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Perspective on Bitcoin’s Value Amidst Crypto Winter

Liz Louw
3 December 2018

“Back into the $20,000 price range by the end of 2018”, rang the predictions by cryptocurrency bulls. For many a retail investor, this wild speculation served as a hopeful mantra for pushing through the dog days of the year’s price recession. After the Black Friday-weekend flash crash with just over a month left before the New Year arrives, a surge back to near all-time high prices seems even less likely.

While prolonged bearish markets are emotionally painful for the entire industry, retail investors in particular risk endangering their nest egg by taking irrational action fueled by the media frenzy. To take a page out of the book of Berkshire Hathaway’s vice chairman, Charlie Munger:

“The goal here is not to be intelligent, but rather to avoid being stupid.”

The first step to avoid making misinformed investment moves is to sift through media reports to distinguish between rumour and fact to gain some perspective.

Gaining Perspective on Bitcoin’s Value in Present Scenario

The Global Economy is in Trouble

While the latest price slump has reinvigorated crypto haters in their cries of Bitcoin’s death, the prognosis conveniently ignores the fact that the crypto market is not the only one that has tanked over the past few weeks.

The US stock market is currently in free fall with the Dow predicted to drop another 2,000 points before it ever reaches top level again. Already 2018 gains have been deleted. Over the same period, Amazon dropped $56 Billion, Apple fell $51 Billion, Netflix lost $13 Billion (8%), Facebook capitulated $16 Billion, totalling in a $172 billion loss for FAANG stocks on October 10th, 2018 alone.

Many believe that cryptocurrency could someday replace the current monetary system with one that provides transparency, censorship resistance, financial inclusion, and a deflationary economy that would never need a bailout. In the present, however, the heritage of the legacy financial system has dealt investors across the board a weak hand.

The likelihood of an impending global economic crash informs investment strategies alike as risk factors tally up: high debt levels, reeling emerging economies, trade conflict, failing banks and more.

Commenting on the of these economic hazards, Michael K Spencer writes:

“Many of these risks are inevitable and setting up the likelihood of a major 2020 economic recession.”

With such warnings in the back of the mind and the concurrence of the latest crypto price slump with a flash crash in traditional markets, one has to ask if there is a bigger picture developing. Whether we are seeing the birth pangs of a new financial recession or the extension of the 2008 financial crisis that remains unresolved, only time will tell.

What is certain is that legacy monetary policy’s like QE that promised to invigorate the economy has proven inefficient, and that is time to review.

Cryptocurrency Fundamentals Remain Strong

While the prices of cryptos have slumped, the fundamentals have not retracted. And, given the inherent qualities of cryptocurrencies like Bitcoin, it is an excellent contender to tackle many of the dilemmas where the legacy system has failed.

Bitcoin is Still Better Money

“I tend to move my dollars into bitcoin, because why would I want this currency that’s tied to some political force when I have a currency that is going to be frictionless and global? I would much rather have a global currency than one that is sort of tied to a political force.” American billionaire venture capital investor, Tim Draper

We have written about some of the qualities that make Bitcoin valuable and its contribution to society priceless. To summarise:

Bitcoin is Finite

With a limited supply of 21 million coins hard-coded into the algorithm, growing demand will most certainly lead to an increase in price. As there are currently between 35 million and 70 million millionaires in the world (say that twice, fast!), demand is bound to outstrip supply without even factoring in retail investors’ cut. So long, inflationary fiat!

Bitcoin is Decentralised

Unlike the legacy monetary system that is centrally controlled by governments, Bitcoin is a distributed network of trust. Unlike current forms of currency that are held within traditional banking systems and governed by political processes, decentralised cryptocurrencies cannot be frozen, seized or confiscated.

Bitcoin has Utility

One of the core aspects that gives Bitcoin value and distinguishes it from the many scam coins we’ve seen, is its utility. Whether it is BTC as remittance layer and its potential to become digital gold or Bitcoin SV that functions as digital cash minus the fees, friction and restriction, it is the utility that gives Bitcoin value even when legacy investors like Warren Buffett cannot see it.  

