Let’s be clear that the below is not to be thought of as financial advise but my personal opinions at this very moment.
That aside, I do believe investing in Bitcoin might be one of the most interesting assets at the current moment and for a variety of reasons. I have been a sceptic for a long time and most likely that is due to my lack of understanding (which still is very limited as talking crypto can fast become very technical).
A number of factors have made me change my opinion as to the value and potential value of digital currencies and in particular Bitcoin and in this post I will talk you through my point of view as for investing in Bitcoin.
I’m not going to be technical at all but trying to simply explain what Bitcoin is in layman’s terms.
Bitcoin is a digital currency which was created in 2008 without the interference of any central bank. Our traditional paper money like the USD, EUR, GBP, YEN etc. are controlled by the central banks and they can “print” more of them when they feel the need to.
The setup with Bitcoin is very different as there is no central controlling party (decentralized) and the number of Bitcoins are limited (there will never be more than 21 millions Bitcoins).
Bitcoins have been used mainly to make transactions and transfers and the idea was to create something that was fast, cheap and decentralized. So a user has a “wallet” where they hold their Bitcoins and they can transfer them very quickly to anyone else at any place at any time and at a tiny cost. Which is not what one can say of making a traditional money transfer, let’s say to a relative in Liberia on a Saturday morning.
In the early days, there were of course very few users wanting to exchange their traditional money for Bitcoins as you couldn’t really use them for anything but over the last 12 years more and more players are starting to accept Bitcoin and it’s becoming easier to make transfers and even purchases with them.
Something that makes it faster and cheaper to pay and transfer money globally sounds pretty nice, right? Yes but I was very sceptical for a very long time…
Why I was very sceptical towards investing in Bitcoin
I have no engineering background, no programming background and I’m not very technical so when I first came across Bitcoin and crypto I just didn’t understand it (I still don’t understand it in any detail) and hence I was very sceptical.
Some of the reasons were:
- There is no guarantee that it will become of any use (with lots of users and a high demand)
- Security?? No government or institutional backing what prevents hackers from just stealing it all?
- Just a fad?
- I am supposed to just pay money for something called a crypto currency, only existing in the digital world?
Why my view has changed
As I’m a bit (if not very) concerned about our global economy at the moment with extremely high valuations of many listed companies, loads of leverage in the system, high debt levels across the board, Covid-19, increasing unemployment, digitalisation and automation to name a few, I’m always looking at alternatives to balance out my risk.
I have been looking for different types of assets to lower the risk amongst my investments and as a traditional investor, when you are getting concerned, you might invest more into bonds, treasuries and gold.
The challenge I find with bonds are that the yield is very low compared to the risk and that was something we experienced in the sell-off in March 2020. Treasury yields are so low it’s ridiculous to hold them and still loads of investors do so to “lower their risk”. But if you hold a 10 year treasury yielding zero percent return, your purchasing power is going down every year we have inflation (prices increase but your savings don’t)! If you expect the products or investment you want to buy to increase with say 5-10% per year over the next few years, that’s even worse!! But let’s not get into the discussion of how inflation is measured or perhaps should be measured…
In the current environment, central banks across the world are printing more and more money to support companies and the unemployed etc., to keep the wheels of the economy moving. The problem with this is that eventually it will lead to deflationary pressure on those currencies.
As an example: If there are 100 USD in the world today and prices are based on that amount, what would happen tomorrow if there were 200 USD around?
People would want more USD for their products as the value of the USD is less as there are more of them in circulation.
This is what’s currently happening at a large scale by all the money printing taking place. It will not happen over night but over time the value of those currencies will go down, i.e. one will need more of them to buy the same things!
Investors across the globe are very wary of this and very conserved because it means that the value of their savings will have less purchasing power in the future! They also know that if they put their money in bonds or treasuries, their returns over time will be very poor and are extremely unlikely to match that of the inflation.
Hence why they are all looking at alternatives to invest their money in order to try avoiding the deterioration of their savings.
The question of all questions is what to invest in not to be eaten by this deflationary pressure we will see on many currencies!
This is a challenge not only for large pension funds, insurance companies, asset managers, corporates etc. but also for us as individuals (even if we might not have thought about this just yet).
Gold versus Bitcoin?
I have exposure to gold but there are some clear differences between gold and Bitcoin.
- Bitcoin is limited, gold is not so if prices of gold go up more money will be poured in to extract more of it.
- Bitcoin is easily transferable regardless of amount. Try to transfer 100musd worth of Gold from the US to Singapore on a Friday evening and just imagine the cost and the work of doing so.
