Image source: Bitcoin Global Macro
With Covid-induced monetary policies sparking inflation in economies all around the world, central bankers were forced to raise rates at unprecedented speeds, severely impacting the capital markets.
As a result, Bitcoin’s valuation – much like the speculative tech stocks of Netflix, Google, and Amazon – took a significant hit in 2022. It was a correlation that persisted until the beginning of 2023.
Under ordinary circumstances, Bitcoin typically correlates very tightly with the Nasdaq index. However, that correlation could come into question now that Bitcoin is solidifying its position as an antifragile asset during times of uncertainty.
Image source: K33 Research
The catalyst for this could be the cracks that are beginning to appear in the global banking sector and are reigniting the decade-long narrative that Bitcoin may, in fact, not be such a foolish haven for capital after all.
Amidst global uncertainty and inflation concerns, we’ve used the latest data to address key questions from investors such as:
- “Is now a good time to buy Bitcoins?/Is now a good time to invest in Bitcoin?”
- “Why invest in Bitcoin?” ; and
- “Is it smart to invest in Bitcoin?”
Our analysis provides valuable insights for potential investors covering Bitcoin’s correlation with tech stocks, limited supply as a store of value, increasing adoption for financial inclusion, outstanding performance against traditional assets, and its enduring nature.
Banking Dominoes Reminiscent of 2008
Those who have studied Bitcoin’s origins know that the genesis block was mined by Satoshi Nakamoto in January 2009, with the embedded message: “Chancellor on the brink of a second bailout for banks”
Today, the global economy is again facing serious macro challenges which threaten its stability. And like it was the case more than a decade ago, the promise of Bitcoin being an improved option to the traditional financial ecosystem still stands strong.
When describing the ideal successor in his whitepaper, Nakamoto insisted that “what is needed is an electronic payment system based on cryptographic proof instead of trust “. It is a quote which sits uncomfortably against today’s crooked banking sector, whose confidence trustworthiness comes under into question time and again.
Back in 2008, it was the subprime mortgage market bubble which triggered disarray in the markets, causing the collapse of many top-tier banks at that time, including Lehman Brothers and Bear Stearns. This time around, we are witnessing the aftershocks of a combination of poor risk management and central bankers raising rates at an extraordinary speed.
And so far, it has already claimed Switzerland’s second largest bank, Credit Suisse, and Silicon Valley Bank (SVB) in what was the biggest bank failure in the United States since 2008.
A Widespread Loss of Faith in Banks
The issue here is, of course, that the zero-rate environment of 2020 forced many banks to chase returns wherever they could find them. Banks like SVB bought long-duration bonds with an expected upside of around 0.2-0.3%. That likely seemed reasonable at the time, but with the same type of investments with shorter maturity now delivering closer to 5%, those investments from 2020 and 2021 are now highly unattractive, shackling the balance sheet of those same banks.
This is all a rather technical discussion, and it is likely that the average bank depositor does not care much for it either. What most people care about is security, and the accessibility of their funds. But when disasters strike the banking sector, it affects the image and trustworthiness of the entire sector because these two crucial priorities are thrown into doubt.
Image source: Statista
And the timing for this latest crisis is highly unfortunate, as studies show that the banking sector’s trustworthiness has not even managed to recover from its last crisis. To put it simply, the banking sector is suffering from a multi-decade-long trust issue.
Bitcoin: The Hardest Asset in the World
Bitcoin is arguably the hardest asset in the world, and for good reason. Unlike fiat currencies, which can be endlessly printed by central banks, Bitcoin has a hard limit of twenty one million coins. This limit gives Bitcoin a reputation as one of the best assets for preserving and increasing value, because limited supply is bound to guide valuations upwards if demand continues to increase.
As of the time of writing (April, 2023), 19 million BTC has already been mined, leaving only 2 million coins left to be released into circulation. Due to its high predictability when it comes to distribution of the outstanding coins, we know that 2140 will be the year when the last BTC is sent into circulation.
There is No Hiding From Inflation
The fundamental consequences of increased inflation following expansive monetary and fiscal policy – like the US Fed’s printing of trillions of dollars in 2020 and the planned liquidity boost of 2023 – have only highlighted the benefits of Bitcoin’s capped monetary policy.
