In contrast, in the cryptocurrency bull market that lasted from 2019 to the end of 2020, Bitcoin outperformed other cryptocurrencies, and its market share is now back to its highest level since the beginning of 2017. The Bridgewater Fund has communicated with large cryptocurrency market participants and service providers and found that people are becoming more and more interested in the idea of ​​Bitcoin as a "digital gold", which seems to be the key driver of this new round of cryptocurrency bull market force.

Central banks around the world have issued a large number of fiat currencies, The attractiveness of Bitcoin with a limited supply increases

Bitcoin is somewhat similar to gold, but if they are directly used as a medium for exchanging goods and services, their use is very limited. However, Bitcoin has the same advantages as gold, such as limited supply and a more stable issuance cycle, so it may not depreciate due to central bank issuance like fiat currency. According to the Bitcoin code, its total supply is 21 million, and the issuance rate is automatically halved every four years. It is this characteristic of Bitcoin that makes people call it "digital gold". As shown in the figure below, although the circulation of Bitcoin was relatively high in the first few years, the current supply growth rate is far lower than that of gold.

At this stage, Bitcoin may be particularly attractive to some investors, and the reason for this phenomenon may be the same as the reason for the popularity of gold in the past few years. It should be noted that investing in gold and Bitcoin cannot immediately generate income, but when the return on other assets drops sharply, this seems irrelevant. Gold is one of the few assets that can perform well during inflation. In an inflationary market environment, investors are likely to take gold into consideration and make investment plans for it. In addition, under the background of high internal and external risks and rising risks, gold has some other benefits, for example, it is not affected by any national political situation. If people really accept the view that Bitcoin is "digital gold", it is conceivable that, conceptually, a similar situation will occur with Bitcoin.

Bitcoin is easy to carry, circulates globally, and can become a value-preserving asset

Of course, scarcity alone is not enough to drive market demand for an asset. People need to regard Bitcoin as a viable and value-preserving asset. In fact, there are other cryptocurrencies that may have similar characteristics to Bitcoin, conceptually compete with Bitcoin, and have the potential to become "digital gold." However, Bitcoin has a relatively long history, a larger scale, and a wider range of recognition and acceptance. These are very obvious advantages that Bitcoin has, at least so far. For example, although other cryptocurrencies have similar technical features as Bitcoin, such as a fixed total supply and emphasizing the concept of "coin price stability", Bitcoin's market performance is significantly better than Bitcoin Cash (BCH) , Litecoin (LTC) and Monero and other mainstream cryptocurrencies. Stable currency is a cryptocurrency that is mainly linked to the US dollar and has a collateral. This type of cryptocurrency has also seen strong growth. However, in essence, stablecoins are not a real hedging asset, but a new form of digital dollar.

Finally, whether it is now or in the future, in addition to maintaining purchasing power for a long time, for an outstanding value-preserving asset, bitcoin transactions and purchase needs are very easy to achieve. Compared with other traditional preserved assets such as gold, art and real estate, bitcoin exchange transactions are much easier, especially for individual holders. In fact, considering the digital nature of Bitcoin, it may be the most portable asset to maintain value, more convenient than physical cash. Moreover, in terms of geographic scope, with the increasing number of bitcoin transaction services around the world, people can cash in bitcoins relatively easily in most parts of the world, even more easily than converting U.S. dollars into local currencies. Many (except for certain capital controlled places).

Whether Bitcoin can become a diversified investment option is still uncertain

Bitcoin has less than 11 years of history, and there is not enough evidence to prove that Bitcoin can make people think that it can become a reliable diversified investment option in the future like gold. Despite this, we still studied the existing data on the market to understand the role and role of Bitcoin in hedging inflation and portfolio shrinking. As shown in the figure below, in 2021, with rising inflation expectations, Bitcoin generally appreciates, but compared to gold, which has long played an inflationary role, Bitcoin seems relatively weak.

In addition, the following chart also shows that during the 60/40 portfolio shrinking period, gold is still a more reliable investment and has a good return. Since the advent of Bitcoin in 2009, Bridgewater Fund has been paying attention to its performance during the deflationary period. However, considering the relatively short development time of the cryptocurrency industry, we cannot draw any definite conclusions with such a small sample size. So far, if Bitcoin is used as a diversified investment portfolio, it can indeed bring some benefits, but this is more a theoretical analysis than a reflection of actual conditions.

