Earlier this year, it seemed that everything that wasn’t DeFi was moving at a snail’s pace. Now that Bitcoin’s back in the spotlight again, we’re continuing our series on what makes it valuable to the world beyond its digital scarcity.
Previously, we introduced you to our main argument for Bitcoin’s value as a safe haven, using its recent adoption during the pandemic as well as its historical status as a reliable diversifier. In the past three weeks, however, institutional adoption has exploded, with Bitcoin skyrocketing along with it.
Because of this, we’ve pieced together this update for you so that you can keep abreast of the latest developments, including the current opinions of various industry leaders on Bitcoin’s recent performance and future outlook. With what follows, you’ll find it easier to understand both where Bitcoin’s headed as well as what still stands in its way.
The Foundational Case for Bitcoin: A Recap
What makes Bitcoin valuable beyond its digital scarcity?
If you’re aligned with the safe haven thesis, then you believe that it’s a fact that Bitcoin is working its way towards being a trustworthy portfolio diversifier and treasury reserve. Additionally, to be a “safe haven,” an asset needs to be proven to work to protect both retail and institutional portfolios during times of economic chaos.
Right now, gold is quite possibly the most popular example of such an asset in practice.
As an analyst for Seeking Alpha as well as many others points out, however, there’s actually a strong case against gold being a reliable safe haven. In their most basic definition, safe havens have to be stores of value. That means that even when other markets are crashing, they need to show that they can retain value. Looking at the graph below, it’s fairly easy to see why gold doesn’t appear to fit that mold.
What’s most important to note in the above image is that gold’s returns have been excellent, particularly from 2000–2014 where they’ve reached up to 100%. Still, simultaneously, it hasn’t been able to demonstrate consistent performance as a store of value. When the chart below is taken into consideration, that becomes crystal clear.
As you can see, over the past decade, gold’s gone up by as much as 27.74% in a year and down by as much as -27.79% in a year. While some upside volatility is good for a store of value, conversely, too much downside volatility isn’t, because that means the asset in question can’t be trusted as an effective savings account (store of value) during times of stress.
So then what’s gold’s upside?
Gold’s upside is in the faith that the global population puts in it, as well as in the historical returns that it continues to provide. As long as people continue to make money with gold positions over the long-term, then it’ll continue to be seen as a safe haven, despite its volatility. While we, at NBX, believe in gold’s value, we also believe that Bitcoin provides a better way forward. To understand why that’s the case, it’s important to consider the recent developments related to its institutional adoption, alongside the opinions of industry experts on where it is now and where it’s going.
Is Bitcoin a Safe Haven?: Experts Weigh In
Over the past three weeks, several experts with varying backgrounds in the crypto space were asked they think of Bitcoin as a safe haven as well as what they think may stand its way. Through taking in their aggregated opinions, you’ll find it easier to understand the consensus on Bitcoin’s value at this point as well as what roadblocks might still oppose its ascent as a safe haven.
Jason Williams, Co-Founder of and Partner at Morgan Creek Digital, a digital asset-focused investment fund- Jason was asked: “What’s your bull-case for Bitcoin as a safe haven?” He responded:
“Bitcoin could hit 1–3M dollars in the next 5 years. People have no idea what it will look like when large banks and countries start holding bitcoin in their treasury.”
To this, he also added that Bitcoin’s digital scarcity is a key feature in its continued growth across institutional contexts. If you’ve read any of our previous articles on Bitcoin’s value, then you know that we, at NBX, believe that digital scarcity is the crux of Bitcoin’s value, alongside its efficiency as a diversifier, among other factors.
In other words, to pin down Bitcoin’s complete value proposition is a complex undertaking, which is why it’s important to nail down aspects of it that we haven’t mentioned yet.
Jeff Booth, the author of “The Price of Tomorrow”: With the above in mind, Jeff Booth was asked: “What, in your mind, is the biggest advantage of Bitcoin in today’s environment?” He responded:
“If I had to pick just one advantage, (there are many), it would be its portability which will allow it to serve as a lifeboat to the coming economic storms. By portability, I mean that when governments confiscate your money -(and they will) through inflation, capital controls, taxes, or otherwise, most people won’t see it coming because all of their wealth is concentrated in one currency. It is why people get stuck as revolution(s) (caused by failing economic conditions) take hold. Their wealth becomes trapped. With Bitcoin, if you can remember 12 words, you can move your wealth anywhere in the world.”
Like Jason’s, Jeff’s bull-case for Bitcoin’s continued adoption is one that speaks to Bitcoin’s foundational qualities. It was and always will be the first workable cryptocurrency, which also means that it will be the first improved form of money in terms of portability.
