reason #18
BITCOIN COULD REACH $1 MILLION
Before we look forward, it is worthwhile looking back at 2022. It was a brutal year for the world’s largest cryptocurrency. It lost more than 65 percent of its value. There were a number of reasons for this freefall - some of them directly related to crypto assets and others not. As a financial asset, Bitcoin does not operate in a vacuum. It is a risk asset and therefore is affected by most of the factors that affect other risk assets such as stocks. In the course of 2022, the Fed hiked the Fed Funds rate from 8 basic points (0.08 percent) to over 400 basis points (4 percent). It ramped interest rates to the highest levels in almost 15 years in response to higher inflation. When you make money fifty times more expensive, you are delivering a body blow to financial assets. Most people don't realize how important leverage is in relation to the performance of the stock market. It is relatively simple to understand. During 2022, the average dividend yield on Standard and Poor's stocks was slightly under 2 percent or 200 basis points. When you can borrow money at 8 basis points, and if you use that money to buy the Standard and Poor's index, the market is paying you 192 basis points to do the trade. How do I get to 192 basis points? The cost of the borrowing is 8 basis points. The dividend yield is 200 basis points - 200 basis points minus 8 basis points is 192 basis points. That is kinda nuts. It is almost like going to buy a car, and the bank pays you the monthly installments. You would be nuts not to execute the trade. So what happens when interest rates go to 400 basis points? That evaporates every ounce of enthusiasm out of the trade. Instead of the market paying you 192 basis points, you need to pay 200 basis points. On a relative basis, that is a lot less attractive. On an absolute basis, it makes perfect sense. The problem is that investing is a relative game - investments are neither good nor bad, they are better or worse. On a relative basis, the stock market in 2022 was a lot less attractive than in 2021. That explains why in 2022, the Standard and Poors declined by 20 percent. Bitcoin, as a new financial asset, amplified this downward move as investors bailed out of risky assets and clamored into safer investments like bonds. But there were other reasons why Bitcoin declined substantially more than equities. There were some specific events that took place in 2022?
The year 2021 was a champagne year in the crypto space. Bitcoin rallied 50 percent, and NFTs were capturing the imagination of the investing public and moving into the mainstream. The man in the street was debating the virtues of Bitcoin over Ethereum but then the story started to unravel. After the collapse of the TerraUSD algorithmic stablecoin, major crypto players fell like dominos: Three Arrows Capital. Voyager Digital, Celsius Network, FTX, BlockFi. FTX was the biggest scandal in the final quarter of 2022. So all these internal crypto events, combined with the sell-off in risky assets provided the perfect storm and a chilly winter for crypto in 2022.
Enter 2023. At the time of writing this blog, Bitcoin is up 35 percent year to date and it appears that the winter ice may be thawing. All the scandals of 2022 took place in centralized and opaque organizations, and instead of detracting from the Bitcoin thesis, it did the opposite. There was a reason why Sam Bankman Fried of FTX was so opposed to Bitcoin - it was the opposite of his operation. Bitcoin is decentralized and transparent. FTX was highly centralized and even more opaque.
The time has now come to look forward. A common mistake made by investors in projecting the value of Bitcoin forward is seeing it through the lens of a developed market like the United States. There is no denying that the US is the single most important market, but they only account for 36 percent of total Bitcoin mining. More Bitcoins are collectively mined in Kazakhstan, Russia, Malaysia, and Iran, and what do these four countries have in common? They are emerging markets, and are subject to more volatile governmental regimes, higher inflation rates, and higher rates of currency debasement. Instead of looking at Bitcoin through the lens of a middle-class American, who drives a large SUV and lives in a house surrounded by a white picket fence, you need to look at it through the eyes of a Venezuelan taxi driver who is seeing the value of his local currency lose half its value in a month or an Iranian businessman who is terrified of setting up a company because the government has a history of seizing companies. What can these people do in the face of rampant inflation and government corruption? They need to find an asset that cannot be debased, confiscated, or stolen.
Consider also the risk of a foreign country freezing your assets. Have you ever heard of OFAC - the Office for Foreign Asset Control. This organization has the power to impose sanctions on countries, companies, and individuals. It has the power to levy significant fines against entities that defy its directives, including freezing assets and barring parties from operating in the United States or doing business with United States entities and individuals. More than 1,000 Russian individuals are on the OFACs sanctions list. If you have a few minutes free, you can go onto their website (https://sanctionssearch.ofac.treas.gov/) and search for sanctioned individuals in every country in the world. If you click on the name, you will also see a brief description of the reason for the sanction.
For people in troubled nations, Bitcoin is not only a great investment, but it also represents their hope and salvation. It is the most concrete way in which they can secure the future well-being of themselves and their families. If they are forced to leave their countries and seek exile in foreign countries, Bitcoin can seamlessly cross the border with them and secure their future. It would not be an exaggeration to say that Bitcoin could save their lives. It is a life insurance policy that vests without having to trust the fidelity of a financial counterparty. It is almost impossible to put a value on that, but let's look at reasons why Bitcoin could reach $1 million by 2030.
1) Hash Rate
Hash rate, which is an expression of the processing power dedicated to the network by miners, is currently at 321 exam hashes-per-second (EH/s), according to MiningPoolStats raw data. Despite being only an estimate and impossible to measure entirely accurately, the latest readings are quite the feat, having never crossed the 300 EH/s level before. This means that if you hold Bitcoin, your wealth is more secure than ever.
2) Long-term holders
At the end of 2017, the percentage of Bitcoin holders who could be classified as long-term (their holding had not been moved for more than one year) was 44 percent. Today that percentage is closer to 70 percent. This is important for a very simple reason - what is it that long-term holders do not do? They do not sell their Bitcoin. Under what circumstances do the prices of assets fall? When there are more sellers than buyers. Simple math will tell you that a 60 percent increase in the number of long-term holders is going to reduce any potential downward pressure on Bitcoin prices. This means the only alternative is for prices to rise.
