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bitcoin store of value

cryptorevolution, disruptor, reports & analysis

Bitcoin as a Store of Value: Part 2

Earlier in the year we provided an analysis of Bitcoin’s role and potential as a Store of Value.  One can find that analysis at the following link:

https://cryptortrust.com/2016/06/28/bitcoin-as-a-store-of-value-where-1-really-adds-up/

Prior to catching up on where we stand currently, let’s review a definition of the term Store of Value so we clearly understand the intent here.  This is how Wikipedia defines Store of Value:

A store of value is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved. The most common store of value in modern times has been money, currency, or a commodity like gold, or financial capital.

The definition of Store of Value as a function is certainly easy enough to understand, but let’s not confuse simplicity with lack of significance.  An effective Store of Value needs to be easily and seamlessly retrieved, exchanged at a later time, and predictably useful when one does retrieve it for use.  Discussions over practical use and what is most likely to happen in a world dominated by technology and mobile connectivity can easily lead to a comparison of Bitcoin and gold and silver as a Store of Value.

Critics of Bitcoin tend to refer to how gold and silver continue to withstand the test of time and “hold their value”.  That is true.  The physical piece of metal, assuming it is not fake, will always retain some level of value.  However, it is more important to consider which options that we have now will perform the best as Stores of Value moving forward rather than the past performance and history of precious metals. 

Given that, let’s compare the performances of Bitcoin, gold, and silver as Stores of Value measured in USD and going back to September 1, 2015.  We will compare the price action from this date because in middle to late August of 2015 the PBOC (People’s Bank of China, or China’s “Central Bank”) started to very clearly and publicly reveal its intentions to devalue the Yuan.  Although we understand that nations always have and always will engage in “currency wars”, this verbal and written action by the PBOC ratcheted up the intensity.  We can see this is indeed the case simply by looking at the Yuan versus USD and the Yuan versus a basket of currencies representing China’s top trading partners since this time.

Here is the performance of each denominated in USD since 9/1/2015:

Bitcoin +305%

Gold +3%

Silver +9%

Naturally after major moves in prices people tend to ask if it is “too late” or if they “missed out” on an opportunity.  This raises the question of whether it is “too late” to effectively use Bitcoin as a Store of Value and where we are in terms of this entire experience with Bitcoin and cryptocurrency in general.  In short, how much potential still exists for the market value of Bitcoin to rise substantially?

This analysis contends that we are still very, very early in the game fully understanding that Bitcoin has been operational since 2009.  Bitcoin enthusiasts, early adopters, blockchain techie experts, and VCs tend to express frustration over a “lack of killer apps” or the purported failure of Bitcoin to “go mainstream”.  We will analyze what killer apps may appear next in another piece but regardless there is still an absolutely enormous amount of potential for Bitcoin to continue performing exceptionally well as a Store of Value.  In fact, this analysis contends it is likely that the “killer app” of Bitcoin will remain Store of Value for the foreseeable future because it has the most direct and significant impact on human nature and hence economic behavior.  Applications for the use of Bitcoin will continue to emerge but there is certainly nothing wrong with Bitcoin “only” being used by most as a Store of Value for the time being.

Part 1 of our discussion of Bitcoin as a Store of Value looked at merely 1% penetration of massive pools of funds such as bank deposits in China and global FX daily trading volume.  Obviously those factors are still present, but let’s veer into another couple of topics that could also play a strengthening role in the very near future.  An emerging battle between Bitcoin and gold, looming Bitcoin ETF approvals at the SEC (Securities and Exchange Commission), and the extremely intense battle against cash are three spaces that could very well shine bright lights on Bitcoin over the next several months and beyond.

Given the price performances noted above it is natural and highly likely that more and more people and investment professionals start to at least consider trimming exposure to precious metals and initiating exposure to Bitcoin.  Gold topped in 2011 and has been in a bear market since with the typical bear market rallies elevating levels of hope that “this time is different” and gold will soon instantaneously vault to $5,000/oz or $10,000/oz.  Perhaps gold will enter a new bull market at some point but the reality is that over the last 12, 24, 36, and 72 month periods, gold’s performance falls well short of that of Bitcoin.  Globally about $7 Trillion is stored in gold.  The GLD ETF stores about $30 Billion and there are several other ETFs related to gold or gold miners.  Bitcoin currently stores around $15 Billion.  As more people ask why they should not shift at least some funds oriented around gold into Bitcoin the size of the potential funds moving could substantially impact Bitcoin’s market value.

