*This is purely my opinion and not financial advice or recommendation to buy or sell an asset. As always, please do your own research.
Although 40% of my crypto portfolio is in Bitcoin, I’m going to start off by saying Bitcoin is actually the least exciting crypto we will be discussing on Free Lunch. It’s important we cover the basics before diving into other projects, and as you will soon see, there’s a lot more to Crypto than Bitcoin. Given the maturity and size of Bitcoin today, I’m going to go as far as saying I believe Bitcoin is actually the safest out of all the crypto assets out there. This is of course not including stablecoins like USDC, which are cryptocurrencies pegged to $1 US Dollar and will never fluctuate.
When Bitcoin was originally introduced, many believed it will become the digital currency for global payments and transactions. But with time, we are starting to see flaws with that thinking. First, transacting with Bitcoin is actually really slow - the average time to transact is about 10 minutes, and could be more if the network is congested. Additionally, people aren’t willing to accept a currency which can fluctuate up or down 30% in a matter of days. Besides, if most people holding Bitcoin believes the price is going to the moon and there will only be 21 million Bitcoin ever created, who in their right minds will use Bitcoin to buy pizza?
So in reality, the narrative around Bitcoin has really evolved towards another function of money, which is a store of value, think digital version of gold. Bitcoin fits this narrative because we know it is both scarce and decentralized, meaning no single entity can ever control this currency. If Bitcoin is to become digital gold, it’s hard to imagine a scenario where we won’t see Bitcoin hit at least $150k per coin. This is because even on a very conservative estimate that Bitcoin could become 1/4 the size of gold (a $11 trillion dollar market cap asset), Bitcoin would reach roughly $2.75 trillion in market cap and $150k per coin.
Thinking more about the value of any asset, I think it’s safe to say what something is worth should be determined by how much someone else is willing to pay. For instance, if you bought a piece of Picasso at $150k, but not a single person on this planet is willing to pay more than $30k, then its price should be $30k. Using this line of thinking, if you, I, and everyone else believes Bitcoin is worth $500k, then it should be priced at $500k.
Even if we can convince ourselves that Bitcoin has value because others believe it does, we still haven’t answered the question why Bitcoin would only be more valuable over time and not less? Couldn’t everyone adjust their thinking tomorrow and value Bitcoin at only $10k? The reason can be answered by exploring who actually owns Bitcoin and why.
Many people argue that unlike Fiat money which it is “backed by the government”, Bitcoin is not backed by anyone. But people forget that throughout history, governments have collapsed and countries have defaulted on their debts. Just because the US Dollar dominated the global economy for as long as we could remember, doesn’t mean this will be the case forever. Throughout the pandemic, we have seen the US Federal Reserve print an endless supply of money with seemingly no consequences. Inflation concerns aside, what is one US Dollar really worth when people, corporations, and institutional investors no longer trust our governments?
As a result, we have seen institutional investors, corporations, and wealthy individuals move towards Crypto, primarily into Bitcoin. This is one of the contributing factors to the Bitcoin bull run this year. Unlike 2017 when it was driven primarily by retail investors like you and me, Bitcoin today is mostly owned by institutional investors, corporations, and wealthy individuals who are using it as a hedge against inflation, the economy, and the US Dollar, as a safe store of value.
Although there will always be investors and hedge funds speculating to make profits, I would argue most Bitcoin holders see it as a hedge with no intention of selling. This is true because recently, in addition to hedge funds and mutual funds, we are also starting to see pension funds enter the Bitcoin picture as well. Given the goal of any pension fund is to preserve wealth for their clients for retirement, they would not be taking on this risk just to make short term profits. Additionally, as we see corporations decide to hold Bitcoin on their balance sheet, this would only continue to validate and stabilize the asset. Corporations like Tesla and Square aren’t in the business of making money off Crypto. They are doing this as a way to hedge their cash balances.
Looking at some on-chain metrics and data, we are also seeing this narrative shape up in front of our eyes. The number of long term holders (held the asset for 5 months of longer which based on historical data is a good indicator they are not planning to sell) continues to increase compared to short term speculators.
At the rate at which Bitcoin is gaining mainstream adoption today, it is clear there will only be less and less supply of it to go around. Institutional investors, corporations, and wealthy individuals who have chosen to allocate 1-5% of their portfolio to Bitcoin are not looking to sell anytime soon.
I believe we are still relatively early in the Bitcoin story, with the true value yet to be determined. Based on what we know today, it is most likely Bitcoin will only be a safe store of value, and that might be enough to give it its value. But who’s to say it can’t one day be used as a medium of exchange as its price reaches a certain point to become more and more stable.
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