Bitcoin as a Life Raft: Raoul Pal’s Case for Bitcoin’s Value
Now consider the idea of portability as described by Booth, alongside Bitcoin’s digital scarcity and the fact that it can’t be manipulated by any government or institution. These thoughts, together as a thread, lead to Raoul Pal’s Bitcoin thesis which has exploded onto the scene this year.
Raoul Pal, for example, recently posted a video titled “The Bitcoin Life Raft: Bretton Woods 2.0,” which serves as a long-form version of the ideas that Booth communicates above. In it, Pal points out that the “scale” of the current global economic stimulus “has been shocking” and it will continue since the current economic situation will get worse before it gets better.
To truly stop a recession from becoming a widespread economic collapse, it is likely that as the IMF has already proposed, the world will become underpinned by Central Bank Digital Currencies or “CBDCs.” With this thesis in mind, Pal goes on to posit that this is because “central banks want to be able to give people money directly” but “they can’t do that right now.” In the current fiat-driven system, all money flow has to happen from the central banks on down to eventually reach the average individual. If central banks were able to create and distribute CBDCs en-masse, they would be able to theoretically expand their balance sheets forever since they would then be in charge of both creating and distributing money that governments give value to. At that point, Pal appears to posit that we would all be stuck in a new monetary system in which nothing is anonymous and behavioral economics rule the day.
For now, what he concludes is that Bitcoin is a way out of that future due to its digital scarcity and the fact that it can never be manipulated by the IMF or any single government and it’ll always be digitally scarce. What’s even more important than this conclusion, however, is Pal’s suggestion near the end of his video that the shift to CBDCs will inevitably sacrifice the US Dollar as a global reserve asset over the long-term. So, if that comes to pass, it’s logical to conclude that the global population will be looking for a way out or “life raft” as currencies begin to become useless.
It’s this thesis that serves as an excellent umbrella for the bull cases that everyone else above has offered. When asked to sum up his thoughts for this post, Pal responded:
“Bitcoin’s the living example of Metcalfe’s law, but in trust.”
This is an idea that’s been echoed through countless sources but began in Bitcoin’s white paper. If you’re familiar with it, then you know that it has revolutionized trust through introducing what may be termed “trustless trust” related to the movement, storing, and ownership of money. Put that together with the idea that Metcalfe’s law says that a network’s value “is proportional to the square number of its users” and you’ve got a basic understanding of what Pal’s driving at here. To dig deeper requires analyzing Pal’s entire thesis on the leading cryptocurrency, which we’ll do in our next article. For now, however, consider this additional quote from his recent groundbreaking video on “The Bitcoin Life Raft and The New Bretton Woods.”
“As I have said, we are at the $200 billion market cap in Bitcoin right now. As more people come into the space, the more the price goes up, the more the market cap goes up, the more it attracts people. It is going to create a Soros-style reflective loop of which we have never seen before.”
This speaks to the summary that he provided us with above, shining more light on it. Generally, the idea that price and market cap increases drive adoption and vice-versa is a widely accepted theory that seems to hold true. This year, for example, the recent boom in institutional adoption has largely come his month, after several months of a Bitcoin bull market that may still result in the asset supplanting 2017’s all-time high. This doesn’t mean that price increases are directly due to institutions buying Bitcoin, in fact, far from it. What it does mean is that social sentiment(behavioral economics) rules the day.
To be clear, this refers to both positive and negative events driving buying and selling pressure at a powerful level. In a future article, we’ll dig further into sentiment but for now, it’s important to remember that because of the power of all sorts of news on the crypto markets, price increases are key to growth in positive sentiment and adoption.
Tracking whether this growth loop does result in Bitcoin being the world’s leading safe haven means following certain key indicators such as Bitcoin’s effect on a portfolio’s Sharpe ratio, its long-term trend in volatility, and its aggregated institutional adoption.
What stands in Bitcoin’s way as of now?
Alongside tracking the above metrics in importance is understanding the major roadblocks that Bitcoin currently faces. Below, we’ve compiled the opinions of two influencers, which also generally represent the industry consensus on the topic from traders and investors alike.
Crypto Michaël(Michaël van de Poppe), a full-time trader on the Amsterdam Stock Exchange and frequent contributor to Cointelegraph and other publications was asked: “what major roadblocks stand in the way of Bitcoin breaking its all-time high in your mind?.” He responded: “Traders don’t really mind what movements the markets make, as long as there’s heavy volatility. For investors, however, they do enjoy the recent momentum on the markets and the adoption from listed companies towards cryptocurrencies and Bitcoin. This adoption and interest show the likely maturing of the markets alongside the acceptance of bigger entities towards Bitcoin as a real asset class. -There’s a major roadblock and that can be classified by a potential crisis kicking in. If there’s another coronavirus pandemic occurring through which countries need to have a strict lockdown, causing panic all over the world, a renewed crash of the markets can occur. Such a crash would cause a need for liquidity, causing investors to sell their other assets (like Bitcoin) to cover their losses on other markets. Such a move could drive down the price of Bitcoin.”
