How did bitcoin reach a $1T market cap faster than any other tech company? Why does bitcoin have any value at all? What is bitcoin used for?
Bitcoin has combined properties that no other singular asset contains. It’s through these properties that bitcoin gains value. For example, Bitcoin has the following properties: 1) an emerging store of value, 2) used for attaining yield through lending, 3) used as collateral for loans, 4) facilitates “risk free” trades in the derivatives market, 5) used for payments, 6) has fast final settlement, 7) acts as a rewards mechanism - i.e. bitcoin rewards for credit cards, 8) used for protection against central authorities, and 9) has a strong community of supporters.
Bitcoin Uses
Emerging Store of Value
Bitcoin has the same properties as gold that makes it a store of value. Due to it’s store of value properties entities like BlackRock, Fidelity, and Druckenmiller have bought bitcoin to hedge against inflation. More specifically, bitcoin is considered digital gold because like gold it’s scarce, widely recognized, transferable, transportable, divisible, and can be in full possession by the owner. People also refer to bitcoin as Gold 2.0 because it’s natively digital and outperforms gold in many of core elements mentioned above. For example, bitcoin is more scarce than gold because gold supply increases by 2-4% each year. Whereas, bitcoin has a hard cap of 21M coins. If the gold price spikes then gold miners will be incentives to increase the supply by even more. Bitcoin is also 1000x easier transfer to someone else over the internet compared to than moving physical blocks of gold. Bitcoin also is more divisible than gold.
Lending Yield
Owners of bitcoin can lend their bitcoin out for a yield of 3-8% APY depending on who they are lending the bitcoin out to. For example, through BlockFi people can lend out 2 or less bitcoin for a 6% rate. You can lend out 2 or more bitcoin at a 3% rate.
Collateral for loans
Bitcoin functions like a house or a business in that people can use their bitcoin as collateral. Specifically, people can bitcoin to take loans out at a APRs of 8-14%. While the APR for bitcoin is higher than houses and a business, there is one key difference for bitcoin as collateral. People can take a loan against their bitcoin within a few minutes and with little to no paper work. Additionally, if people need to sell their bitcoin to pay back the loan or a portion of they loan they can do this instantly because it’s highly liquid. Where as selling off property can take months and the transaction fee is ~6%.
Derivatives Yield
In the derivatives market, Bitcoin offers one of the highest yielding “risk-free” cash carry trades in the futures market yielding 10-20%. In the options market, options traders can earn a 40% premium on covered calls. These yields compare to less than 1.5% for 10-Year Treasuries and less than 5% for junk bonds.
Payments
Bitcoin can be used for payments of goods and services. Bitcoin will also be used for peer-to-peer payments, e.g. with Venmo’s launch this year. The use of bitcoin for payments will be expanding as Visa enables bitcoin for their global merchant network and Venmo opens up peer-to-peer payments this year.
Fast Settlement with Finality
On average bitcoin settles with finality in 10 minutes. When compared to traditional finance of 2-3 business days. This makes bitcoin easier to transfer between two parties especially internationally. Additionally, 2nd layers like Lightening are being built on top of Bitcoins base protocol layer that offer settlement within seconds.
Rewards
Within the last 365 days, Visa will launch three credit cards that reward users with bitcoin rather than cash back or points. For example, Fold already has a Visa bitcoin rewards available. Gemini and and BlockFi are up next. The demand for bitcoin rewards is skyrocketing and Visa is fulfilling that demand.
Full Ownership and Security from Central Authorities
Bitcoin has value for people who live in nation-states where asset seizure isn’t uncommon. People in these nation-states can store and move bitcoin with them securely in cold wallets or seed phrases where it will be very difficult to seize.
Strong Bitcoin Community
Bitcoin has one of the strongest communities in the world. Bitcoin owners and advocates will buy bitcoin when everyone is selling. There are bitcoin meetups happening globally at every minute of the day and night. There are dozens of bitcoin books that they read and discuss. Bitcoiners are evangelical. Bitcoiners love to bring non-bitcoiners into the community even when there’s not direct benefit to the bitcoiner. I.e. The next door neighbor or relative isn’t going to really change the price. The bitcoin community is what keeps bitcoin going and growing.
The community includes OG cypherpunks who got bitcoin off the ground, people who see it as a path towards being a sovereign individual, miners who earn block rewards, people validating the blockchain via nodes, content creators via books + podcasts + Twitter + Clubhouse, on-chain and chart analyst, bitcoin enthusiasts, and most recently members of institutions with mountains of money. For example, bitcoiners are in institutions like BlackRock, Fidelity, Goldman Sachs, Morgan Stanley, PayPal, Square, Visa, MicroStrategy, Tesla, the SEC (Gary Gensler), the Singapore Sovereign Wealth Fund, and the list goes on. As the community and network of individuals who understand bitcoin grows, so too will Bitcoin’s adoption and price as the value shown above continues to be actualized.
