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6 Things Bitcoin Investors Must Focus on in 2023

  • Jan 17, 2023
  • 4 min read



Last year was a rough year for Bitcoin investors, losing 65 percent of its value. It however has kicked off 2023 on the right foot, gaining almost 30 percent in the first 17 days. As we look ahead to the rest of the year, here are a few things that you need to keep in mind as you build a long-term investment thesis.


1) Adoption and Conviction

It is important to understand the degree of adoption of this new digital currency. The more adoption, the more solid the long-term investment thesis. For me, the most encouraging metric is the number of unique addresses holding at least 1 BTC. The keyword here is unique - how many new addresses holding the asset are being created? Almost 1 million unique addresses holding at least 1 BTC were added in 2022. That is an increase of 20 percent over 2021, a year in which Bitcoin price gained almost 50 percent! If you dig deeper into the numbers and look at unique addresses holding at least 0.1 BTC in 2022, that number has grown 27 percent over 2021 to 4.18 million from 3.3 million. An additional metric is the length of time Bitcoin has been held in these addresses. A holding period of 155 days is used. If investors hold their BTC for longer than that period, the coins become less likely to be spent and more likely to be held for the long term. As of now, 73 percent of the BTC in circulation has become sticky and is not likely to be sold at these prices. Not only are they unlikely to sell, but we are also seeing a large number of people buying regardless of the price. They are said to be price agnostic.


2) Investable Universe

In the evolution of currencies, they tend to go through three orderly phases- store of value, medium of exchange, and then finally unit of account. Bitcoin is currently in the first phase and investors are starting to realize how great it is as a store of value. It is very liquid, easy to move, secure, easy to audit, and definitely scarce. It, therefore, stands head and shoulders above other stores of value like gold, real estate, and equities. As BTC continues to reinforce these virtues in the minds of investors, it has to start triggering asset switches as people move out of traditional assets into BTC. It is estimated that the global residential real estate market is worth $260 trillion, fixed income $126 trillion, equities $124 trillion, agricultural land $35 trillion, commercial real estate $32 trillion, gold $11 trillion, and silver $1.3 trillion. BTC is a drop in the ocean at one-third of a trillion USD. If BTC had to just take 1 percent of this $590 trillion investable universe it would be worth $5.9 trillion or $300,000 per coin. If investors were to allocate 10 percent (replacing gold), BTC would then be valued at $3 million per coin.


3) Transfer Volume

Let's now look at how much BTC has been transferred over its history. This speaks to the utility of BTC as a transferable store of value. Sure, transfers take place between different addresses of the same users. If you buy BTC on a centralized exchange and then move it into cold storage, that is a non-commercial transfer. The metric would also include transfer between different entities. In USD terms, total BTC transfers were close to $15 billion in 2022, the highest in its history and higher than all the years between 2009 and 2020 combined.


4) Macro Environment

Bitcoin cannot operate in a vacuum - it is subject to the same macro factors that influence other investable assets. When the world is awash with liquidity, all asset prices rise. The COVID pandemic saw unprecedented liquidity in the system and this helped to propel BTC close to $70,000. As this liquidity was withdrawn on the heels of inflationary pressures, so too to BTC come tumbling back to earth like other financial assets. The short-term future of BTC is therefore in the hands of global monetary policy generally and the Federal Reserve specifically. If Jerome Powell continues to chase the Paul Volker legacy of killing inflation, that is not good for BTC. You need to pay close attention to US inflation numbers. If they start to decline, the Fed is forced to take their foot off the gas on their interest rate hiking vehicle. They will need to pivot and this is when BTC will roar again. If inflation continues to rise, grab your helmets and gore-tex because the crypto winter is not over.


5) Bitcoin Mining and Infrastructure

Despite the price decline in 2022, miners continued to commit resources and build mining infrastructure. The last time BTC prices found themselves in the current range (2017), the network hash rate was one-fifth of current levels. This means there has been a five-fold increase in BTC mining machines which is inordinately bullish for BTC. Although miner revenues fell in 2022, they remain committed to the long-term thesis.


6) Increasing scarcity

Most people focus on the 21 million maximum supply of BTC in their scarcity equation. This is too simplistic- you also need to look at the illiquid supply of coins. Someone that never sells has a liquidity score of 0. A trader has a score of 1. In 2022, we saw a massive migration of BTC off exchanges on the back of the FTX scandal. Almost $10 billion of BTC was moved off exchanges into self-custody wallets, and this has created a spike in the illiquid supply of coins. This means that 75 percent of coins are illiquid which further heightens the scarcity of BTC which in turn reduces selling pressure. In addition, the loss of faith in exchanges has made it more dangerous to short BTC.


In summary, there are compelling reasons to be bullish on BTC in 2023. With supply declining and demand increasing, the only way is up in price. Industry insiders (the miners) continue to commit unprecedented resources to the asset. The only thing that could scupper a recovery in BTC would be the Fed.


 
 
 

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