A Tipping Point for Bitcoin
Updated: Jun 1, 2021
The Bitcoin Bull Market is Far from Over: Part 1
Since Bitcoin’s origin in 2009, the undisputed, most effective financial strategy has been to simply buy and hold. If your reasoning for reading this analysis is to try to figure out when to buy, or when to sell, then you’re wasting your time. If you’re waiting for the right time to buy, then you don’t understand Bitcoin. If you’re waiting for the right time to sell, then you also don’t understand Bitcoin.
I believe Bitcoin to be at an inflection point in its young life. At 12 years old, Bitcoin is entering its adolescence. It is beginning to be taken more seriously in the world of traditional finance and economics, although you should not hold your breath waiting for certain critics (such as Peter Schiff, Warren Buffett, and Paul Krugman) to change their minds. But for the rest of the world, with each passing year Bitcoin’s path to success is becoming clearer and clearer.
Predicting certain prices at certain dates is a futile game. Five years ago, no one could have predicted with confidence that Bitcoin would be at $40,000 in May of 2021. But five years ago, plenty of people did confidently proclaim that Bitcoin would move much higher in the coming years, and those people have been proven right. I have no idea what the exact price of Bitcoin will be at the end of 2021. But there are several quantitative and qualitative factors that lead me to believe the second half of the year may be far more explosive than the first.
The purpose of this essay is to provide a framework from which to evaluate the current state of the Bitcoin market. This framework will be broken down into two parts.
Part One focuses on the recent exponential growth in and around the Bitcoin ecosystem in regard to awareness, education, infrastructure, and perception.
Part Two takes a look at how Bitcoin fits into the socio-economic environment currently rife with systemic uncertainty as central banks have expanded the currency supply to unprecedented levels.
A Tipping Point for Bitcoin
To begin, let us take a trip down memory lane. In late 2017, Bitcoin hit the mainstream. The price had surged from $1,000 at the start of the year to $20,000 by December. Financial media outlets such as CNBC began regularly discussing the price action of Bitcoin. Google searches for ‘Bitcoin’ surged to all-time highs which are still unsurpassed as of May 2021.
At the peak of the bull run of 2017, Bitcoin’s market cap reached about $330 billion. In other words, $330 billion is what the open market valued the Bitcoin network to be worth. Today the network is valued at $700 billion, or about 2x the value from the heights of 2017.
Bitcoin’s Emergence as an Investable Asset
Over the past four years, the market has doubled its valuation of Bitcoin's network. I would argue, however, that the overall strength of the network and the ‘investability’ of Bitcoin have increased by factors far greater than 2 over the same time period. By investability I mean the potential or capacity for investment into Bitcoin; the propensity of market actors to buy Bitcoin. Below I have highlighted four key factors that have contributed to Bitcoin’s increased investability in relation to the previous bull market of 2017:
Increased Bitcoin Awareness
At this point, almost everyone has at least heard of Bitcoin. Most people will probably still admit to being ignorant as to what exactly Bitcoin is or how it works (spoiler: no one fully understands Bitcoin), but what matters is that they’re aware of its existence. Awareness precedes understanding. No one hears the word ‘Bitcoin’ for the first time, and then buys some the next day. For most people, it takes years of ‘Bitcoin bombardment’ from friends, family, or the news media before they finally relent and make their first purchase. For many people, that moment was in the 4th quarter of 2017. But for every person who bought bitcoin for the first time in late 2017, there were several more people who simply heard about Bitcoin for the first time and decided to sit on the sidelines. When 2017 began, the majority of the global population had never heard of Bitcoin. By the end of the year, Bitcoin had inserted itself into the awareness of the majority of the world. The current 2021 bull market is the first in which Bitcoin is a household name. The significance of this cannot be understated.
Throughout the bear market of 2018/19 as the mainstream media moved on to juicier stories, many people simply forgot about Bitcoin. In fact, there were 134 Bitcoin obituaries written during this time period to certify its death. For many people who unwittingly assumed those obituaries to be true, Bitcoin’s reemergence in 2021 has seemed more like a resurrection. Bitcoin is quickly acquiring the reputation of the comeback kid, the magic internet money that just refuses to die.
After awareness comes education. Many people, quite understandably, feel uncomfortable investing in that which they don’t understand. Many people are intimidated by Bitcoin, just as many people were intimidated by the internet. The only way to overcome a lack of understanding is through education. The educational content available for Bitcoin has never been more abundant than it is today. I would argue (and recommend to all that will listen) that Saifedean Ammous’s book, “The Bitcoin Standard” is the only educational resource necessary to begin one’s Bitcoin journey. Published in 2018, it was not available during the previous Bitcoin bull market. Michael Saylor cites the book as playing a significant role in his decision to purchase billions of dollars’ worth of bitcoin to hold as a treasury reserve asset on MicroStrategy’s balance sheet. A short list of Bitcoin books I can personally recommend include: The Bitcoin Standard, 21 Lessons (a philosophical angle), Why Buy Bitcoin (a financial advisor’s perspective), and The Internet of Money (a Q&A style book).