- Bitcoins can be bought and transferred in tiny fractions (smallest being a “satoshi” and it represents one hundred millionth of a bitcoin, or 0.00000001 BTC. Try to do that with a gold bar and transfer it to fifty of your relatives…
- Gold does not really have any utility more than a potential “store hold of wealth” but it’s not really used for anything, nor can you easily convert or exchange it for something else, unlike Bitcoin.
- When we have inflation, more gold can (and will be) mined, increasing the supply and dampening the price. Again Bitcoin is limited in amount.
The main reason I still want exposure to gold is that as of now most large investors see gold as a store hold of wealth much more so than Bitcoin or other digital assets. As with anything, if demand is high, prices tend to go up and most investors have historically viewed gold as a “safe” investment in troublesome times. I do feel that will be the case this time as well but some of these sophisticated investors will and actually are looking at investing in Bitcoin as an alternative and that’s one of the main reasons I find Bitcoin so interesting at this point in time!
The are many reasons why I find investing in Bitcoin to be very interesting right now
Below are just a sample of what has happened within this space recently and I will just give my two cents on why I feel these are important/significant:
- Bitcoin has been around since 2008 and it’s not a new thing anymore. Most things linked to the “security risk” have been tested and I would say it has passed the level of proof of concept. It might still be early stages but it has come a long way and the miners are becoming larger and larger which should make the system even more robust. The fact that block chain technology is used and is gaining widespread interest and usage across the world as a technology also makes me feel pretty comfortable.
- Money printing by central banks will not disappear and will put pressure on those currencies printed (deflationary pressure) and hence myself and most investors want to maintan or ideally increase the value of our assets in real terms, not only in nominal. We might not have experienced any real inflationary pressure as of yet but different currencies are for sure feeling the preassure of the money printing. Based on the current state of many economies and that rates can’t go much lower means that money printing is the only ammunition left to boost the economy. Investors are therefore looking at different investment alternatives both against deflationary pressure, higher debt levels in general and the existing price risk in most traditional assets (high valuations). This will just continue and as more eyes are looking at digital assets, the largest one (Bitcoin) is likely to be the first investment for any of these investors.
- Fidelity Investment launched a Bitcoin fund in late August of 2020. As one of the largest asset management firms in the world, they are embracing Bitcoin and hence paving the way for other large asset management firms to follow their path. It’s a fund for High Net Worth Individuals enabling them to get exposure to digital assets. Just this week (early November) they announced they are looking to add more staff to this unit. So a fad? I don’t think so!
- JP Morgan turns bullish on Bitcoin according to a recent report. JP Morgan is one of the largest banks in the world and just a few years back they showed no interest in Crypto currencies and saw little value in this but it seems something has significantly changed. A couple of quotes from their report: “With millennials set to become a more important market participant over the next few decades, their favorability towards bitcoin over gold should set up the cryptocurrency for success. But bitcoin still represents only a paltry sum of the gold market, and the cryptocurrency would have to surge 10x from current levels to match the same value of the physical gold market”. No comments really needed more than if a bank of that size and with their resources can do a 180 degree turnaround, so can I.
- MicroStrategy, the publicly listed business intelligence company has been investing in Bitcoin massively! I recently listened to an interview with their CEO and founder Michael J Saylor (MIT graduate with a double major in aeronautics and astronautics; and science, technology, and society…). Basically, the guy is fucking smart! He has spent months with his team to figure out what to do with their corporate cash to the tune of 500 million USD. Guess what, after a few months, they decided to buy Bitcoin for 425 Million USD! So far this is the largest purchase by a corporate who really sees this as an asset in its own right and they are a long term owner (less circulation of Bitcoin). Michael has been within the tech space since the late 1980’s and has invented numerous products and solutions and is the CEO of the company since 23 years. He is clearly extremely intelligent, he works within the tech space and he is willing to walk the talk (in that order). The cool thing with this is that one can invest in Michael and his company and get exposure to Bitcoin, hence the stock can be put in tax efficient accounts etc. Though there is no guarantee the BTC price and the price of MicroStrategy will be 1, I would expect it to become higher and higher, especially if the price continuous to increase. Link to one of his interviews below, please listen!
