By Niall Minihan.
With Bitcoin being the best performing asset over the last decade surging from a few cents back in 2009 to $20,000 in 2017, many investors will look at the historical price increase of Bitcoin and think they have ‘missed it’.
This couldn’t be further from the truth in the eyes of a growing number of prominent investors and macro figures such as Raoul Pal, Paul Tudor Jones, Stan Drukinmiller, Mike Novogratz, and Anthony Pompliano who are all in agreement that we are at the start of another boom cycle in Bitcoin which could drive the price anywhere from $100k-250k in the next few years.
This article will look at their investment case for Bitcoin through the lens of 3 key drivers:
- Macro Backdrop
- Bitcoin Demand
- Bitcoin Supply
We are at an unprecedented time in the macro-economy: After slowly raising interest rates since 2016 from the zero bound, the Federal Reserve was forced to reverse course and cut interest rates to 0% when Covid-19 hit, and they have indicated that they plan to keep us in a zero-rate environment for the foreseeable future.
After attempting to reduce the size of the balance sheet in 2019 through quantitative tightening, again the Fed was forced to reverse course with multiple stimulus packages in 2020 now totalling more than $3 trillion in QE.
The balance sheet currently stands at 7.1 trillion, with another $2 trillion on the way. The Fed’s balance sheet has expanded by 75% since the start of the year and is starting to grow exponentially with some analysts expecting it to surge a lot higher.
While there is a strong argument that this QE won’t lead to higher inflation because of the current deflationary environment, the Fed has publicly committed to sustaining a 2%+ inflation level.
Whereas Bitcoin’s demand historically has come from retail investors there are two new significant drivers of demand: traditional asset management firms and corporate treasuries both making the leap into owning Bitcoin.
1. Traditional Asset Management Firms
Fidelity Investments recently published a paper showing a positive impact for 1%-5% Bitcoin allocation in clients’ portfolios. Stone Ridge, a $10 billion asset manager now owns $115 million in Bitcoin. Paul Tudor Jones publicly revealed that he has put 2% of assets into Bitcoin. Grayscale, the largest digital asset investment manager, saw record inflows of $1B+ in 3Q20 and now has almost $7.6B of Bitcoin in total AUM.
2. Wall St
We are seeing a new trend emerge where corporations are using Bitcoin as a reserve asset for part or majority of their treasury. In August, we saw MicroStrategy, a NASDAQ listed tech company with a $1.7 billion market cap put 85% of its $500 million balance sheet ($425M) into Bitcoin.
And most recently, financial technology company Square announced that it had purchased about $50M of Bitcoin for its balance sheet (approximately 1% of assets).
This increase in demand is just the beginning. Eventually, the peers of these leading, forward-thinking firms will join them which means demand should accelerate into the first half of 2021.
Bitcoin only has 21 million total coins that will ever be available. There are approximately 18.5 million currently in circulation.
New Bitcoin enters the market on a pre-determined schedule that is coded into software and cannot be changed without agreement from 51% or more people, which is highly unlikely to ever change.
That programmatic monetary supply schedule started in 2009 with 7,200 Bitcoin entering circulation every day. That continued for 4 years, before the 7,200 daily Bitcoin was cut to 3,600 Bitcoin each day. 4 years later it was cut to 1,800 Bitcoin per day. Most recently, in May 2020, we experienced the latest “Bitcoin halving” which now has 900 Bitcoin per day entering the circulating supply.
Historically, these supply shocks have led to significant price increases of 20X+ in the following 18 months post-halving. A 20X increase from the Bitcoin price at the halving in May 2020 would see a price of over $200,000 per Bitcoin.
There is a third factor which indicates that we could be at the beginning of a new bull market in Bitcoin and that is that more than 60% of all Bitcoin in circulation today have not changed hands in the last 12 months.
This log chart maps the historical price of Bitcoin over the percentage of all bitcoins that have not been moved from one wallet to another for at least 1 year.
This is an indication of significant holding and that 62% of the Bitcoin in circulation is being held by strong hands. The last time this happened was in early 2016, at the start of the bull run.
In summary, you could evaluate this situation as:
(a) The demand for Bitcoin is increasing significantly,
(b) The supply shock from the ‘Bitcoin halvings’ is making Bitcoin more scarce, and
(c) The available float is much smaller than people actually realize.
This is the framework that leads the aforementioned well-known investors to believe that we are going to see a violent upward movement in the Bitcoin price in the next couple of years which could see the price rise to anywhere between $100,000 to $250,000 per Bitcoin.
Prepared by Patrick O’Brien
For more information, check out this video: https://www.youtube.com/watch?v=TcFeL2ebuKU&t=7s
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