The year 2020 was extremely exciting for investors. After a major market downturn in March, almost all markets grew and reached new historical highs by the end of the year.
Stock markets around the world have generally experienced an increase of 5 to 15%. Gold rose 24%.
Digital gold, ie Bitcoin, however, simply swept the competition and achieved growth of 304% (USD 40,000 for Bitcoin). Even more interesting is that serious business crypto projects, such as Ethereum, have achieved even significantly higher growth than Bitcoin.
Below I would like to entrust you with 4 key factors that influenced this growth and my thinking about the future of Bitcoin and the crypto market.
1. Curve of introduction of new technology
Almost every revolutionary new technology (for example a steam engine, railroad or internet) follows the same introduction curve:
After innovation, a bubble of unrealistic expectations emerges because people think that new technology will change the world overnight. Then there is great disappointment or sobriety, where the public cools down and forgets about this technology for a while. This happened, for example, in 2000 in the field of Internet technology. During this period, new business models and new products developed in the background. But they are not visible to the public.
And only after this phase, which can last for years, does the impact of new technology really see the light of day. Today, this is reflected in the global dominance of Internet companies in the Internet market.
(Internet technology introduction curve (source: Yahoo! Finance)
In the case of the crypto market, the revolutionary technology is called blockchain.
To understand blockchain technology, imagine a table (database) that doubles in a network of a large number of computers. All records in this table are public and can be checked. Since there is no central location, it is almost impossible to hack it, because information exists in millions of places at the same time. This technology allows the distribution of digital information, but not copying. However, each piece of data can have only one owner. This technology is the foundation on which Bitcoin is based, as are many new technological business services and business models.
2. Inflation and printing money
Last year, central banks printed huge amounts of new money. For example, the US Federal Reserve generated more money in the first half of the year than in the entire decade following the 2008 financial crisis. Other central banks, including the European one, are not far behind.
We are therefore justifiably concerned when we wonder what will happen to inflation in the coming years. For now, it is "hiding" in rising property prices, such as stocks and real estate, but it can quickly affect the prices of everyday necessities. Especially in the event that such extensive printing of money continues.
Historically, the best defense against inflation lay, of course, in gold.
But in today’s digital age, gold no longer has the same luster as in the past. We live in a digital world and such a world needs a digital tool to store value and defend against inflation.
And here comes Bitcoin, which has secured gold status of 2.0 in the last year. Thus, improved gold, which has significantly better properties than gold itself (fast and cheap transfer, strictly limited amount of coins in circulation, etc.).
Prudent investors, of course, use both options to defend against inflation. However, there is a high probability that Bitcoin will increasingly erode the market share of gold and thus grow much faster than gold. Bitcoin today represents approximately 4% of the market value of gold and it is quite possible that in a few years that percentage will be 10, 20 or even 50%. Of course, when investing in Bitcoin you need to be long-term oriented as well as able to survive major corrections on the way to potential super returns.
3. The role of joint stock companies
A few months ago, MicroStrategy announced the surprising news that it had converted almost all of its $ 425 million cash reserves into Bitcoin (now this investment is worth well over $ 1 billion). In a press release, they explained that money is losing value extremely quickly and that Bitcoin is simply better than gold in long-term preservation of value.
Being the first joint stock company to make such a decision is not easy. For this move, it was necessary to regulate many legal and accounting aspects and to reach the consent of the entire management of the company. But once they did, they opened the door to all other joint stock companies. Recently, their example was followed by Square, a company run by Twitter founder Jack Dorsey. And now every week we hear the story of some new joint stock company that decided to make the same move. 2021 will be the year in which this story is likely to continue at a pace we can hardly imagine now.
Do you know the story when runners failed to run a mile in less than 4 minutes for decades? But in 1954, Roger Bannister finally broke that record. But it’s interesting what happened after that. In the years that followed, hundreds of runners also ran a mile in less than 4 minutes. Have they acquired supernatural abilities in just a few years? They are not. It was about psychology. Being first is always the hardest. Only when someone achieves the "impossible" do the doors open to the masses. I think it will be the same with corporate investment in Bitcoin. MicroStrategy has shown that this can be done from a legal, accounting and security point of view. They have proven that the company's management can confirm such a big decision. This is also recognized by other joint stock companies, whose value of monetary reserves is declining day by day due to inflation. Of course, as large and sluggish systems, it will take them about half a year to be able to follow this trend. And here is our chance to overtake them as individual investors.
4. Roles of institutions
The last factor for the growth of Bitcoin and the crypto market is the entry of institutions. In 2020, various mutual funds began to invest en masse in Bitcoin. As an example, I will mention the large English fund Ruffer Investments, which has invested $ 744 million in Bitcoin, ie 2.5% of the funds it manages
The Grayscale Fund, which allows institutions to easily enter the crypto market, is literally sold out and buys out almost all of the Bitcoin available on the market each month. In 2020, due to the exceptional interest of institutions in Bitcoin, the funds it manages have been increased from 2 to 20 million US dollars.
It's just the tip of the iceberg. Now they bring daily news about new funds, millionaires and billionaires investing part of their assets in Bitcoin.
Where is the development of the crypto market going in the future?
When it comes to investing, there is no security. There are only probabilities. Given all the above, I can say with certainty that there is a high probability that the crypto market will develop very nicely in the future. The crypto market is booming tremendously, aided by “smart” institutional money. This is in stark contrast to the speculative bubble that occurred in 2017/18. Bitcoin has thus become a mature, legitimate asset that will survive on the market in the long run. And it is quite possible that his victorious campaign will continue
Very good article!