- Paypal recently started making Crypto currencies available and they have around 350 million users! Basically helping it becoming an easy form of payment to use broadly. It’s still an early stage so at the moment their users buy and sell crypto currencies but they can’t buy products from their merchants. I find it very likely to just expand over time but as they are a huge company, they will have to make sure they comply with all rules and regulations and take this step by step. Another cool thing is that they almost immediately increased the maximum amount allowable per user per week from 10kusd to 15kusd. Which I guess was linked to the initial response they got. This quote is also showing it’s just a minority of their users who can access this service immediately: “PayPal plans to roll out buying options in the US over the next few weeks, with the full rollout due early next year.”
- Square invested 50 MUSD of the firm’s money into Bitcoin! As one of the largest payment providers in the world and a tech savvy company, this is a great signal and still the 50 million USD is just a tiny fraction of their assets (around 1%). This is a 90 Billion Dollar company working within the tech space so they should know what is happening within this space and have a good understanding of it (crypto, digital assets and payments, block chain etc…).
- Square increased their Bitcoin Revenues with almost 50% in q3 to 1,63 BUSD! This represents almost half of their turnover for the quarter and is clearly helping validating Bitcoin as commodity (tradable asset). I expect these numbers to increase even more in the future.
- Gazprom bank and Sygnym bank in Switzerland recently announced they will be offering digital asset platforms to their High Net Worth Individuals (HNWI) as well as to institutions! More players within this space are giving access to their customers and I think that speaks volumes of what is going to happen with the interest in digital assets going forward.
- En+, one of the world’s largest energy producers, is joining forces with crypto firm BitRiver to open new mining farms in Russia. In my mind this means more stability and a clear signal that they see digital assets as something which is here to stay!
- Grayscale’s crypto trusts in the US have grown their AUM to 8,5bn USD and it’s going fast because of the increased interest amongst institutional clients. The trust can be accessed on a private placement basis but as units are also listed on the exchange, they can be bought and sold there. They just buy and hold crypto asset on behalf of their clients and they have a few studies on their site with some interesting facts about the increased interest they are seeing amongst institutional investors. See link below at the end of this post.
- Legendary hedge fund manager Paul Tudor Jones announced earlier this year that he had invested 2% of his firm’s assets under management in crypto currencies (implying around 1 billion USD). A quote from Tudor Jones: “Bitcoin has a lot of the characteristics of being an early investor in a tech company… like investing with Steve Jobs and Apple, or investing in Google early.” His position was taken as a hedge against inflation and he also said “never had an inflation hedge where you have a kicker that you also have great intellectual capital behind it,”. I could not agree more. The setup is smart and seeing more and more really sophisticated investor enter the space, makes it even more interesting.
- Iran has recently amended its law to allow imports to be funded with cryptocurrency. This is a step quite a few people within the crypto space has been expecting. That economies with big challenges, especially with regard to their currencies, will start to adopt crypto currencies. Iran has had large sanctions against them and their currency has lost around 40% over the last couple of years. As a “global means of payment” they are now turning to crypto. This I believe is not the first country who will do so and again, this in my world will lead to more demand for Bitcoin but the supply is still (and always will be) is limited!
- More and more central banks are officially working on their own digital currencies, i.e. digital currencies are here to stay. Some might say that will limit the demand for decentralized currencies like Bitcoin but I tend to disagree. A centralized digital currency is still going to be issued by a central bank and they will be able to issue more of it and hence dilute its value, just like with a paper currency. Bitcoin is limited and as long as there is an acceptance for it as means of payment or as a store of value and the demand is there, it will hold its ground and more. Still, the trend towards digital currencies and more blockchain technology is very obvious, the only question is which country will launch it first (might actually be here in Sweden).
- No broad Exchange Traded Funds (ETFs) approved (as of yet) in the US, which means the retail demand seen in other ETFs is not really there yet. When it gets approved (just a matter of time now) I’m pretty sure that it will drive the price of Bitcoin or which ever crypto currency it buys, higher.
- There are some Trusts and Certificates available in different jurisdictions to track different crypto currencies. Grayscale mentioned above is one of them and here in Sweden and Vontobel is also offering a tracker via an online broker as well as XBT. So there are a few players within this space and I’m sure they will become more and more as this space matures and it becomes easier to implement the technology to hold digital assets in safe custodian for its clients. What one should be aware of is that certificates or trackers come with the issuer risk of the entity issuing the paper which is in starch contrast to buying the coins outright and that should be taken into consideration if one decides to go down this route to access the crypto space.
- The total Market Value of Bitcoin is around 275 BUSD which is tiny compared to most other assets. If we compare with gold (as some see them as competitors) which has a market cap close to 10 trillion USD. If we were to compare it with the global bond market which stood at around 130 trillion in August of 2020 it’s even more microscopical… If more firms start thinking and acting like MicroStrategy and Square more funds will flow towards the crypto space which still is in its infancy.