This sounds too good to be true. What are the risks?
Bitcoin is young. It’s only 11 years old. Bitcoin is early in the global adoption phase at only 2% penetration. Bitcoin isn’t well understood by the general public and media. Meanwhile, Bitcoin is unique when compared to all other asset types as we saw in the 9 listed properties of bitcoin above.
Meanwhile, once understand, there is obvious and enormous potential for bitcoin - i.e. $10T when compared to gold or $100T when compared to bonds and real estate. So, with bitcoin’s youth, common misunderstanding, and high potential there is a lot of speculation. That speculation will catch people off guard especially in the short term when the price skyrockets and when the price drops -30% in a few days. For example, people who use leverage irresponsibly can lose it all in an hour or less. People who get in at the end of a bull run of halving cycle can lose 80% of their investment in 30 days. Perhaps most notably, Michael Burry - who predicted the 2008-2009 financial crisis and was the protagonist in “The Big Short” - stated last week that the bitcoin market reminds him of 2007. He stated that there is far too much leverage in system and this won’t end well in the short term even though he sees bitcoin’s value over the long term. (Note: Annapurna is also the most dangerous mountain in the world to climb.)
The good news is that if we zoom out, there is considerably less risk for owning bitcoin over the longer term. For example, since inception has an average rate of 197% ROI per year and has beaten every other macro asset class on a risk adjusted basis (e.g. stocks, bonds, real estate, gold, etc.). When compared to gold, if Bitcoin continues on the current trajectory for the next 10 years it wouldn’t be surprising to see Bitcoin reach the $10T market cap ($540K/coin). If we compare bitcoin to other yield bearing assets that can also appreciate like bonds ($100T) and real estate ($100T) then it’s not inconceivable to see Bitcoin reach $20T+ in valuation in 10 years, or $1.1M+/coin.
Finally, because there’s no other asset like bitcoin, it’s difficult to fully valuate an asset that 1) is an emerging store of value, 2) garners yield through lending, 3) utilized as collateral for loans, 4) provides “risk free” trades in the derivatives market, 5) used for payments, 6) acts as a rewards mechanism - i.e. bitcoin rewards for credit cards, 7) performs final settlement in 10 minutes, 8) provides protection from central authorities, and 9) has a strong community. That said, with these inputs and based on the last 10 years, we expect Bitcoin to continue to rise over the next 3, 5, and 10 years as it matures in experience and grows in adoption.
Bitcoin Adoption Curve
(This one requires zooming. The green line is bitcoin adoption. It’s currently growing faster than the internet did and is at the same place in time as the internet in 1997.)
Bitcoin Adoption Compared to Other Tech
Bitcoin Reaches $1T market cap faster than tech
Bitcoin ROI
(Bitcoin’s performance compared to other assets.)
Bitcoin Risk Adjusted Return
(5 year adjusted risk adjust returns - Bitcoin, Gold, US Stocks, US Real Estate, Bonds, and Emerging Currencies.)
Bitcoin Price History
(Here we can see the price from $0-$58K. This chart is on a log scale.)
Important Questions
The most important questions we currently have are:
Are we in a 3rd halving cycle of bitcoin where we will have a strong bear market? Where’s the leverage in the system that would cause this to happen? What would trigger the bear market? Or, will this be a super cycle where bitcoin exits it’s normal halving cycles and continues upwards towards its approach to gold’s valuation ($10B)?
We currently believe there will be a bear market in 2021 or 2022 and concur that there is a lot of leverage in the system. We are actively working to understand this situation more deeply. We do not want to be caught flat-footed where the price drops -80% and we have wait another 3 years to get back to the same high water mark. That said, we aren’t closed off to the possibility to a super cycle occurring as the largest investment institutions and sovereign wealth funds in the world are entering into bitcoin in a major way. Additionally, the volume of bitcoin daily volumes makes the mining rewards look less consequential. Also, miners can now use their coins as collateral and for yield; so they may not be as inclined to sell. Therefore halving cycles may be less relevant going forward.
How do we hodl bitcoin while also getting a yield from bitcoin in the process?
Ideally, people should never need to sell bitcoin. Instead, they can use it to produce income either through lending and/or participating derivative markets. This way people can benefit from the appreciation of bitcoin and while also receiving yield.
Due to the leverage in the system and the long-term value that bitcoin will have over the years, we are currently hesitant to take the risk of lending bitcoin without better understanding the counter-party risk. We are therefore not lending at this time and would rather wait to see how lending works out for others and learn from their experience. If over the course of 2-3 years, lending works out well for others or if we learn new information that changes our minds then we will also consider lending bitcoin.
———
We hope you enjoyed this article and we hope you have a great rest of your week.
Thanks,
Bitcoin Daily