The pain points of inflation and its consequences for ordinary citizens is something understood in emerging markets like Brazil and Mexico. However, since 2020 the concept of inflation has slowly crept into the households of people in the Western world as well, which is why a global interest for harder assets such as BTC should be brewing.
Bitcoin: The Ultimate Asset of the 21st Century
While Bitcoin ultimately has yet to win a pole position in the minds of the broader population, there are more than a few trends to pay attention to which should serve as comfort for anyone looking to gain conviction. These include the performance of Bitcoin compared to other assets and its enduring nature. Investors can draw valuable insights from these factors when considering Bitcoin as an investment option.
Bitcoin Recognized as Money
Firstly, BTC has been recognized and adopted as a valid form of money in two countries: El Salvador in June 2021 and the Central African Republic (CAR) in April 2022. Both of their respective central banks recognize BTC as a form of payment.
Naturally, their decision to adopt BTC as legal tender has not been without controversy, especially amongst global oversight bodies such as the IMF. Recently, the IMF cautioned the government of El Salvador about the potential risks associated with cryptocurrencies and advised them to be more transparent in their BTC transactions.
At the same time – and ironically so – these same oversight bodies are pushing hard for implementation of Central Bank Digital Currencies (CBDCs), which will come at significant privacy costs and will increase the state’s control over the population. In contrast, Bitcoin offers an alternative which preserves users’ privacy while also providing a viable form of money that can be sent across borders without being subjected to capital control or censorship.
The number of daily Bitcoin transactions has also been steadily rising since its inception in 2009, reaching a record high of around 400,000 in January 2021. However, it goes without saying that opponents will argue that such figures are insignificant compared to the daily transactions processed by leading global payment service providers such like Visa, who average around one-hundred-and-fifty million transactions per day.
Financial Inclusion and Payment Rails for the Unbanked
Secondly, Bitcoin provides a means of financial inclusion for any person on planet Earth, allowing everyone to participate in the value network of tomorrow. Not surprisingly BTC payments are highly popular with the unbanked demographic in regions like Africa and Latin America where financial service penetration is at its lowest. According to a report by Chainalysis, Africa’s crypto remittances surpassed $105 billion between July 2020 and June 2021.
Image source: Chainalysis
This growth highlights the role of Bitcoin in facilitating cross-border transactions and providing access to financial services to millions of people who were previously excluded.
Bitcoin’s Performance is Outstanding
Thirdly, BTC has outperformed most, if not all, asset classes over the past decade.
Image Source: Charlie Bilello
As such, BTC’s annualized returns are ten times higher than Nasdaq, with BTC recording 230.6% and Nasdaq only 20%. In contrast, gold only had a 1.5% increase between 2011 and 2021.
However, there is a catch. Despite BTC’s impressive overall performance, it remains the most volatile asset. In 2018, BTC lost 73%, while Nasdaq only decreased by -0.1% and gold dropped by a mere 1.9%. Similarly, last year Bitcoin was down over 70%, whilst gold remained mostly flat throughout the year.
But what is worth noticing in this regard is that the volatility of BTC is decreasing over time as the market capitalization and number of participants grow, with both moving at impressive speeds. Its market capitalization is predicted to continue to compound at more than 50% year on year while the number of users roughly doubles.
The Lindy Effect and Why Bitcoin is Likely Here to Stay
The Lindy effect is a theoretical phenomenon which suggests the longer something has existed, the longer it can be expected to exist in the future. In other words: the longer something has survived, the greater the likelihood of it surviving in the future.
This is interesting to think about because on many accords Bitcoin can be considered an experiment, but the thing about this experiment called Bitcoin is that it is coming to a stage where it has proven itself.
Since Bitcoin’s inception it has never been captured by foreign governments, succumbed to hacks, suffered from downtime, or otherwise failed. It is also worthy of note that Bitcoin’s adoption is budding much like that of the internet in its early years.
New Bitcoiners are Born Every Day
According to Glassnode, the number of BTC addresses with a non-zero balance is now over 44 forty-four million, up from eleven million in 2020. Evidently, more and more people are adopting Bitcoin as a viable investment option.
Image source: Glassnode
Similarly, the number of wallets holding 1 BTC is also on the rise and currently sitting at an all-time high. Quantitative data from recent investment surveys support this, revealing that BTC is in the top 5 holdings of millennial investors.