I could add many more points here but these are just some of the ones I find significant and which have occurred within the last couple of months. To me this speaks volumes about the demand to come.
My conclusion is that Bitcoin might be the “thing” were we as the average Joe can actually be a part of something of significance at a very “early stage”. Often things like these are accessed by the large institutions first but this time, it has been the other way around. There is risks on the down-side for sure but I do feel the risk profile is very assymetric to the upside!
What’s making me more and more confident given my lack of understanding is that there are so many smart people and now also large institutions with loads of very smart people getting into this space. They are paving the way for us as soon as they will be offering digital assets to their customers right, left and center and with the supply being limited, there is one major player, Bitcoin.
If many of them are investing heavily within in this space now (at current BTC price), they obviously find this long term appealing as most of them can’t offer it to their customers/investors just yet. I’m pretty sure they will and when they do, the price might not be where it is at the moment.
The other thing is that BTC has gone from being a crypto currency (to some extent) to an asset in its own right. What this means is that as it gains wider interest as an asset, the BTC in circulation will diminish and that is also likely to put upward pressure on the price.
If the majority of Paypal’s users start buying or using BTC for transactions, that too will increase the interest in BTC which is also likely to put upwards pressure on BTC.
It’s a tiny market by comparison so if large institutions start pouring just some of their funds into BTC, that will for sure drive prices and especially so if it is seen as a long term asset. We are talking about a wall of tsunami of money jumping into a very small pool and it will get very crowded.
Yes, it can go to zero and might be hacked but the potential upside based on what we have seen recently amongst institutions have clearly changed my view on Bitcoin as an asset and not “only” as a means of payment. The investments I have made personally are for the long term because even if I’m bullish I’m sure I’m not able to time it but based on the information I have at hand, I do feel that the odds are stacked in my favor. Before investing in Bitcoin or anything else, you will of course have to make your own decisions as this is not investment advice!
A simple metaphor
Let’s say you are sitting around the dinner table with your friends and there is a pizza on the table and it’s the only one in the world and you can’t make a new and identical one but you can split it in millions of small pieces.
Let’s now say there are ten of you and you all have one equally sized piece each and you all have 10 USD and feel that 10 USD would buy you one more piece. A few might want to spend some USD to buy some small slices from someone else who don’t see the value of this pizza (nothing really special about it besides from the fact that it’s the only one in the world ever being produced).
Let’s now say there are 10 other people joining the the table and they have 15 USD each and that a change of hands of pizza slices will happen as well as the price will go up (more money around the table to buy slices for).
Let’s now say that another party comes along and shows a pizza you can buy for 5 USD, it’s not the same but similar. Some will buy and some will move over to that pizza (metaphor for another digital currency).
Let’s then fast forward 12 years (the life of Bitcoin) and now you have 1000 people around the table but still just that one same pizza and surprise, the price of each unit of pizza is now much higher than it was 12 years ago!
There are loads of other pizzas around but the combined value of your slices is now around 70% of the total value of all pizzas (like Bitcoin)!
Basically, there seems to be an acceptance that your original pizza for some reason is a bit more valuable as it’s so dominant in the market place and you can even use your slices to buy other things. It has become acceptable as a means of payment!
Looking forward now, you hear and see that some cities, states and even central banks might be interested in your pizza… Your pizza and the total value of your pizza is still limited based on the money “around the table”. What if cities, states and central banks want a piece of that pizza? Well, there is no more than that one pizza (equivalent to the 21m Bitcoins) so no more supply but a wall of money is likely to come chase those pizza slices…
Your guess is as good as mine as what might happen to the value of those pizza slices but the cool thing now is that you can still get some slices or keep your slices as the larger players have just started buying pizzas.
Personally, I would hold on to my slices of pizza very firmly!
Let’s just again state that these are my personal thoughts and not any financial advice or recommendations and before you make any financial decisions, you should always discuss with your financial fiduciary!
Actions to take:
- Great site for continuous updates within the crypto space www.coinbase.com
- A must listen to, MicroStrategy CEO Michael Saylor on why they invested 425 Million USD into Bitcoins! https://www.whatbitcoindid.com/podcast/bitcoin-in-the-boardroom
- Check out this study on institutional investor demand from Grayscale: https://grayscale.co/insights/bitcoin-investor-study-2020/
- The 10 Key Questions I ask before making an investment
- Learn The Language of Money – a language for life
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