[Not financial advice] Even adjusted for its high risk, Bitcoin significantly outperforms most asset classes.
Editor's update: BTC (Closing) Price
Date of Publishing (20 Sep): $43,010 USD
27 Sep: $42,154 USD
04 Oct: $49,239 USD
11 Oct: $57.492 USD
18 Oct: $62,026 USD
Bitcoin Futures ETF ($BITO) started trading on 19 Oct!
Interested? Scroll to the end of this post for details!
"COVID must have made him siao. Don't you know Bitcoin is a bubble and it'll eventually pop? Tulip mania hellooooo."
"Bitcoin has no fundamental value, no valuation framework, no cash flow (hence not asset), hence it should be 0."
"Bitcoin is so risky, so dangerous, it can crash 50% in a matter of days. I prefer gold."
"lmao just delete the bitcoins?"
If these are your thoughts on Bitcoin, let me attempt to dispell these arguments / misconceptions and perhaps persuade you why bitcoin deserves a place in every modern investor's portfolio. Yes, even investors who desire "stable" returns. 😎
Who am I? I'm just a nobody that bought the top of BTC in late 2017, then DCA-ed + witnessed Bitcoin crashing to $3K USD back and ETH crashing to $90 USD in Dec 2018. Safe to say, I've been here longer than many crypto investors on here AND have weathered a multi-year bear market in crypto. Definitely not one of your cryptobois that only post charts of crypto prices on instagram. 🙂
This article is intended for all readers of all experience levels who has heard of Bitcoin and either likes it, hates it or wants nothing to do with it.
Let me start by making some things clear.
Bitcoin is not an asset. From Investopedia, An asset is broadly defined as "a resource with economic value that an entity controls with the expectation that it will provide a future benefit." Example of assets are like patents (from which you earn royalties) or say a house (earn rent). Bitcoin generates no future benefit, except only when it is sold at a higher price.
"Never in the history of the world had it been possible to transfer value between distant peoples without relying on a trusted intermediary, such as a bank or government." - The Bullish Case for Bitcoin
Bitcoin is not a commodity. A commodity refers to oil, natural gas, grain, beef and to some extent, gold (has industrial applications). As such, the value of oil is determined largely by how much of it is needed as inputs to other industries (demand) vs how much is produced. Bitcoin does not serve as inputs to other industries. Nothing (outside of crypto) needs Bitcoin to function.
Bitcoins are not backed by any physical commodity, nor are they guaranteed by any government or company, which raises the obvious question for a new bitcoin investor: why do they have any value at all? - The Bullish Case for Bitcoin
Bitcoin is a store of value. A** **store of value is an asset that maintains its value over time, rather than depreciating. Gold and other precious metals (silver, platinum) are good stores of value because their shelf lives are essentially perpetual (A gold coin found 4000 years ago is still a gold coin today).
Summary: Know that bitcoin is not comparable to stocks (asset), nor is it comparable to oil/natural gas (commodity). It is comparable to other store of values held mainly for preservation of purchasing power (such as gold). Gold held for 50 years has appreciated roughly 25.9x, not adjusted for inflation.
Now, have a look at the Bitcoin price chart over its history, especially from 2017.
Are they really any different?
From the start of the chart (~4 years), Bitcoin appreciated 77.6x.
With the stage set, we can explore these points below:
1) Volatility does not equal risk
2) Why Bitcoin is in a favourable position regarding regulation and adoption
3) What separates Bitcoin from Gold as a stronger contender for a modern future-proof store of value.
These points will hopefully address some of the key concerns investors have when looking to invest in Bitcoin.
Volatility is associated with risk. However, it is not equal to risk. Have a look at the below chart (01Jan2020 - 01Jul2020):
From the right hand side, the tickers are: Amazon (Green), Bitcoin (Blue), Apple (Purple), Nasdaq top 100 (Yellow), Gold (Pink), SPY (Turquoise) and STI (Orange).
Had we established that volatility = risk, nobody would have invested in the individual companies mentioned above, much less the index during the Covid March crash. Volatility simply represents the magnitude of asset price swings around its mean price. It tells you little about the risk of the underlying asset/good.
I'll repeat: Volatility tells you little about the risk of the underlying asset/good. If you're investing for returns, it's ok to invest for a lower volatility return. However, assuming that an asset's volatility is equal to it's risk is an irrational bias.
The company-specific risk is simply the probability that the company can't acheive what it set out to do (disrupting legacy companies, maintaining competitve advantage, capturing market share), relative to market expectations.