Bitcoin: An Antidote to Corruption
Bitcoin’s transparent nature also naturally promotes openness because its inherent “monetary” policies and transactions are fully transparent to anyone participating. This high level of transparency makes it an unsuitable economic backbone for corrupt politicians or regimes seeking to operate in secrecy, thereby offering additional assurance to investors contemplating whether “is now a good time to buy bitcoins”
With Bitcoin, governments would be completely incapacitated in their ability to print money, fund public spending, and subject the population to inflation.
Moreover, the transparent nature of Bitcoin’s public ledger would make it very difficult for government officials to misappropriate and misuse funds.
Bitcoin’s Regulation: A Web of Confusion
Bitcoin’s regulation has been a hot topic over the years and even more so recently, with the US government cracking down on the crypto industry. While using Bitcoin is not illegal, there is a lot of confusion as to whether US authorities deem it a security, commodity, or crypto asset. For instance, in a recent lawsuit against Binance, the CFTC termed Bitcoin a commodity, whereas the SEC holds the view that all crypto assets are securities except for Bitcoin.
In Europe, the recently approved MiCA bill, which is set to come into enforcement in late 2024 or early 2025, classifies Bitcoin as a crypto asset. This classification means that Bitcoin falls under digital assets that leverage distributed ledger technology (DLT). However, a recent study commissioned by EU lawmakers to consider the eligibility of a sequel to the MiCA bill to oversee NFTs, DeFi, and staking suggests that all crypto assets should be treated as securities by default.
That said, there are some jurisdictions that have placed implicit bans on Bitcoin use. These jurisdictions include Zimbabwe, Lesotho, Gabon, Libya, and Guyana. Meanwhile, in China, Qatar, and Saudi Arabia, cryptocurrencies such as Bitcoin have been completely banned.
Looking at these developments, it is very obvious that there is currently a lot of confusion about Bitcoin’s legal status. However, what’s important to remember is that the very decentralized nature of Bitcoin was intended to avoid regulation or interference by central authorities. After all, the Bitcoin blockchain has never halted transactions since its debut due to regulatory uncertainty.
Bitcoin is Wireless Energy
It would be a shame to write this lengthy article about Bitcoin without including a short commentary on its energy usage. Why? Because the energy debate about Bitcoin is likely one of the most misunderstood topics out there and is also the preferred battleground of many Bitcoin opponents.
The reason is of course because Bitcoin’s network requires quite a bit of energy to run.
In the time of writing there is currently 341.43 TerraHashes (TH/s) committed to the network, which translates following these estimates to amount to around 127 terawatt-hours (TWh) spent on a yearly – roughly the same as the Netherlands.
Imagine that. The magic internet coin spends more energy than the Netherlands!
What is really worth spending energy on?
It would be worthwhile having a philosophical debate about what kind of human activity should be deservant of energy. In such a conversation, one could debate that upholding a free, open, inclusive, censorship-free, and decentralised payment network for all of Earth’s population is inherently worth the watt hours it consumes.
However, the conversation about what type of infrastructure deserves our energy is not an easy one to have, and so for the sake of ease, we should start by focusing on one point:
We know how much energy Bitcoin consumes!
Had Bitcoin not been designed to be as transparent as it is, it would be difficult to even have a debate about how much energy it consumes. After all, when do we ever question how much energy is required to run the modern banking system? How much energy does Visa and Mastercard even require to operate?
Secondly, a big confusion has snuck into the debate and instead of focusing on total energy consumption, which is the usual battleground, we should start focusing more on the type of energy consumption. Recent research conducted by Daniel Batten, an ESG analyst and investor, shows that 52.4% of Bitcoin mining energy is sourced from renewable energy, which is much better than most nations’ energy mix.
No one in the world knows where Bitcoin is headed. No one knows if it will continue to exist and be relevant. But what seems plausible right now is that in a time where economic downturn and recession is on everybody’s lips, Bitcoin has proven its capability to uphold an economic value by outperforming inflation, the stock market, and gold, as well as its ability to uphold a value of around $30.000 per unit (BTC) whilst doing billions upon billions of trading volume on any given day.
Granted, Bitcoin is still at a place where it has yet to win mainstream global recognition as a valuable and reliable asset, but for every day that passes and for every new Bitcoin participant that is born, that future becomes more likely.