In addition to books, some great educational Bitcoin podcasts freely available to all include, Swan Signal from Swan Bitcoin, the What is Money Show by Robert Breedlove, The Stephan Livera Podcast, Bitcoin Rapid Fire podcast by John Vallis, and the Bitcoin Fundamentals podcast Preston Pysh. None of these podcasts existed before 2018. There are also many brilliant writers in the world of Bitcoin including Robert Breedlove, Gigi, Nic Carter, Lyn Alden, as well as many others who freely publish their work for all to read. To top it off, recently Michael Saylor released a free online course taking students from A to Z on Bitcoin in 12 hours of engaging content.
This proliferation of educational material has made ignorance of Bitcoin a choice. And a very expensive one at that.
Improvements to Bitcoin Infrastructure
After one is made aware of Bitcoin, and gains an understanding of Bitcoin, there must be an easy avenue through which that person can obtain exposure to Bitcoin. In 2017, essentially the only option buyers had was to open an account at a Bitcoin Exchange such as Coinbase or Gemini. The Grayscale Bitcoin Trust (GBTC) existed for easy access in stock brokerage accounts, but its significant premium to NAV made investment into the trust unrealistic for many buyers.
Today the entire game has changed. The premium on GBTC has vanished, and now actually trades below NAV giving investors an opportunity to buy exposure to Bitcoin in their retirement and brokerage accounts at a discount. Bitcoin ETFs have sprung up in Canada and Brazil. Applications for an American Bitcoin ETF are piling up outside the door of the SEC, and I would not be surprised to see the first ETFs approved before the end of the year. Bitcoin exposure can be acquired through investments in publicly traded companies such as MicroStrategy, Square, and Riot Blockchain, with this list growing rapidly. Websites such as ShapeShift and Changelly allow customers to purchase Bitcoin with a credit or debit card within minutes. Cash App allows its 40+ million users to quickly purchase bitcoin directly from the app. Swan Bitcoin allows users to set automated daily, weekly, or monthly purchase plans to remove the stress of trying to time the market. Robinhood, PayPal, and Venmo also offer easy access to Bitcoin exposure, although these platforms do not yet let allow their customers to take custody of the bitcoin.
Recent news from Bitcoin solutions firm NYDIG indicates that Bitcoin integration may be on its way to 300 million checking accounts in the US. By granting customers the ability to purchase bitcoin directly from their mobile banking apps, banks are embracing Bitcoin in a way that would have seemed incomprehensible just a couple years ago.
In the recent past, it was difficult to quickly, safely, and efficiently buy Bitcoin. Those days are over and thanks to magic of capitalism, the buying process is getting easier by the day.
Less Reputational Risk
For better or worse, Bitcoin has always been somewhat of a controversial topic. Its decentralized nature means that there is no official spokesman or PR team to address fake news or uninformed takes. People are free to come to their own conclusions about Bitcoin. Since the majority of the world is still just trying figure out what Bitcoin is, it can be difficult for many people to know what is true and what is false when it comes to the narratives surrounding Bitcoin. No, Bitcoin is not drug money. No, Bitcoin is not boiling the oceans. No, Bitcoin cannot be hacked or shut down. Nonetheless, these narratives (along with many others) have made it difficult for institutions and traditional finance to get involved.
In the world of finance, reputation is everything. Years of good decisions can be forgotten with one single bad decision. Until very recently, corporations, hedge funds, banks, insurance companies, and other institutions have stayed as far away from Bitcoin as possible, fearing a blemish on their reputations. That all changed the very instant that Michael Saylor decided to place his billion dollar publicly traded company on a bitcoin standard. MicroStrategy was the first, and was followed quickly by Square, and then by Tesla. Banks who last year were calling Bitcoin a fraud are now selling it to their clients.
The perception of Bitcoin has finally begun to shift. The institutional world is just now beginning to dip its toes into Bitcoin. They won’t all jump in at once, but the dominoes have already started to fall. The cat’s out of the bag. The genie’s out of the bottle. Choose your favorite metaphor but be aware that trillions of dollars are on their way.
To summarize Part One, it has never been easier to invest in Bitcoin. The awareness, education, and infrastructure are at all-time highs, and the reputational risk is at all-time lows. The door to Bitcoin is wide open, simply waiting for the money to step in. Why is this money going to flow into Bitcoin, and where will it come from? Stay tuned as this will be the focus of Part Two.
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