The key point in the above, for our purposes, is that Bitcoin’s biggest test will be its performance in the next crisis encounters. As Michaël suggests above, Bitcoin’s still largely considered as an alternative asset and not exactly as a portfolio staple by those who aren’t cryptocurrency insiders. For this to change, it will have to continue on the path that it’s on, losing volatility, while gaining value through continuous adoption.
Hasu(on Twitter @Hasfl), a well-known industry researcher, was asked essentially the same question and said: “I think the main thing holding BTC back — if you can even call it that — is time. It’s very hard to compete in the market for storing people’s value if your competitors have been around for centuries and you’re barely a decade old, leveraging a technology that is itself still unfamiliar to many people (the internet). So I think, just give it time. Putting value in a safe haven asset requires trust, and trust takes many years to build. A generation that has grown up with BTC and doesn’t know the world before it will have a completely different trust in it than people who grew up without the internet itself.”
Think about the trust that’s placed in our current banking systems? How long did that take to take hold? Conversely, how long would it take to be dismantled?
As Hasu suggests, for Bitcoin to reach the point of being used by most or all of the world, we’re going to need to think long-term. With this, comes the added notion that further educational efforts need to be made, specifically with regards to those who are used to the status quo and even possibly “grew up with the internet itself.” Currently, those groups of people don’t understand Bitcoin’s value because it doesn’t fit into the model of transacting, saving, and investing that they’re used to.
To change this, all of the dedicated individuals and companies in this space will have to continue to do all they can to attract retail investors en-masse and help them to stay. In other words, education is key, from retail investors on up.
For Bitcoin to truly hit the big time, it will need to be widely adopted amongst institutions as well. This may even predate the coveted coming of widespread adoption amongst the general populace because institutional confidence historically leads to retail confidence.
Just look at gold, for example.
It wasn’t until 1975 when the Gold Reserve Act went fully out of force in the USA that it became a publicly traded investment vehicle. While banks and institutions tend to drive most in-flows into gold, their confidence in it as a reserve asset has caused its adoption amongst average investors to balloon to all-time highs, which has resulted in phenomenons like investors in India owning $1.1 trillion in gold (as of 2019). Even so, as one of the world’s leading safe havens, gold is ripe for disruption.
To Unseat Gold, Institutions Will Need to Lead Retail Investors
As we’ve been suggesting throughout this piece, there’s nothing better than Bitcoin to spearhead that disruption and it logically follows that institutions could lead the way.
In our last post on Bitcoin, we mentioned Square and MicroStrategy’s recent moves (among others) to adopt Bitcoin as a treasury asset(safe haven) and what it could mean for future institutional adoption. With the help of the Crypto Curator, we’ve compiled an overview of some of the most recent institutional involvement that has occurred since then.
Leading the way are the announcements that JP Morgan and Paypal have both flipped their past stances on Bitcoin, with the former touting it as a “preferred alternative currency” amongst millennials and the latter announcing their upcoming support for buying, selling, and holding Bitcoin as well as few other cryptocurrencies. With this announcement, Paypal added that they were trying to do their part to essentially educate the global populace on the value of cryptocurrencies. For now, only time will tell what exactly that entails.
Still, JP Morgan and Paypal’s newfound support for Bitcoin, in particular, has caused it to garner a wide array of press outside of the crypto space, which in turn, has played into the current bull market. If you’re wondering why they’ve decided to change teams now, it’s reasonable to expect that Bitcoin’s performance this year as well as the voices of Jack Dorsey, Michael Saylor, Mike McGlone, Paul Tudor Jones, and Raoul Pal, as well as many others, have played a significant role in the process.
With that all of these individuals and institutions appear to agree on is that Bitcoin’s absolute scarcity is its defining characteristic. On the other hand, as of now, not all of the institutions who believe Bitcoin has some sort of value also consider it a safe haven. If, however, matters continue as they are, it seems inevitable that the doubters will end up having to treat it as such.
Bringing it all Together
Remember that nothing’s set in stone and that for Bitcoin, it’s early yet. As Mike McGlone of Bloomberg has pointed out, for the short-term, crypto’s leading asset is likely to continue to mirror gold’s rise.
Despite this, it’s clear that the world’s catching on to its value in a major way this year, across both retail and institutional sectors. What this trend ends up doing to Bitcoin’s price by the close of this year, only time will tell.
