A friend’s friend has 5% of her net worth in Bitcoin. A family member has been HODLing it for the past five years. Waves of jubilant Gen-Zs are crowing over ‘boomers’ who believe in gold.
Everyone’s happy.
And I have a bad case of FOMO.
Back in May my wife and I first talked about investing in Bitcoin when it was around $10k. And then I did nothing about it.
Bad call!
After that day, I watched it breach its previous $17k high. And then 20k… 30k… 40k… and with every new high I struggled to rationalise making an investment, only to find it soaring ever higher. Bitcoin was up 8x in just 9 months this year, far outclassing even the gravity-defining run of Sea. What magic is this?
So I started to dig a bit more, to see whether it might still be the right time to get into this digital gold. And, based on my (admittedly non-comprehensive) research, I think it’s OK to wait for a better buying opportunity in future. Here’s why.
The case for Bitcoin
- Limited supply: The Bitcoin algorithm is designed to cap the total number of coins at exactly 21 million, of which so far 18.6 million have been mined. And the way the mining rewards and computing power needs work, the last coin is likely to be mined only by 2140. In other words, total supply can only expand another ~11% over the next 120 years, expanding at an average rate of 0.1% per year (more now, less as time goes on). As a comparison, an estimated 20% of all the gold in the world remains underground and only about 1–2% is mined every year.
- Hedge against inflation: Governments are exponentially increasing ‘fiat’ money supply to be able to pay for all their Covid-relief stimulus and support programs. The US alone has increased its total money supply by about 25% just in 2020! Given that the supply of money is increasing way faster than the supply of things we can buy with it, it stands to reason that prices will rise (or, in other words, inflation will increase)and the value of the money you hold today will therefore decline rapidly in future. Bitcoin’s supply cap therefore makes it especially attractive because buyers know that their investment won’t suddenly get devalued just because someone decides to double the number in circulation
- Institutional interest: Unlike previous spikes driven largely by average Joes like you and me, this time the big money is getting in on the game, lending the asset more respectability and giving investors the hope that today’s higher prices will be more sustainable than in the past
Why you can — and maybe should — wait
While the above are indeed true, as a small investor there are three major considerations you should take into account. In my opinion these make a strong case for waiting out this rally for the opportunity to get in in future.
Bitcoin price is easily manipulated
The strength of Bitcoin — extremely limited supply — is also its greatest weakness from a small investor’s point of view. All the coins in existence right now add up to ~$660 billion as of today, and in fact they were worth only ~$90 billion back in March.
Bitcoin’s greatest strength is also it’s greatest weakness
That might seem like a lot but $90 billion is only about double the size of the hedge fund led by Paul Tudor Jones and only 20% of the value of the assets held by MassMutual, which are two of the institutional investors known to have purchased Bitcoin.
Worse, about 80% of all this Bitcoin is out of circulation, either being hoarded for the long term or maybe even ‘lost’ in inaccessible wallets like this infamous example. What this means is that the actual tradable market for Bitcoin may have been just $18 billion in March and still only about $120 billion today.
So in theory, a decent-sized fund, or frankly even a mid-sized billionaire, could easily corner a large swathe of this tradable market, tweet it up with messages like this and dump their holdings when they’ve made their billions. It’s really not that hard for someone with money and a bit of chutzpah. It’s been done many times, especially with penny stocks.
This is not possible with gold, with a market value of $10 trillion, at least a third of which is in a tradable form. All the major hedge funds together couldn’t corner the market (though a consortium of all the world’s billionaires certainly could). And it certainly isn’t possible in the broader stock market, with a market cap of ~$90 trillion!
It has no ‘real-world’ purpose to back up its value
The other issue with Bitcoin is that it isn’t used for any everyday purpose. Stock ownership gives you a share of corporate profits, gold is as good as money and home ownership gives you rental income or a roof over your head. Even commodity holdings give you rights to things that have an underlying use like copper or oil or pork belly.
Bitcoin doesn’t do any of that. And you wouldn’t use it to buy things because you could well end up paying millions for a pizza. On the other hand, stores might not want to accept something that could turn out to be worth 1/3 it’s value in a month.
So the entire premise of Bitcoin is as a speculative trade, whose value is at the mercy of the easily-spooked market. At the end of the day, we could well be paying $40k just for a flash of electricity.
At the end of the day, we could well be paying $40k just for a flash of electricity
Institutional investing does not negate regulatory risk
Finally, the regulatory risks inherent in Bitcoin have not changed. Just because major investors are buying it does not mean the regulatory environment has changed. In fact, the last major crash was set off by the SEC not approving the application for a Bitcoin ETF.
Though, to be fair, another application is now pending with the SEC and the outcome could well be different this time.
Bottomline
I believe the extremely limited tradable supply combined with regulatory uncertainty practically guarantees that Bitcoin prices will remain on shaky ground. All it takes is for a couple of large investors to take profits or a piece of negative news.
And so, while I regret not getting in at $10k, I believe like with all markets an opportunity will once again present itself for getting in at a reasonable price. Let’s wait and see.
