By Justin J. Carbonneau (@jjcarbonneau) —
Bitcoin has gone from JV to Varsity, and now has a valuation as high as some of the world’s top companies. Turning 12 years old, the digital cryptocurrency is growing up, figuratively and literally right in front of our eyes.
The price of Bitcoin has seen nothing short of a meteoric rise recently and over time. In March of last year, it traded as low as $3900 per Bitcoin. As of this writing, the price of Bitcoin is around $50,000. This isn’t the first time in Bitcoin’s history we’ve seen a massive increase. For example, from roughly December 2016 to December 2017, the price of Bitcoin went from roughly $700 to over $19,000.
But Bitcoin is still an adolescent asset, exhibiting some growing pains. Like turning 13 or getting your fist real job, there are important maturity events taking place superficially and beneath the surface.
- Bitcoin price: $50,000 per coin
- Bitcoin market cap: $1 Trillion
Big round numbers and price levels are mostly meaningless, until they are not.
Bitcoin crossed $50,000 a Bitcoin recently. This is not really meaningful, just like Dow 30,000 isn’t meaningful, but it creates an anchor in people’s minds as the figures gets broadcasted from the rooftops of business news networks, social media platforms, around the dinner table and in institutional circles.
Bitcoin reaching $1 trillion in market cap is more meaningful, however, as it allows us to gauge the current market value of Bitcoin relative to the value of other assets. In the U.S. stock market only a handful of the most valuable companies are worth more than $1 trillion, and the rise of Bitcoin continues to make it a larger percentage of the addressable gold market (around $11 trillion).
While most of the Bitcoin owned is by individuals, there are some important developments worth paying attention to in the institutional space.
The first is that a handful of companies, including Tesla, have decided to hold Bitcoin on their balance sheets instead of U.S. Treasuries. While a very small number of companies have allocated to Bitcoin, progressive companies like Square, Tesla and MicroStrategy are early supporters of holding Bitcoin as an asset on the balance sheet.
Also, according to this article on Coindesk, major university endowments like Harvard, Yale and the University of Michigan are also eyeing Bitcoin and starting to make purchases. Add on top of this that the 169-year-old insurance concern, Mass Mutual, recently purchased $100 million worth of Bitcoin and that BNY Mellon, the country’s oldest bank, plans to hold, transfer and issue bitcoin as a custodian for asset and fund managers. In a newly released 100-page report from Citi (Bitcoin: At the Tipping Point), one of the world’s largest banks, the authors provide historical prospective and argue the crypto asset is now at an inflection point where massive adoption could accelerate. And just this week, Goldman Sachs re-started its cryptocurrency trading desk and will begin dealing bitcoin futures and non-deliverable forward contracts.
Another key development happened just recently north of our border with the approval of a Bitcoin ETF. Canadian securities regulators approved the Purpose Bitcoin ETF, which is the first ETF in North America that will invest directly in physically settled Bitcoin (the ETF launched about a week ago and already has $560 million in assets under management). The SEC may follow Canada’s lead as they consider applications for a Bitcoin ETF that trades on a U.S. exchange. Hedge funds are getting in on the action as well – in a Clubhouse room called Bitcoin Café, I listened to a former hedge fund trader who left the business just a few months ago and has received calls from major hedge funds looking to build out their crypto currency trading desks.
So, no matter how you slice it, the stage seems to be set for interest in and adoption of Bitcoin from established, institutional players.
Momentum and Possibly Less Crashes
I would categorize Bitcoin as a momentum driven asset with big price spikes and big declines. At least in the past five years one could say this about the price of Bitcoin. Consistent with momentum investing in equities, you get an initial move up, which gets investors’ attention and attracts investment flows, which then gets more investors’ attention, which attracts more flows and the cycle continues. Eventually, however, the momentum stops, for one reason or another, and assets exhibiting momentum are susceptible to crashes. This is certainly the history Bitcoin has had in the past, but as the asset matures and if more long-term holders establish positions along with additional individual investors and institutions, there is a chance the asset may have less downside volatility than it’s had in the past.
Two Maturity Tests
There will be two other important maturity tests for Bitcoin. One will be the performance during the next downturn in the markets. If Bitcoin manages to act as a hedge against a market decline, this could be a very important moment as it would show, at least in that specific environment at that moment in time, that Bitcoin actually offers diversification vs. other risk assets like stocks, and that allocating to Bitcoin can improve performance during down markets. The other is the performance of the digital asset during the next bout of inflation. Expectations for higher inflation appear to be on the rise, and if we get a sustained period of inflation and Bitcoin continues to increase in value, this would support the belief that Bitcoin protects against the decline in the purchasing power of the dollar (a key feature of Bitcoin is there will only be 21 million coins mined in total).
Is Anyone Doing the Math?
Over the last five years (from 02/23/2016 to 02/23/2021), Bitcoin has produced an annualized return of 258% per year (see the tool I used to calculate this here). I’ve heard some proponents of Bitcoin reference 200%+ annualized returns and talk as though these are the returns investors are likely to see in the future.
At a $1 trillion market cap, a 200% return would make Bitcoin worth $3 trillion next year, and in year 2 it would be $9 trillion. Year 3 it would $27 trillion, and years 4 and 5, it’d be worth $81 trillion and $243 trillion, respectively. In 2019, the global GDP was approximately $88 trillion to put those numbers in some context.
Those investors advocating for future returns in Bitcoin like we’ve seen over the past five years haven’t done the math or don’t understand the power of compounding at such a massive percentage increase.
Maturing & Learning
This is not an article in support of or against Bitcoin, but instead I wanted to focus on the things I am seeing that indicate this young digital asset built on a distributed and decentralized technology is maturing. As we mature, we change, and I think we can say that process is happening with Bitcoin today – Bitcoin is growing up and getting more popular. Investors should take the time to educate themselves on this relatively young and disruptive technology that is emerging as an asset.
Justin J. Carbonneau is VP at Validea & Partner at Validea Capital Management.
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