Volatility, regulatory uncertainty and immature infrastructure slow down institutional investors' acceptance of Bitcoin

If the basic purpose of wealth is to preserve or increase people's purchasing power over time, we think Bitcoin feels more like an option, but it is still a highly volatile and speculative asset. Compared with the existing value store equivalents in the market, Bitcoin has not been widely used as a savings tool or reserve asset, and the government or large global institutional investors have not "real" involved in Bitcoin asset allocation. Even though the participation of private institutional investors who pay attention to Bitcoin has increased recently, a large proportion of investors still seem to be using Bitcoin for short-term speculative transactions instead of using it as an actual long-term savings tool.

Although it is difficult to determine the relevant situation directly, the following chart shows two ways of using Bitcoin shares for savings. Specifically, one is the share of Bitcoin in the cumulative account, and the other is the share of Bitcoin in the "latest active" account that is more than 5 years old. Accumulation accounts are accounts that only bought bitcoins without selling any accounts, while the "last active" tokens are a mixture of long-term investors and tokens that are likely to be lost. We see that although the number of long-term Bitcoin users has increased since 2018, their total share is still small (about 15%). Moreover, although a considerable part of Bitcoin has not moved for more than 5 years (more than 20%), most of the Bitcoin supply is still in active or semi-active circulation (it is recommended to conduct more speculative transactions).

We try to determine why another way to hold Bitcoin (whether as a deposit of wealth or for more speculative purposes) is to look at the transaction volume. Compared to gold, the high transaction volume of Bitcoin may reflect its relative speculation. Sex. Compared with Bitcoin, the transaction value of gold as a percentage of total outstanding assets is almost insignificant. This phenomenon occurs partly because central banks around the world have a large total supply of gold and regard it as a long-term Value reserve. On the other hand, due to the emergence of high-frequency traders, the prosperous derivatives market and the number of other tokens traded with Bitcoin have surged, and Bitcoin transactions have surged in recent years. Coupled with unregulated cryptocurrency exchanges reporting doubtful transaction volume data, it also creates the illusion of increased liquidity in the market. In fact, in addition to the long-term liquidity risk, this kind of liquidity also represents the high churn rate and speculative problems of Bitcoin transactions.

Indeed, the market's growing speculative interest in Bitcoin in recent months also shows some classic dynamics of asset bubbles. For example, Bitcoin options are currently pricing in future earnings, and the results seem to be highly optimistic. As we have analyzed in previous studies, the very fast future discounting price appreciation is a classic bubble behavior, which further illustrates that the Bitcoin market is still highly speculative. In addition, although the current rise in the cryptocurrency market has not yet formed a bubble, there will undoubtedly be a certain degree of over-leveraging. Take the cryptocurrency bull market bubble in 2017 as an example. At that time, the market was driven by retail speculators, and now retail investors’ interest in Bitcoin investment has begun to soar again. On some well-known Bitcoin trading platforms in the market, margin lending rates have begun to rise, which also shows that the use of leverage to buy cryptocurrencies is becoming more and more common. In the future, the price of Bitcoin is likely to appreciate rapidly. At the same time, the market is also full of broad bullish sentiment and an upward trend in leveraged trading volume. These all indicate that the market does have a bubble risk, although as we wrote before, this bubble Trends can last a long time.

All of the above factors will cause the price of Bitcoin to fluctuate much higher than other traditional financial assets such as stocks and commodities, let alone store of value such as gold. In the short history of Bitcoin, there have been many times of large fluctuations, and many people who hold Bitcoin have basically experienced losses. Although sometimes most bitcoins are profitable (this is currently the case), and sometimes a considerable amount of income can be obtained, for wealth holders, reducing downside risks is actually more important than ownership. Speculation is more important. Similarly, the current Bitcoin options market has similar speculative characteristics.

Compared with the price volatility of existing wealth storage objects in the market, Bitcoin's volatility is indeed slightly higher since its inception, but we know that this situation may change significantly over time. As we have seen in the evolution of other markets, as the number of investors with different investment targets and time horizons increases, market volatility may be reduced.

Bitcoin's regulatory outlook is highly uncertain; two-way risks arise

Perhaps most importantly, large institutional investors believe that the widespread adoption of Bitcoin will depend on regulation. Whether decision makers have created a reasonable regulatory environment that helps to win trust in certain assets, otherwise investors will reduce their attractiveness to other assets such as Bitcoin. Will regulators completely ban Bitcoin? Although we don’t know how regulatory trends change, we do know:

(A) Bitcoin will be the focus of increasing attention of regulatory decision makers.

(B) Supervisors may adopt different approaches to implement supervision.