3) Institutional Ownership
Everyone knows where the big money sits. It can be found with the institutions. These are the pension funds, the asset managers, and the hedge funds. These investors manage trillions of dollars and there is no one bigger than BlackRock. This company finds itself in a unique position. Not only is it the biggest private asset manager in the world managing in excess of $10 trillion, but it also provides portfolio management software to the majority of its competitors through a platform known as Aladdin. In 2022, BlackRock announced they were building into this portfolio platform the ability to trade and manage crypto assets. This is a big deal because no institution will think of buying an asset if its internal systems are unable to manage the asset. All these developments were taking place in 2022, one of the worst years for crypto in its 14-year history.
4) Halving in 2024
Bitcoin halving is an event that cuts Bitcoin mining rewards in half. It is part of the original algorithm of the Bitcoin protocol that counteracts inflation by checking scarcity. Bitcoin halving occurs after every four years. The first halving happened in 2012 when the mining reward slashed from 25 BTC to 12.5 BTC. In 2016, Bitcoin experienced a second halving, which reduced the mining reward to 6.25 BTC. The last halving happened in 2020, with the mining reward further reduced to 3.125 BTC. Bitcoin is preparing for its fourth halving event, which will happen in March 2024. It will reduce the mining reward to 1.5625 BTC. The halving process reduces the rate of introducing new Bitcoins into the network. Hence, the inflation control and scarcity check. Bitcoin halving will continue until the last of all 21 million created Bitcoins is mined. Users expect this to happen around the year 2140.
The famous Twitter Bitcoin analyst with the online identity PlanB predicts that Bitcoin price will climb above $100,000 after the next halving event. The actual range estimate by PlanB is that Bitcoin price will be between $100,000 and $1,000,000 by 2025. PlanB’s analysis and prediction came after a poll that he conducted on Twitter to gauge the Bitcoin community’s expectations for the upcoming halving event. From 24,831 poll participants, 58.8% expect the Bitcoin price to pump after the next halving.
Those who think the market has already priced in the 2024 Bitcoin halving were 11%, while 30.1% claimed not to know what the outcome would be. PlanB’s analysis agreed with the popular votes on the conducted poll. He believes that the next Bitcoin halving will bring about increased scarcity in the eyes of investors. According to him, the 2024 halving will be his guidance for the next three years in the Bitcoin market.
To measure scarcity, PlanB deploys the Stock-to-Flow (S2F) model, which currently stands at 110. He notes that Bitcoin’s S2F is at a similar level to what it was during the previous halving events in 2012, 2016, and 2020, the result of which was significant bull runs that pushed Bitcoin price to new levels.
In summary, here is a quick recap of the key virtues of Bitcoin:
Bitcoin is decentralized
One of the primary benefits of bitcoin is that it is a decentralized currency. This means that it is not controlled by any central authority, government, or financial institution. This decentralized nature makes it immune to government intervention and manipulation, which is one of the main reasons why people are drawn to it.
Bitcoin is transparent
Another advantage of bitcoin is that it is transparent. All transactions on the blockchain are visible to anyone, making it virtually impossible to commit fraud or cheat the system. This transparency is critical for those who are concerned about the security and integrity of their financial transactions.
Bitcoin is global
Bitcoin is a global currency that can be used anywhere in the world. This means that it is not limited by the borders of any one country, and it can be easily transferred from one person to another, regardless of where they are located.
Bitcoin is fast and efficient
Compared to traditional financial systems, bitcoin is incredibly fast and efficient. Transactions can be processed in just a few minutes, compared to the several days or weeks it can take to process traditional financial transactions. This speed and efficiency make it an ideal choice for those who want to send money quickly and easily.
Bitcoin is secure
Bitcoin is also highly secure, thanks to its use of advanced cryptography. Each transaction is secured with a unique digital signature, making it virtually impossible to counterfeit or manipulate. Additionally, because it is decentralized, there is no single point of failure that can be attacked by hackers or malicious actors.
Bitcoin is a store of value
Another advantage of bitcoin is that it can be used as a store of value. Like gold, bitcoin is a finite resource, with only 21 million coins set to be mined. This limited supply makes it a valuable asset that can hold its value over time, even in the face of inflation or economic uncertainty.
Bitcoin is a hedge against inflation
Inflation is a significant concern for many people, particularly those who live in countries with unstable economies. Bitcoin can serve as a hedge against inflation because it is not subject to the same economic factors as traditional currencies. This means that it can hold its value even if traditional currencies lose value.
Bitcoin is accessible to everyone
Unlike traditional financial systems, which are often only accessible to those with significant wealth, bitcoin is accessible to everyone. Anyone with an internet connection can buy and use bitcoin, regardless of their financial situation or background.
Bitcoin is becoming more widely accepted
As bitcoin continues to gain popularity, more and more merchants and businesses are beginning to accept it as a form of payment. This means that it is becoming easier and more convenient to use bitcoin to purchase goods and services, making it a more practical choice for everyday use.
Bitcoin is an investment opportunity
Finally, bitcoin is an investment opportunity that has the potential to generate significant returns over time. While bitcoin prices can be volatile, many investors believe that the long-term potential for growth is significant. Additionally, because bitcoin is not tied to any one country or currency, it can serve as a diversification tool for investors looking to hedge their bets.
In conclusion, there are many reasons why you should consider buying bitcoin. It is a decentralized, transparent, global, fast, efficient, secure, valuable, inflation-resistant, accessible, and investment-worthy asset. If you're interested in buying bitcoin, be sure to do your research and work with a reputable exchange or broker to ensure that your investment is safe and secure.