The risk for gold comes from other sources such as 1) supply shocks, 2) regulation and 3) disruption from new monetary goods (i.e. bitcoin).
The risk for Bitcoin comes from 1) government regulation and 2) network security (hacking network successfully causes irrecovable damage to its reputation).
It's not an exhaustive list.
Do you agree? Price, while it should reflect the intrinsic value of any company in the long run, currently represents the market expectation** of the comanpanies' intrinsic value today, discounted by sentiment**. During the depth of the Covid crash, every company was irationally sold off (including Bitcoin), but for some, Covid and work-from-home brought massive tailwinds that actually improved their long-term intrinsic value.
You see, risk and price movement are interlinked. In the short run, prices of any good or asset is completely random and is influenced primarily by market sentiment. Over the long run, it is pegged to the company's intrinsic value (a reflection of their risk).
For Bitcoin, since it's price is determined by the supply/demand dynamics (and risks as described above), Bitcoin at $60,000 USD is counter-intuitively more valuable than when it was at $3,000 USD, showing demand - supply imbalances that are eventually resolved via price appreciation.
Investors in stocks and bitcoin will do well focusing on the long-term prices rather than short term price fluctuations, which are irrational. I'll further append some quotes of great investors (past and present) who think the same way about volatility.
Source: The Novel Investor
Warren Buffet didn't get life changing returns by avoiding volatility. He embraced it, as should many of us in the pursuit of index-outperforming returns (S&P 500 (the index) returned 10%~ for 55 years (189x) with dividends reinvested as per Buffett's letter). Can you beat that?
People who think of Bitcoin as a fad (such as the Tulip mania which it clearly isn't in 2021) are generally tongue-tied when asked to point out reasons for it being a fad. Here's some factual information regarding it's state of adoption and regulation that I think will address investors' concerns regarding the global demand for Bitcoin.
1) Corporate adoption
The top 5 public companies owning Bitcoin are Microstrategy, Tesla, Galaxy Digital Holdings, Square and Marathon Patent Group, for about 77.3k Bitcoins, or about 0.37% of total supply (21 million). Canada has already rolled out the first Bitcoin ETF (btw you can invest in it if you don't want the hassle of managing your own bitcoin). Cathie Wood, behind one of the largest thematic ETF funds Ark Invest, has already allowed herself to purchase shares in that ETF via her thematic ETF ARKW. In US, the idea of ETFs are not an IF but a WHEN. Such moves will allow large funds (& even endowment funds) to gain exposure to Bitcoin. Editor's note: Bitcoin futures ETF has already been approved, and has started trading on the 19th Oct under $BITO.
something something demand supply
2) Retail adoption
To assess retail adoption, there are on-chain analytics that one can look towards as a decent barometer for crypto adoption. In chainalysis's 2021 global adoption index, they reported that global adoption (as measured by their own methodology) grew 2300% from Q2 2019. I'd recommend a read to appreciate how fast other parts of the world are embracing cryptocurrency.
3) Other adoption signs
Alas, adoption in 1) and 2) doesn't direct translate to price increases. As mentioned in the earlier section, in the short term, price fluctuation are often a result of market sentiment, and may not be reflective of the true speed of adoption and demand. However, I will point out some other examples showing adoption.
Singapore's biggest bank, DBS, setting up digital exchange allowing institutional & accredited investors to manage their digital assets. Twitter, a global platform with monetizable daily active users (mDAU) of 200+ million, is experimenting on lightning network to allow tips to twitter users with Bitcoin. El Salvador recently recognized Bitcoin as its legal tender, in a landmark global experiment.
It's probably nothing much, right?
Ever since Bitcoin topped in early 2018, there has been ongoing news coverage on the new shiny thing on the block. Threatening to usurp gold as a store of value, bitcoin's movement and volatility has been repeatedly used as clickbait, usually around a narrative that bitcoin can only be considered a speculation and not an investment. To understand the key differences between the two, we have to apply consistent attributes to compare both Bitcoin and Gold.
Source: The Bullish Case for Bitcoin
Let's touch onto each aspect briefly; will recommend the link above for a deeper understanding. In that post, Vijay describes wonderfully the key attribues of a store of value and how Bitcoin, Gold and Fiat (e.g. USD) fare. I don't pretend to think better than he did, so I shall summarize his writings on this below (excluding fiat for brevity).
Gold was first documented around 3100 B.C. (5000 years ago!). The gold discovered then remains gold today, and will remain gold for another thousand years. Old coins (especially antique ones) still maintain significant value today. Bitcoin is not issued by a central authority, so it's durability is derived from the security & uptime of the network. 10+ years of being a store of value is terribly short compared to gold, but its resilience in face of attempted hacking and regulation in years past shows encouraging signs of anti-fragility.