No matter its status by this year’s end, one thing is clear. The heart of Bitcoin’s value is its absolute digital scarcity, together with the fact that it exists outside of the fiat-driven global financial system and can consequently work as a bet or hedge against it. One point that hammers all of this home is Robert Breedlove, the CEO of Parallax Digital’s response when asked: what, in your mind, speaks most directly to Bitcoin as a safe haven?
“Bitcoin is the first social institution in human history with laws that cannot be corrupted: there will never be more than 21 million Bitcoin, only the owner of a private key can move their Bitcoin, and (when properly custodied) Bitcoin cannot be forcibly confiscated. Bitcoin is the only money maximally resistant to misappropriation in a world increasingly under siege by overreaching governments.”
First and foremost, this quote is an excellent summary of what makes Bitcoin work as a safe haven and therefore also aligns with the theses of Jeff Booth, Raoul Pal, and many others. In short, Bitcoin’s value as a safe haven boils down to Bitcoin’s digital scarcity, decentralized governance, and allowance for self-custody. While we’ve spoken of the first feature at length, the second and third may bear some explaining.
By decentralized governance, we’re referring to the fact that miners verify bitcoin transactions and create new bitcoins, and because of this, they also end up owning them and transacting with them. So, overall, unlike any other currency, Bitcoin is controlled by one class of its users, leading to the term “decentralized.” It’s this decentralization, as well as the ability to “self-custody” or always own your bitcoins at all times that makes Bitcoin an opportunity of a lifetime since its supply can also never be manipulated. Knowing all of this, you now understand the crux of Breedlove’s thoughts as discussed above.
Still, you might find yourself wondering: how does all of this lead to Bitcoin being trusted as a safe haven?
As Pal and Booth posit, because of all of the factors that Breedlove mentions, it’s becoming the most reliable bet against the rest of the global financial system or a “lifeboat.” When this will translate to Bitcoin being a household name is anyone’s best guess. Generally, with the trajectory that it’s taking, we at NBX are looking at the long-term in that respect (5+ years).
Whatever its time horizon turns out to be in the end, three things are crystal clear based on all of the leading cases for Bitcoin’s value. First, it will always be scarce so as long as demand increases, price should increase a significant amount with it and hit new floors. Next, as the Bitcoin markets become less narrow or, in other words, more balanced in terms of how many retail investors exist versus whales or institutional investors, its volatility will stabilize. Judging by data from this year, we may already be on that road.
As we mentioned in our last post in this series, Bitcoin volatility has been trending downward throughout its history and is at an all-time low as of this year. Whether or not this sticks around remains to be seen, especially after global markets pick up and COVID-19 is largely behind us. Because it’s both hard to tell when that turnaround will occur (even in general) and Bitcoin’s still largely event-driven, it’s better to consider careful investment strategies like dollar-cost averaging, rather than throwing more money than you can afford at it as it rises.
If you’re not familiar with what dollar-cost averaging is, check out our post on the subject here to get up to speed.
For now, just as the first post of this series was supposed to be the foundation for all explorations of Bitcoin’s value, you can consider this as the first story of the effective house we’re building. If you keep the previously discussed opinions under consideration, including the idea of Bitcoin being, as Robert Breedlove puts it, “the discovery of absolute scarcity,” then you’ll find it easier to develop a well-rounded case of your own for Bitcoin’s value.
Where are we headed next?
It goes without saying that the ideas above make up the leading cases for Bitcoin’s value, especially as a safe haven. Still, there’s a lot more to them, which is why you can expect more content from us at NBX that explores Bitcoin’s developing value, starting with a deeper dive into the theses of Robert Breedlove, Raoul Pal, and Anthony Pompliano, in particular. Once you’ve read that article as well, you’ll have an even better of a grasp of why Bitcoin may be seen as a life raft or a “bet against the system.”
In the end, the ultimate goal of all of our Bitcoin-related content is to be there with you on your journey as you make your own judgments on Bitcoin’s value. If that interests you, follow our blog here, while also checking out our Knowledge Base and making sure to stick with NBXHub on Twitter, which is our content epicenter.
Norwegian Block Exchange (NBX) is a pioneering, forward-thinking, and client-oriented Norwegian cryptocurrency exchange, custodian, and payment system. Trade with us on nbx.com, follow us on Twitter or Facebook📲✔️
Disclaimer: Content provided does not constitute financial advice.
Special Thanks to Raoul Pal, Jeff Booth, Robert Breedlove, Crypto Michaël, Crypto Curator, Hasu, and Jason Williams for providing time and effort to this piece. You can check out their respective efforts for the space by clicking the links attached to their names here and throughout the piece.