To illustrate these characteristics on a practical level, Linda Xie (0x Project Advisor) explains in a twitter thread how she got her parents to understand cryptocurrencies:

Linda: “If you were to create ideal money from scratch (forget what we know now), you’d want it to be 1) Digital, because you don’t want to carry your coins or change around.
Parent: (nods head)
Linda: 2) Global, because you don’t want to exchange your money every time you go to a new country.
Parent: (nods head)
Linda: 3) Out of the control of third parties, because you don’t want things like governments or banks to tell you when you can use your money, take it away, or keep printing more.
Parent: Why?
Linda:
  • Some countries like China have very strict capital controls, and you can’t even move out your own money.
  • In history, women have been denied from even owning bank accounts.
  • You can’t move your money out when the banks are closed.
  • The government took people’s things during the Cultural Revolution in China just because they were educated.
  • There are almost 2 billion people who don’t even have bank accounts.
  • There are countries like Venezuela that are going through hyperinflation.
Parents: That makes sense.
Linda: All of those features combined is what cryptocurrencies are. It can help many people in the world. We are still in the early days, so it’s not clear yet what it will become, but the demand should be very clear
Parent: Yes, I understand.

Cryptocurrency is Best Performing Asset Class of Past Decade

On top of cryptocurrency’s potential to revolutionise the global monetary system, Bitcoin has also drastically outperformed stocks, bonds, currencies and commodities and the S&P 500 over the last ten years (CNBC).

“Bitcoin is down over 75% from its all-time high. It is still the best performing asset class in the last 5 years. It has dwarfed stocks, bonds, currencies and commodities since inception too. Ignore the noise, trust the code.” Anthony Pompliano, Founder and Partner at Morgan Creek Digital

When it comes to forecasting the near future of public equity, Morgan Creek Digital’s Pompliano holds a rather bleak outlook of between -3% and 3% for the next decade. Not so with Bitcoin.

Morgan Creek Digital’s Pompliano points out some important factors to consider even when crypto prices are down, are:

  1. That Bitcoin is the most secure transaction settlement layer in the world. Even though speculation has driven much of the price movements over the past few years, the underlying utility has immense long-term value for the global monetary system.
  2. Despite the immense price retreat over the year, it remains the best performing asset class over the last ten years.
  3. The significant performance of Bitcoin so far has been due to retail activity alone. Reports indicate that large institutions have started pouring money into the crypto market over the past year. Prices do not yet reflect this new capital as it entered via OTC channels instead of through exchanges. Other investment firms have announced their imminent entry to the market, including ICE’s Bakkt exchange, Fidelity’s institutional crypto products and services, Coinbase’s SEC-regulated institutional crypto products, and NASDAQ.

If the growth in the crypto market up till now has relied on retail investors alone, what lies in store when regulated infrastructure and patient capital (e.g. Andreessen Horowitz’ a16z fund) start flowing in?

Bears and Bulls - Par for the Crypto Course

“Tech that changes industries and markets doesn’t get built overnight. There are fits, starts, and failures. And value doesn’t always flow to the places we believe it will.
Value is being created by crypto assets and blockchain technology. That is an absolute statement.” Meltem Demirors, Chief Strategy Officer at Coinshares

It is reasonable to expect investors to suffer a high level of uncertainty and fear whenever markets see a significant drawback from all-time highs – especially for those who invested at the peak. Cryptocurrency, similar to every other market and specifically like nascent markets, will inevitably undergo its share of ups and downs. Over these periods of price depression, it becomes even more important to block out the media hype aimed at driving clicks and focus on the fundamentals instead. In the present scenario, it is clear that Bitcoin’s fundamentals have not backtracked along with the price. That thought alone should encourage investors to take a level-headed approach to investment decisions at this time.

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