Bitcoin is the most portable store of value ever used by humans. Wallets having hundred of millions of dollars in Bitcoin can be stored in a tiny USB and carried around the world (even on Mars). Equally valuable sums can be transferred across the global instantaenously. For gold, it's often the title of ownership that is transferred and not the physical gold itself, as it is costly and time-consuming to do so.
A gram of melted gold is essentially indistinguishable from any other gram (fungible). Bitcoin (down to 8 decimal places or 1 sat) is fungible at the network level as 1 Bitcoin is recognized unequivocally across the network. However, Bitcoin may be tained by its use in illicit trade.
Gold is not immune to counterfeits. Bitcoin can be verified with mathematical certainty (fake bitcoins will not be accepted by the network unless 50% of compute power agrees, which is near impossible and will incur a massive cost).
Bitcoins can be divided down to a hundred millionth of a bitcoin (1 satoshi). Gold, while physically divisible, becomes difficult to use and impractical for even day-to-day trade.
By design, only 21 million bitcoins can ever be created. The owner will represent a known % of the total possible supply. For example, an owner of 10 bitcoins would know that at most 2.1 million people on Earth (< 0.03% of world population) could ever have as much bitcoin as they had. For gold, while remaining quite scarce, is not immune to sharp increases in supply, especially with new technologies like sea-floor and asteroid mining.
7) Established history
Gold has been valued since the beginning of human civilisation. What's valuable then will still be valuable now. Bitcoin has only been around for 10+ years, yet the fact that it's still not $0 in the face of regulation, hacks and attempts to dunk on it shows resilience in the value of bitcoin that will no be eroded anytime soon. Furthermore, the Lindy Effect suggests that the longer bitcoin remains in existence, the greater society's confidence that it will continue to exist long into the future.
8) Censorship resistance
Bitcoin is maintained by a decentralized network of nodes, securing the bitcoin network. No government nor central entity can shut it down even if they wanted to (they would have to shut down all nodes). As such, it is resistant to state censorship. Gold, since it is not very portable, is far more susceptible to government regulation than Bitcoin. India’s Gold Control Act is an example of such regulation.
Across many attributes, Bitcoin proves to be a better asset to gold. I'm sure when gold was discovered, it's value was highly volatile. Why should Bitcoin be any different? Furthermore, a store of value should ideally preserve its purchasing power over time.
Ask your friends if they are buying gold or stocks. I find little evidence that young Singaporeans will flock to gold as a de facto store of value. Gold will, of course remain as a strong store of value for a long time, but just a small amount of gold demand shifting to Bitcoin will result in strong price appreciation (law of small numbers). Furthermore, buying bitcoin is far more easier than buying gold, as Bitcion can be transferred globally without an intermediary.
I cannot promise you that Bitcoin will retain its purchasing power over the short term. However, over the long-term (10+ years), I expect the current generation around the world to embrace digital-over-analog investments that provide an asymmetric risk-reward profile, such as bitcoin over gold.
“If you don't believe me or don't get it, I don't have time to try to convince you, sorry.” - Satoshi Nakamoto
Bitcoin is an investment in a monetary good. For the foreseeable future, unless people who own bitcoin suddenly sell all their bitcoins (like asking Apple fans to switch to samsung immediately) for unknown reasons, one should expect demand to outpace supply for many years to come. The fact that Bitcoin hit $3k USD twice, and went on to eventually hit $65k USD is clear evidence of demand. Expect & embrace high volatility, but in the long-run such demand and supply imbalances can only be resolved in price appreciation.
I won't give recommendations about position sizing (since nothing here is financial advice), but a rule of thumb is to weigh it against your risk appetite.
Finally, the inspiration to write this came from my desire to try and make a difference. Having made a near life-changing returns from crypto, I still believe we are still very early in this march towards global adoption, and I want to help more people understand cryptocurrencies better. It also stemmed from the impetus of having partnered with Seedly & Singsaver to help accelerate local adoption of cryptocurrencies.
If you have made it thus far, thank you for reading. My efforts will not be in vain if so much as 1 person changes their mind about bitcoin and crypto after reading this. Bitcoin simply has unique properties that will edge out gold when future investors from retail to the super rich (including institutions) think about stores of value.
All comments and criticism welcome!
Cheers & keep stacking sats,
For further reading, I highly recommend Vijay's Bullish case for bitcoin, which has since turned into a book and has been translated into 10+ language.
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