This analysis will not speculate on if or when either of the two pending ETFs for Bitcoin will or will not gain approval from the SEC.  Chances are that at some point there will be a way for individuals and institutions to gain exposure to Bitcoin through the status quo channels if only because of the desire of the establishment to profit from Bitcoin.  However, the key here is the potential for institutions to be able to enter into significant Bitcoin positions via an ETF eventually.  Currently there is no seamless and direct way for professional money managers to gain exposure to Bitcoin using OPM (“Other People’s Money”).  In most cases the charters and regulations governing their funds place very strict controls on what they can and can’t buy.  If institutions could quickly direct seven and eight figure sums into Bitcoin or even more this would have an enormous impact on Bitcoin’s market value in both directions.  People may not completely understand and absorb that unlike gold or silver money managers moving very large sums of funds can’t simply buy a large chunk of Bitcoin with the click of a mouse or phone call.  Professional money managers crave and need Alpha (the delta or difference between their AUM and fund’s performance and its benchmark).  Don’t be shocked if Bitcoin ETFs are used to try and generate Alpha.  This is a potential stimulus that is still sitting out there as a future catalyst.

Venezuela.  India.  Australia.  Pakistan.  These are not tiny countries with miniscule populations in the grand scheme of things.  Venezuela and India already banished certain bank notes literally at the drop of a hat and instantly created even more havoc for their citizens and economies.  Australia and Pakistan announced plans to do the same in the near future.  It is very obvious that this is not a crazy, hypothetical scenario and that Central Banks are and will continue their battle against physical cash (to see our prior analysis click here: https://cryptortrust.com/2016/07/07/real-reason-for-cash-ban-and-why-it-will-only-boost-bitcoin/ ).  Banning cash will only push more people into using Bitcoin as a Store of Value and even a Medium of Exchange as well.

Despite the exceptional performance of Bitcoin since 2009 as a Store of Value relative to all major currencies, we are still very early in the game.  The current market value of Bitcoin is a microscopic drop in the bucket in the global tsunami of fiat and liquidity sloshing around.  We have not yet even seen the impact institutions can have on Bitcoin and the War on Cash is just entering the tornado phase.  Shifting 10% of the $7 Trillion stored in gold currently is $700 Billion.  How high can Bitcoin’s market value ultimately rise over time?  We can’t answer that definitively.  How much DEBT IN TRANSIT (state sponsored, Central Bank issued fiat currency) can be exchanged for Bitcoin?

Stay focused on the basic fundamentals:

SCARCITY

STORE OF VALUE

UNIT OF ACCOUNT

MEDIUM OF EXCHANGE

PORTABLE

FUNGIBLE

DIVISIBLE

HARD TO COUNTERFEIT

EASY TO STORE

David Young

cryptorevolution, cybersecurity, disruptor, guides, reports & analysis

Real Reason For Cash Ban And Why It Will Only Boost Bitcoin

Governments and Central Banks really picked up the pace in the war on cash in the last couple of years.  Various former Central Bank and government officials openly declared the need to ban cash to stop “criminals” and “terrorists”.  The ECB (European Central Bank) earlier in 2016 formerly declared that it is literally starting to banish larger denomination bank notes.  All of these actions will only help raise more awareness and acceptance of Bitcoin and cryptocurrency.  While attempts to ban cash can only help Bitcoin adoption and awareness, a look at the real reason for the push to ban cash uncovers some alarming truths about the existing financial system.

Central Banks are in full blown panic mode.  The real reason why they are trying to ban cash is because there hardly is any non-counterfeit physical cash in existence.  This is true when we look at actual currency in circulation (bank notes and coins) relative to aggregate measures of digits in accounts such as money market funds, equities, and bonds.  Analyzing this data also magnifies how transparent Bitcoin is versus the fractional reserve and excessively levered current monetary system.

The Board of Governors of the Federal Reserve System reports on its own website that as of June 1, 2016 there is $1.46 Trillion of currency in circulation (https://www.federalreserve.gov/faqs/currency_12773.htm).  The Fed also states that of this $1.46 Trillion, $1.4 Trillion is denominated in Federal Reserve notes (FRN).  A Federal Reserve statistical release published on June 9, 2016 states that as of the end of April of 2016 seasonally adjusted M2 equaled $12.56 Trillion.

M2 is equivalent to M1 plus savings deposits, money market deposits, a portion of small denomination time deposits, and a portion of retail money market mutual fund balances.  M2 is clearly in part an assessment of what any rational participant would consider extremely liquid funds that one in theory could immediately convert to physical cash.  Physical currency only covers less than 12% of what the Fed purports to be the most liquid assets in the current financial system. 

The size of the equity market in the United States is roughly $20 Trillion and the bond market (corporate, municipal, state, and federal bonds) is pushing $40 Trillion.  M2 plus equities and bonds amounts to almost $75 Trillion, all considered very liquid assets.  Converting them to physical cash is another issue though, and this analysis is still ignoring outstanding derivatives, real estate, precious metals, and many other financial instruments and products.  Unlike when a Bitcoin user opts to send Bitcoin from a wallet to another address, it is entirely possible customers with FRN could face resistance when trying to liquidate accounts particularly when higher quantities are involved.  This is even more critical for the Fed if customers liquidate and demand physical cash.

If participants in increasing numbers started to demand liquidation of various types of accounts along with the possession of physical cash, the Federal Reserve would have an extremely serious problem.  The Federal Reserve would face a nightmare scenario where the general population started to question why they are being restricted from withdrawing bank notes from their own bank accounts.  It is almost as if an attempt to ban cash is a not so subtle nudge to at least explore the option of exchanging some fiat for Bitcoin.

