Bitcoin: 10 Reasons Why it is valuable

The genesis of today’s monetary policies could be traced back to 1936 when John Maynard Keynes presented his ideas during the Great Depression which inspired the current central bank-led quantitative easing leading to massive asset price inflation globally. 

Bitcoin has been perceived as a decentralized revolt against consistent monetary debasement by central banks across countries. Irrespective of the merit of the monetary policies, there is a rationale for a peer to peer payments/finance network and which solves many real-world problems.

The counter-view has been that anything digital is susceptible to fraud and Bitcoin is too volatile to be institutionalized. One cannot dismiss this criticism and many governments have banned crypto-currencies under the same pretext.

The value of Bitcoin is purely driven by the perception of people who are willing to pay a price for its scarcity and the respective risk and reward. It has no intrinsic worth and in some sense is no different from Gold which has sustained its “Perception value” through millennia.

In the long run, blockchain network/cryptocurrencies could provide a sovereign way for wealth creation, storage and protection from the state. This is a very big idea with a total addressable market of trillions of dollars. It would be interesting to see how central banks/governments react to Bitcoin’s rapid adoption as ironically it also becomes “too big to fail”.

10 Reasons why Bitcoin has emerged as an investment idea:

  1. Bitcoin network has survived over 12 years with transactions worth over USD 10 trillion without any single fraudulent transaction. Every year it survives, it amasses more credibility and value.
  2. Only 13% more Bitcoins will be mined in future and it will take decades for them to hit the market. Bitcoin has better stock to flow ratio (scarcity) than gold which makes it an excellent store of value.
  3. Bitcoin Supply has near-zero price elasticity unlike Gold and other assets. It is also more fungible and transferable than physical gold.
  4. Bitcoin’s current market cap is not even half of a large FAANG stock. The Idea/impact and TAM of Bitcoin is much greater than any of these companies. Adoption could massively take off if any of the large B2C companies like Apple, Google include it in their payment networks / set up exchanges.
  5. Bitcoin safeguards against inflation and wealth confiscation. People living in countries with persistent inflation also fear capital controls and demonetizations. Bitcoin will emerge as a better alternative for them.
  6. A lot of global companies will consider moving some portion of their corporate cash into Bitcoin. Data shows that over 60% of Bitcoin is held by investors for long term hence free float is reducing rapidly pushing the price up.
  7. Bitcoin has a low correlation with other asset classes. Institutional adoption has started with better custody infrastructure.
  8. Volatility is inversely correlated to the size and depth of the market. As Bitcoin’s market value increases, it would take many more billions to move the price. A decrease in volatility will further increase adoption.
  9. We are at a very early stage of adoption of blockchain technology. Decentralization of Finance (DeFi) would be a huge disruptor in the payments, lending, and even derivatives space. Bitcoin is the safest play on the adoption of blockchain.
  10. Bitcoin has a massive network effect going for it. Even though Bitcoin may never be adopted as a global currency, the journey towards that goal could be a very rewarding trade.

Risks:

Investing in Bitcoin/cryptocurrencies have inherent risks meant only for high risk-taking investors. Deep corrections, exchanges being hacked and excessive government regulation could crash the markets in a matter of hours. Do not invest unless you understand these risks and allocate capital accordingly.

Disclaimer:

This is not investment advice. This is strictly my personal opinion. I have invested some of my savings in Bitcoin and other cryptocurrencies.

Author: Himanshu Khandelwal, CFA

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