Regarding this point, at the beginning of this month, Christine Lagarde, President of the European Central Bank, pointed out when talking about Bitcoin:

"Bitcoin is a highly speculative asset, but it has also developed some interesting businesses. At the same time, there have also been some illegal money laundering activities that should definitely be condemned... So there must be regulations to regulate Bitcoin... This is a need Issues agreed on a global scale, because if someone escapes supervision, they must be severely punished."

Similarly, Yellen Janet, who attended the U.S. Treasury Secretary's confirmation hearing in mid-January 2021, pointed out that “cryptocurrencies are particularly worrying” when it comes to financing terrorism. She explained:

"We really need to study how to reduce the use and manufacture of cryptocurrency currency. Make sure that money is not laundered through these channels."

We believe that in the coming year and years, there may be two main regulatory approaches:

1. Due to the fear that the use of Bitcoin and cryptocurrency will destroy traditional legal tender, thereby cutting off the further development of the asset in the current market environment, the regulator will restrict the use of Bitcoin and cryptocurrency, or

2. Create a regulatory environment to enable people to have longer-term trust in encrypted assets, but at the same time it may also lead to increased market volatility.

We believe that both regulatory paths indicate that the "roller coaster" state of Bitcoin prices may continue for some time.

We can see an example of stricter restrictions on China. In September 2017, the Chinese authorities banned the initial coin offering (ICO), which is a fundraising process based on cryptocurrencies. After the ban was issued, the price of Bitcoin immediately dropped by 8%. In the United States, the possibility of a similar ban is relatively small, but it is also technically possible. Given that most bitcoin buyers rely on wire transfers and bank debit accounts to transfer funds to or from bitcoin exchanges, the United States may prevent American investors from buying bitcoin for all practical purposes. Here, our main concern is: if there is a central bank digital currency in the future, and the central bank's digital currency issuance surges and becomes an officially recognized digital store of wealth, then governments may prefer to restrict Bitcoin as a non-governmental legal tender alternative because Bitcoin is likely to compete with central bank digital currencies.

Of course, even if there is no large-scale comprehensive ban, there will still be many potential regulatory constraints. These measures may also seriously damage the adoption and market value of Bitcoin. In the past few years, the U.S. basically has an overall regulatory direction for cryptocurrencies. Bitcoin is regarded as non-threatening and regulatory measures tend to be moderate. Therefore, people’s recognition of blockchain technology and cryptocurrencies has continued to increase. But some regulators see cryptocurrency as a threat to support illegal activities and/or subvert the existing financial system.

Let us give two examples. The Office of the Comptroller of the Currency (OCC) issued an explanatory letter on the evening of January 4, local time. It clarifies that U.S domestic banks and Federal Reserves can use public blockchains and stablecoins for settlement, which means that U.S. domestic banks and Federal Reserves can run crypto nodes and use associated stablecoins for permitted payment activities, as long as they comply with With existing laws and regulations, banks can use public blockchains to verify, store, record, and settle payment transactions. But a month ago, the US Treasury Department’s Financial Crime Enforcement Network (FinCEN) proposed rules restricting the use of non-custodial cryptocurrency wallets, requiring crypto companies to verify the names and addresses of non-custodial wallet users for transactions greater than $3,000. In addition, exchanges also need to submit and store records related to cryptocurrency transactions, aiming to effectively prohibit the use of "privacy coins" such as Monero and Zcash.

Given that the market currently presents an unregulated "Wild West" pattern, Bitcoin and cryptocurrencies have developed rapidly, but there are other regions that may face the risk of destructive regulatory actions. Among them, the current market value is the largest stability. Tether (USDT). The U.S Commodity Futures Trading Commission, U.S Department of Justice, and New York State Attorneys are currently investigating Tether because they have issued billions of dollars worth of USDT tokens, which may not be fully supported by actual U.S dollars. If Tether is to be shut down or subject to other major regulatory penalties, considering the interconnected liquidity of the entire cryptocurrency market, this may destroy the value of all cryptocurrencies, including Bitcoin.

In addition, regulators may allow more safe-haven institutions to adopt Bitcoin, which may still cause Bitcoin holders to face huge market volatility. Many of them are early adopters and they strongly agree with Bitcoin founder Satoshi Nakamoto. Create the principles of anonymity, encryption and anarchism. For example, just after the US Treasury Department’s Financial Crimes Enforcement Network proposed rules to restrict the use of non-custodial cryptocurrency wallets, there was a sell-off in the Bitcoin market, which once led to a price drop.

However, in some cases, clear regulation may bring long-term value-added to the cryptocurrency market. Compared with the 2017 bull market, the efficiency, market liquidity, and complexity of transaction infrastructure and custody solutions have become higher, which in turn "stimulates" institutional participation. We believe that this is partly due to regulatory changes, and traditional exchanges have also begun to accept bitcoin derivatives.

