Bitcoin is The Trade of The Century; Here’s What You Need to Know

• In a Real Vision interview on December 9th, the Winklevoss twins lauded bitcoin as the “trade of the century”. At the time of the interview, bitcoin was trading around $19,000 USD per coin. Since then, not even one month later, bitcoin now trades at $34,500 USD per coin, a more than 81.5% increase.
• Despite this absolutely insane rally, bitcoin is far from done this year, with some analysts predicting a bitcoin reaching $100,000 per coin by the end of 2021 and as high as $1,000,000 by 2025.
• Here’s why that prediction could be conservative:

Here’s what you need to know:

• Bitcoin is the world’s first and largest cryptocurrency (a digital currency secured by cryptography).
• Bitcoin does not operate through any central authority or bank and allows individuals to transact freely amongst themselves.
• Bitcoin is open-source, which means its design is public, nobody owns or controls it, and everyone can take part.
• Bitcoin can be used as a store of value and is commonly referred to as ‘digital gold’.
• As a global currency, bitcoin is money for all people.

Here’s why you should care:

• The Federal Reserve has been devaluing the dollar to pay for COVID-19 stimulus, and it's costing you money. Every time the Fed prints dollars, yours become less valuable. As a result, the demand for alternative currencies such as Bitcoin increases.
• Bitcoin has utility as a store of value and as a decentralized global currency. Following a year of unrest and distrust in central banking systems over the handling of the COVID-19 pandemic, a decentralized monetary system has become increasingly desirable. Bitcoin also acts like gold in that is a safe haven asset where investors can store value.
• Digital Payment solutions are in demand and growing rapidly. As societies become more global, and as more people begin to transact over the internet, the need for global digital payment solutions like bitcoin will only increase. According to Global News Wire, the Digital Payments marketplace is expected to grow in value at a compounded rate of 20% per year from 2020 until 2023, reaching $8059.3 billion.
• Bitcoin is secure. Bitcoin is encrypted and backed by blockchain technology, which allows individuals to work together to encrypt transactions as they happen. A measure of the security of the bitcoin network is the hash rate, which represents the processing power of the bitcoin network. From January 2020 to January 2021, bitcoin’s hash rate increased from approximately 107 million hashes per second to 145 million hashes per second.

• Bitcoin is an incredible investment opportunity. Aside from having utility as a decentralized global currency, bitcoin is an incredible investment opportunity.
• Bitcoin is not strongly correlated to the stock market and is not a cyclical asset. Bitcoin’s risk and return profile are not strongly correlated to traditional equity markets. Bitcoin also is not affected by market cyclicality.

The correlation between the two assets is below 0.5.

• Bitcoin is a scarce asset. Bitcoin has a fixed supply as set out in its source code of 21 million. Currently, 18.5 million bitcoin have already been mined.
• Approximately every four years, the number of bitcoin that enter the marketplace is cut by half. This feature is built into bitcoin’s source code and is commonly referred to as “halving”. The last halving event was in 2020, where the number of bitcoins that entered circulation every 10 minutes was cut in half from 12.5 to 6.25 bitcoins.
• If the demand for bitcoin continues to grow or even remains the same, the finite supply will cause bitcoin’s price to rise as time passes.

This chart shows the past effect of the Halving on Bitcoin price

• Bitcoin has a history of success as an investment. Nearly 99% of bitcoin ownership has been a profitable investment.

Here’s what could take bitcoin way, way, higher:

• Borrowing costs are low and are expected to stay low.
• Bitcoin is only becoming more scarce. Bitcoin’s supply is finite.
• Investors want exposure to bitcoin as a hedge against inflation and dollar devaluations. As the US Treasury continues to print money to fund fiscal stimulus, investors have looked to bitcoin to hedge against rising inflation.
• Buying cryptocurrencies is easier than ever before, as exchanges expand their product offerings, plan IPOs, and investment firms launch new crypto investment vehicles. In January of 2021, investment management firm VanEck filed with the SEC to launch a Bitcoin ETF.
• Large-scale institutional buying has given bitcoin and other cryptocurrencies legitimacy and liquidity. Where bitcoin was once scorned as an illegitimate investment opportunity and most famously called ‘rat poison squared’ by Warren Buffet, the recent entrance of large institutional buyers such as MassMutual, PayPal, Square, and hedge fund gurus such as Paul Tudor Jones, Michael Saylor, and Anthony Scaramucci, have legitimized bitcoin. In the Fall of 2020, MicroStrategy CEO Michael Saylor invested over $1 billion in bitcoin. This buying wave has made retail investors and others more confident in the new asset, driving up prices.
• Trading volume is spiking. On January 4th, crypto exchange Binance hit a record high of $80 billion in daily volume as crypto markets surged.
• Bitcoin is growing into a massive ‘store of value’ market. Currently, the gold market is facing pressure from Bitcoin as a better store of value. Over the next decade, bitcoin could overtake gold’s $10 trillion market cap. If bitcoin were to replace gold as the world’s primary store of value, the price of bitcoin could easily surpass $1,000,000 per coin. Currently, bitcoin’s market cap is approximately $620 billion, less than one-tenth of gold’s.
• Bitcoin is still not a retail phenomenon. Internet searches for bitcoin have not surpassed their 2017 highs. This suggests that there is still room for retail participation and prices.

Potential headwinds for bitcoin:

• Large-scale profit-taking could derail this rally quickly.
• Macro changes such as the strengthening of the dollar or lower inflation or other macro factors could hurt bitcoin.
• Regulatory changes such as the banning of purchasing crypto assets on exchanges, new investment regulations would hurt bitcoin.

How to invest in bitcoin:

• Investors can invest begin investing in cryptocurrencies directly on crypto-only exchanges such as Coinbase, Binance, or Gemini, or indirectly through crypto investment trusts such Grayscale through a brokerage account.

How to mitigate risk when investing in bitcoin:

• Take a long-term focus. Investors who take a long-term focus are less likely to be affected by short-term price swings. Because bitcoin and other cryptocurrencies are volatile, an active approach can create undue stress and spur trading activity that is not in line with an investor’s long-term goals and that is detrimental to performance.
• ‘Setting and forgetting’ can be an effective approach to reap long term performance without undue short-term stress.
• Only invest your disposable income. Because cryptocurrency prices are volatile, and investors have the potential of losing some if not, all of their investment, they should only invest their disposable income.
• Don’t make crypto your largest or only asset allocation. While cryptocurrencies have real investment potential, one should never only invest in one asset class or concentrate all of their assets into a young asset class such as crypto.
• Dollar-cost averaging is a great way to reduce the risk of adverse price swings when investing in bitcoin. By investing incrementally over time, buyers can spread out risk and take a more long term focus.
• Don’t be illusioned by ‘get-rich-quick’ crypto offers. Despite all of its legitimacy, the cryptocurrency space is filled with get-rich-quick scams. Please trade with caution and operate as if someone is always trying to get one over on you.

Disclaimer:

The opinions expressed in this article are solely my own and not that of any entity, company, or institution that I am associated with. This article was written by myself for the purpose of examining a key market trend. At the time of writing, I am long bitcoin and other cryptocurrencies. Please do not take the opinions expressed in this article as fact. Investing in cryptocurrencies and other risky assets can result in losing some if not all of your investment. Investors should do their own thorough research. Please invest at your own discretion in a way that is appropriate for you.