Key drivers like price, current macro trends and risks indicate that bitcoin is a great investment and possibly the best one available now.
Like many, when I first heard of bitcoin, my reaction was “Why would anyone invest real cash in magic internet money?” It was worth zero — backed by nothing. And, like a fool, I was keen to point this out to anyone who would listen. But still, I was curious what the buzz was about, so I continued to keep an eye on it until, in 2015, I had a mental breakthrough. I was listening to a podcast when Wences Casares made a statement that went something like this:
“The miracle of bitcoin was going from zero to one cent. The debate of whether bitcoin has value has been resolved. The market has already assigned it value, so we can now only argue over how much it is worth.”
Bitten by the bug, I spent months reading anything bitcoin-related, talking with friends, developing an investment thesis and assessing probabilities that bitcoin could actually achieve these outcomes. Like any good MBA graduate, I quickly worked up a SWOT analysis (strengths, weaknesses, opportunities and threats) and a simple pricing model that compared the number of network wallets to price. At the end of this exercise, there was only one answer: It was prudent to invest a small percentage of my portfolio in bitcoin. For me, I chose 1 percent of investable assets. And now, like all other bitcoiners, I wish I had invested far more.
Below is my hopefully simple and concise explanation as to why I still believe bitcoin is a great investment, and quite possibly, the best investment opportunity there is right now. Let’s look at some key drivers of price, current macro trends and risks.
In my opinion, “printer go brrrr” is not exactly accurate as some of this is a swap of similar assets, but the Federal Reserve did effectively prevent wide-scale deleveraging during the COVID-19 pandemic by aggressively opening lines of credit, lowering rates and embarking on the most aggressive quantitative easing (QE) program we have ever seen.
Meanwhile, politicians are dropping cash on their constituents. Some of that stimulus will chase asset prices, and these actions have moved all markets to “risk on,” given that widespread deleveraging risk is off the table. In simple terms, deleveraging is the selling of assets by institutions or individuals to repair balance sheets and/or pay debt. This was a primary cause of the Great Financial Crisis. In my opinion, the risks today appear more tilted toward higher inflation, not deleveraging, and what better way to hedge inflation than with digital gold?
Millennials are the largest generation in the United States and are now entering their prime earning years (see the Fundstrat chart below). This generation watched during the Great Financial Crisis as their parents lost their jobs and homes. A Facebook survey showed that 92 percent of them mistrust banks, but that they love bitcoin. A survey has shown that 20 percent of them own bitcoin now, and more are likely to buy bitcoin in the future. I believe it. Anyone with kids today can see that youth value digital property as much, or more, than they do real property. I say, don’t fight youth.
The value of a network is related to its number of users, says Metcalfe’s law. Back in 2015, I modeled bitcoin’s price based on the number of network wallets (as a proxy for users). The statistical correlation was very good and the relationship very clear — more users equals higher price. What is particularly interesting about bitcoin is every FOMO event raises price, peaks interest and creates more HODLers.
I have watched this play out for two bitcoin Halving cycles. Now, as I watch a third cycle, I do not see that trend reversing. The bitcoin community is stronger than ever, and once someone falls down the bitcoin rabbit hole, they rarely climb back out. Bitcoin’s fixed supply, portability and auditability make an ideal potential global savings vehicle. I foresee adoption continuing until each country effectively has a currency duopoly — local currency for spending and bitcoin for long-term savings.
Not all adoption is created equal. The small amounts retail has invested in bitcoin will pale in comparison to when institutional investors become heavily involved. MassMutual and Tesla are just the start. Bitcoin is an ideal institutional investment for several reasons.
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