In the case of investing in Bitcoin, the traditional financial world has been literally turned on its head.
Normally the first people to get access to a new investment are the Angel Investors (Pre-Seed and Seed Funding) and Venture Capitals (Series A-D Funding). The Retail Investor (thats you and me) may get an opportunity to invest in the Initial Public Offering (IPO). That is when the afore mentioned people, get to flog off part of the company to the public for an over inflated price.
With Bitcoin, it has generally been the ordinary person (thats you and me again) who has been first to access and HODL Bitcoin. Whether we were the early Cypherpunks mining bitcoin, buying drugs on the Dark Net or just playing Bitcoin Faucets for a few satoshi. Most of us were far removed from being an Accredited Investor, when we bought or acquired our first satoshis.
So what is an Accredited Investor? Down Under they are frequently referred to being a Sophisticated Investor, which can be misleading. The term Sophisticated implying that the investor is some how a better or a more intelligent investor and therefore fully aware of the implications of the investment. In reality they just have a high income or net worth, which doesn't always translate to intelligence or understanding.
For the purposes being able to invest in the Grayscale Bitcoin Trust (GBTC), being an Accredited Investor is defined as:
An accredited investor, in the context of a natural person, includes anyone who either earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR, has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Grayscale Investments have been buying up Bitcoin faster than the Bitcoin miners can produce them.
Grayscale Investments flagship financial product is their Bitcoin Trust (GBTC).
The Bitcoin Trust (GBTC) has over 400,000 Bitcoin under management. And with a total circulating supply of 18,468,725 Bitcoin. That brings Grayscale Investments AUM (Assets Under Management) to over 2% of the total circulating supply of Bitcoin.
Previous posts about Grayscale Investments
Grayscale Investments recently released a 20 page report authored by Phil Bonello, entitled "Valuing Bitcoin".
Its intended audience is the Accredited Investors. This group
- don't know how to set-up the Atomic Wallet
- have never played a faucet
- or got free BAT from using the Brave Browser
- or swapped their DAI Publish0x tips for Tezos (XTZ)
- and then staked the Tezoz on the Atomic Wallet
But they still want access to the best performing asset of 2020 and the last decade. And possibly the next decade.
Why Is Bitcoin Important Today?
To understand Bitcoin’s role today, it’s worth exploring the monetary history of the last 50 years. We believe demand for a scarce monetary asset like Bitcoin grows as global monetary inflation accelerates.
Fifty years of loose Monetary Policy, encouraged the taking on of Debt to purchase assets. The newly created money made its way into financial assets rather than into the economy.
Amidst the current unprecedented monetary and fiscal stimulus (aka QE Infinity), Accredited Investors are searching for ways to protect against an ever-expanding monetary supply and escape the coming great monetary inflation.
How Can We Think About Bitcoin’s Value?
A digital form of money makes sense in the current environment, but Accredited Investors still struggle to assign a fair value
Since Bitcoin is not a cash generating asset, investors can’t apply a standard discounted cash flow analysis to model its present value.
In many ways, valuing Bitcoin is similar to how some value gold. Instead of depending on cash flows, they can use relative valuation and supply/demand analysis to value Bitcoin as an investment.
Only 21 million Bitcoin will ever be created, this scarcity is built into the protocol. A simple way to think about Bitcoins value is through its relative position to other stores of value.
In May 2020, Paul Tudor Jones wrote to investors. He included his investment case for Bitcoin. The analysis examined financial assets, cash, gold, and Bitcoin.
With concerns of monetary inflation in mind, they scored different stores of value based on purchasing power, trustworthiness, liquidity, and portability.
Bitcoin overall score was
- 60% of Financial Assets with only 1/1200th of the market capitalisation
- 66% of Gold with only 1/60th of Gold's outstanding value
Paul Tudor Jones concluded:
Something appears wrong here and my guess is it is the price of Bitcoin.
Supply And Demand
Bitcoin’s supply is set, there will only ever be 21M Bitcoin, however, not all Bitcoin have been mined and not all Bitcoin are actively used or traded (HODL).
The public blockchain that underpins Bitcoin allows the analyzing of supply and demand shifts on the network to estimate price accordingly.
Supply Based Metrics
The report explains the following supply based metrics:
- Active Coins
- Bitcoin Days Destroyed (BDD)
- Realized Capitalization
- Stock-to-Flow Model
- Bitcoin Held on Exchanges
Demand Based Metrics
And then covers the demand based metrics:
- Daily Active Addresses (DAA)
- Whale Index
- Bitcoins Production Value
The current economic environment presents a compelling opportunity to explore how Bitcoin can be part of a resilient portfolio. However, many investors are challenged to find a reliable methodology to ascribe Bitcoin’s value. This report outlines how investors can use relative valuation and blockchain metrics for supply and demand to estimate fair value. However, with more Bitcoin transactions occurring off-chain, these metrics may become less effective.
As demand for stores of value grows during this regime of monetary inflation, Bitcoin may be well-positioned given that it is a scarce digital asset. The plethora of blockchain metrics covered in this report indicate that the current market structure is reminiscent of early 2016, the period that preceded Bitcoin’s historic bull run. Bitcoin continues to command global investor attention, there is scant supply to meet growing demand, and the infrastructure is now in place to satisfy that demand. With the techniques outlined in this report, investors can now measure Bitcoin's network growth and more confidently assess its value.
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