Dec 20, 2020
5 mins read
Blockchain-based cryptocurrencies have been around for over a decade since the release of Bitcoin in early 2009.
What is Bitcoin?
Bitcoin is an open source peer-to-peer software monetary system invented by an anonymous person or group named Satoshi Nakamoto that can store and transmit value.
It is decentralized; there is no singular authority that controls it, and instead it uses encryption based on blockchain technology, calculated by multiple parties on the network, to verify transactions and maintain the protocol. Incentives are given by the protocol to those that contribute computing power to verify transactions in the form of newly-"mined" coins, and/or transaction fees. In other words, by verifying and securing the blockchain, you earn some coins.
Bitcoin's protocol limits it to 21 million coins in total, which gives it scarcity, and therefore potentially gives it value... if there is demand for it. There is no central authority that can unilaterally change that limit; Satoshi Nakamoto himself couldn't add more coins to the Bitcoin protocol if he wanted to at this point. These coins are divisible into 100 million units each, like fractions of an ounce of gold.
While the asset class has grown considerably, it remains relatively small and highly volatile, so deciding whether to insert a small bit of Bitcoin or other cryptocurrency exposure into a portfolio allocation can be a controversial and confusing decision.
Maybe this article will assist some investors in the decision one way or the other. Bitcoin analysis online can be very polarizing; either written by hardcore bullish enthusiasts or dismissed as a worthless Ponzi scheme. I've sought to bridge the gap a bit by sharing my view of Bitcoin, which is currently bullish. My views are influenced by what I see in the market and reading from various sources on this topic.
Bitcoin and other cryptocurrencies caught media and public attention with a huge hype by second half of 2017. It’s prices increased exponentially multiple 💯 % within days and weeks. Most peaked in Dec 2017/Jan 2018. This was followed by massive crash where many of the crypto currencies lost all or most of their value. Bitcoin lost over 3/4th its value in the following years. But it has come back with force and is at all time high territory.
But since it’s peak nearly two and a half years ago, Bitcoin underperformed the S&P 500, gold, Treasury notes, and a variety of other asset classes, especially on a volatility-adjusted basis:
As a beginner retail investors, I was caught up in the hype and frenzy of Cryptocurrencies during 2017. It wasn’t a pleasant experience to see almost all of your investment disappear during the crash. I went in with a HODL mentality, and was fully aware of the risk involved (although nothing prepares you for the crash adequately). I invested ‘only the money I was prepared to lose’ - which has always been the advice with such early stage volatile unproven investments.
However, I kept an eye on Bitcoin price action and macroeconomic shifts in this field. In early 2020, I revisited Bitcoin and became bullish. I started slowly adding it to my portfolio with tiny portions periodically, dollar cost averaged as it moved up. Current cost basis is around $10500.
My base case is for Bitcoin to perform very well over the next few years, but we'll see. I like it as a small position within a diversified portfolio, without much concern for periodic corrections, using capital I'm willing to risk. It still remains a volatile market but it is reassuring to see big players and corporates piling into it recently, increasing strength to the argument that it could be a good store of value. Considering that it underperformed in the last 3years, and the macro shifts towards a favourably view on Crypto space, there is good likelihood that the momentum will continue but with wild moves along the way.
Enter the Big corporations - Bitcoin goes mainstream 🚀
For a long time, institutional investment in bitcoin was hampered by strict investment mandates and regulatory compliance. Now that bitcoin has been formally recognised by many regulators, and regulated accordingly, this issue is far less of an obstacle than it used to be.
We used to argue that bitcoin’s submission to authority was indicative of the core system’s superiority. If bitcoin wanted to play with the big boys it would have to also play by the rules they were governed by, and in so doing give up on its status as a renegade system. But there may be an important counterpoint we failed to consider. In bowing to regulation bitcoin abandoned its key “censorship resistant” attributes, but it also paved the way for large scale institutional investment.
And that arguably is more important than temporarily bowing to the rules of the land. As with ESG investing, once you command sizeable institutional money, you have the power to influence the rules themselves through the threat of divestment. In bitcoin’s case, that might include changing the rules to favour censorship resistant forms of money.
If you consider institutional flows into bitcoin as a form of ideologically-motivated divestment from fiat you can see they’re worth paying attention to.
Economists define money as serving the following three purposes: a store of value, a medium of exchange, and a unit of account. Bitcoin is gaining usability in all of these areas recently.
Lots of organisations now accepts Bitcoin as a mode of payment. It is anticipated that big corporations like Starbucks and Macdonalds might open up to this idea too. Overstocks.com I believe accepts Bitcoin for big ticket items. It is only likely to expand to wider adoption in time.
Companies started to invest in Bitcoin as store of value too, and perhaps for growth of value as well - they include: Square, PayPal, Microstrategy etc.
When there is more clarity on how the crypto-sphere would be treated by taxman across the world soon, this will probably remove the last hurdle for mass adoption.
I stay bullish on this space for long term.
Massive Opportunity to profit from short term trading
Long term HODLing (that’s Holding in Cryptocurrency world) of Bitcoin is not everyone’s cup of tea.
But the volatile nature of Bitcoin provides fantastic opportunity to profit in short term too.
My followers were able to act on the charts that I posted in October when Bitcoin broke out of long term downtrending resistance line ($12490). The price has appreciated nearly 💯 % in 8weeks! at the time of writing this post.
The volatile nature of Bitcoin prices will continue to provide great opportunities for such quick profitable trades.