Cryptocurrency began as a financial instrument in 2009 - and the total cryptocurrency market cap just passed $3 trillion.
Gold began as a financial instrument in 1500 BC - and the total market cap is at $11 trillion.
Bitcoin is up almost 68 per cent in 2021. This most recent Bitcoin correction marks the sixth time this year it recorded a greater than 20 per cent pullback in the price. This volatility is to be expected as Bitcoin remains in the very early days of price discovery. It has increased in value despite some serious headwinds this year:
• China’s ban on all cryptocurrency transactions and the massive drop of hash rate;
• The fear, uncertainty and doubt around its energy consumption in an environmental, social, and governance-driven world; and
• Increased scrutiny from financial regulators.
Bitcoin and crypto, in general, are promising technologies that have the potential to solve some of our most difficult financial problems while also offering the opportunity to build out new frontiers unimaginable in the traditional world. We expect that Bitcoin will play a greater role as a new form of digital money and smart contract networks such as Ethereum to make the internet a more competitive and innovative environment where value moves as fast as information. These disruptions won’t happen overnight, but they have begun. Every day the blockchain industry innovates, it creates some of the most incredible new financial products.
Nothing traditional about it
Cryptocurrency isn’t just an investment in an exciting new technology, but an investment in human ingenuity. Entrepreneurs and innovators are coming together to build real consumer-facing applications that benefit from the new set of rails that is the blockchain. Whilst Bitcoin is a revolution by itself, the reality is that it’s not a productive asset.
Regardless of what economic school of thought you follow or what your opinion is on money, history tells us that investors prefer productive assets. Think global equities at $90 trillion, real estate at $200 trillion, and bonds at $200 trillion, while there is an $11 trillion gold market. We expect this trend to persist even as assets become more and more digital.
The bit about mining
To date, 90 per cent of all Bitcoin has already been mined and the remaining will be mined over the course of the next 120 years. Miners used to be the largest net seller of Bitcoin as they must sell the asset to pay down expenses denominated in fiat to continue the mining process. This dynamic is now changing, the biggest sellers will most likely be investors and users.
Historically, these groups have been the strongest holders of Bitcoin. The HAYVN Research team calculates that more than 50 per cent of Bitcoin has been held for more than a year. Much of the short-term price action is due to over-leveraged traders on retail platforms being liquidated and squeezed as opposed to fundamental real selling pressure.
It’s also important to remember that the global macro backdrop hasn’t changed and whilst Bitcoin has been on the backfoot, there remains a large group of holders who own Bitcoin to hedge monetary debasement and inflationary pressures. The Bitcoin as a safe haven play is still a valid school of thought. The traditional world still views everything crypto-related as a risk asset, so it will be an interesting theme to watch going into 2022.
Instead of only focusing on Bitcoin, we encourage investors to explore the wide array of crypto-assets now being introduced into the market. None of them are designed as cryptocurrencies or to serve as money, but rather to resemble crypto capital assets similar in many ways to the traditional equities markets. Here is where investors can apply well-understood valuation methodologies to better understand the value of their investments.