Therefore, compared with 2017, institutional liquidity has recently entered the Bitcoin market, so the Bitcoin price surge is driven by a larger transaction scale, while the bull market in 2017 was due to the dominance of small and medium retail investors. However, it is worth noting that the degree of institutional participation is still not high, and the number is small, mainly limited to hedge funds and family investment institutions, rather than larger traditional institutional investors, the latter in the market size of cryptocurrency investment tools Still very small.

In the best case, mature cryptocurrency regulations will bring security to the market, and will also provide more means to access assets, such as the Bitcoin Exchange Traded Fund (BTC ETF), which may encourage large institutional investors to increase Bitcoin investment exposure. We want to understand what changes in institutional investors’ attitudes toward Bitcoin investment might look like in the future, for example, how the market will react if investors transfer part of their gold holdings to cryptocurrencies.

The following table is for illustrative purposes only, so it is slightly simpler to make. If a certain amount of private gold savings (that is, excluding gold held by the central bank) is transferred to Bitcoin, it may push the price of Bitcoin to rise. More specifically, at the bottom of get off work, we assume that half of the total market value of privately held gold savings is allocated to Bitcoin, which means that approximately $1.6 trillion will be allocated to all Bitcoins that have been mined. From gold to Bitcoin, investors began to try to diversify their investments, which in theory could increase the price of Bitcoin by at least 160%.

Of course, we make this calculation based on the assumption that there is no problem with liquidity or market rebound. In fact, the above estimates may be considered conservative, because such a large-scale liquidity may cause tight supply and push the actual price of Bitcoin higher. Obviously, there are many factors that may affect the future price trend of Bitcoin that we have not yet seen. For example, we don't know when the central bank may consider transferring its gold exposure to Bitcoin, or the regulator may increase its "strike" on Bitcoin. Of course, these are all assumptions.

Large institutions that want to hold Bitcoin still facing structural and operational challenges

In addition to these potential developments in the future, large institutions that want to hold Bitcoin still face structural and operational challenges, which also challenge the widespread adoption of Bitcoin. Regarding the former, although we will not elaborate here, but to give just one example, the regulatory requirements of institutions are usually different from what we think, and institutional investors are likely to require stronger supervision; The currency is an unregistered asset (that is, the ownership is determined only by the person who owns the private key), which improves the protection and insurance considerations of the institutional asset manager. At this point, digital asset custody is usually still more expensive than traditional stocks, regulatory agencies are formulating qualified custodian rules, and the number of underwriters that custody digital asset insurance in the current market is also very limited. In other words, more and more institutional-level hosting solutions are slowly being introduced, and services and pricing may grow as demand grows.

For large institutions, to hold Bitcoin in their investment portfolios, they also need to have sufficient liquidity to conduct large-scale transactions without destabilizing the market. At this point, although Bitcoin is becoming comparable to Bridgewater Fund trading in certain markets, its liquidity has reached the highest level in history, so you can see that the size of this market is still small. We will summarize some investment tool comparisons below, based on our assessment of liquidity:

  • For investors who can directly trade cryptocurrency hotspots, the current total cryptocurrency market capacity is close to 10% of the tradable gold market.

  • For large asset management companies that are only able/willing to access Bitcoin through traditional venues (ie derivatives, stock markets), the market size is even smaller.

The graph below shows the Bitcoin transaction volume that we believe comes from real liquidity. We see that from these perspectives, although Bitcoin's reported transaction volume is very impressive, the real transaction volume may be relatively stable. Considering this trend, coupled with the fact that the supply of Bitcoin is fixed, the current liquidity of Bitcoin is still related to its price. Despite the recent increase in the price of Bitcoin, at the current scale, investors who allocate relatively small amounts of assets to Bitcoin may also have a significant impact on the market. Although the gold market is much larger than Bitcoin, it is still small compared to the US stock market.

Generally speaking, it is obvious that Bitcoin has a value storage function and has attracted the attention of many investors. Of course, the price of Bitcoin is still volatile. However, we must admit that this financial instrument has only a short history of ten years. In absolute terms, relative to the existing wealth reserves in the market (such as gold), how this digital asset will develop deserves attention. A major challenge for Bitcoin in the future may still come from quantum computing, regulatory rebound, or other issues that we have not yet identified. Even if these issues have not yet appeared, they still need to be paid attention to. For now, Bitcoin is more like a potential wealth reserve option for us.

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