Hence, the Federal Reserve needs to try and ban cash so nobody has the ability to demand it.  If all accounts denominated in FRN existed only digitally then a run on the system at least would not involve the demand for physical currency.  We have already seen restrictions on the size of ATM withdrawals and other withdrawal requests both across Europe and in the United States along with public trial balloons floated about an outright ban of cash.  The prospect of a very real and literal bank run in Italy surged to the forefront in late June and early July of 2016.  The existence of physical cash and coins is a very real threat to the existence of the Federal Reserve System.

This is all very bullish news for Bitcoin of course.  Bitcoin is a way to exit the Federal Reserve System which governs essentially all retail banks in operation in the United States.  Also of note is that given the sustained trade imbalances of the United States and reserve currency status of USD, plenty of this physical currency is located outside the United States.  This makes the potential challenge in demanding physical FRN even more severe in America while also spreading the risk into other nations.

The Federal Reserve is very aware of Bitcoin and even shifting its stance towards it over the last year, but there is no evading the fact that currency in circulation is merely a tiny fraction of all assets denominated in FRN.  Bitcoin allows owners to have complete control over their own money.  Perhaps none of us know for sure if governments will ultimately succeed in banning cash, but there is no doubt that it is under serious consideration.  The fact that the Federal Reserve needs to even consider this option tells us quite a bit about the health and viability of the existing financial system and the potential of Bitcoin to completely disrupt it.  So little physical cash exists the Central Banks have no option but to banish it and blame it on “terrorists” and “criminals”.

David Young

cryptorevolution, disruptor, guides, reports & analysis

Bitcoin as a Store of Value – Where 1% Really Adds Up

Amidst the constant search for the “killer app” and efforts by some to focus on blockchain, Bitcoin continues to perform exceptionally well as a Store of Value.  The proliferation of the ecosystem and emergence of new use cases will certainly impact adoption and market value, but perhaps being overlooked is how much massive opportunity still exists for Bitcoin’s role as a Store of Value.  Looking at two opportunities within the existing financial markets shows how even reaching merely 1% market penetration can place very significant upward pressure on the market value of BTC.

The global FX market trades about $5 Trillion per day.  Daily trading volume in USD for BTCUSD is a moving target given the price volatility and the questions about data reported by Okcoin and Huobi. Using data from bitcoinity.org for the last six months shows that aside from the two exchanges mentioned above the average daily trading volume from all other exchanges is about 168,000 BTC per day.  The price moved between $350 to around $780 during the time period and $565 is the midpoint.  At $565/BTC this yields daily trading volume of $94.9 Million.   Just 1% of the daily FX trading volume globally is $50 Billion (1% of $5T).

For BTCUSD trading volume to reach only 1% of the global FX market, total volume would need to increase by a factor of 526x.  Certainly that could happen in such a manner that the impact on the market price is minimal if the buying and selling balanced out in such a way, but with the supply creation mechanism of Bitcoin’s core existence, this is unlikely.  Given the momentum of cryptocurrencies and major issues facing fiat it is entirely possible that BTCUSD daily trading volume eventually reaches 1% or more of the global FX market.

We are already seeing meaningful spikes in daily trading volume when the price action accelerates and grabs the attention of more people.  Institutions are already looking into gaining more exposure to BTC and in fact can be forced into exposing a certain percentage of investment assets to any asset class that gains in stature and relevance regardless of the personal opinions of management.  The potential result is a massive pool of funds trying to jam itself into what is currently just a $10 Billion market cap.

Institutions and individuals seeking a currency hedge or more risk exposure in their FX portfolio will look to Bitcoin.  Unlike fiat currencies Bitcoin has an established track record as a Store of Value and mathematically enforced scarcity not subject to the opinions and decisions of a centralized group of humans such as a Central Bank.

This is attractive for investors not only due to Bitcoin’s supply dynamics.  Bitcoin not only doesn’t hang on every word from a Central Banker it also acts as a hedge against most if not all of what they are executing as policy.  As funds naturally spill over from the existing FX markets the limited supply of Bitcoins become even more scarce and valuable.  The looming Brexit scenario and inevitable avalanche of other nations looking to leave the EU only reinforces the likelihood that BTCUSD trading volume surges higher.  Keep in mind that the biggest trades in the BTC market take place OTC because the current exchange volume simply can’t absorb large seven, eight, and nine figure or larger USD trades without dramatically altering the price and causing slippage.  It’s likely the amount of coins available for sale is even lower than what is generally reported.

Chinese Demand and Yuan Devaluation

Bank deposits in China amount to roughly $22 Trillion.  Since the middle of 2015 the PBOC (People’s Bank of China) has been trying to simultaneously devalue the Yuan against a basket of currencies representing key trading partners and scare away speculators betting on such a strategic devaluation.  This is just one country among many countries facing challenges related to state-sponsored fiat.  The Chinese as a whole are no strangers to Bitcoin given the large presence of miners in China and China’s experience with Bitcoin in the 2012-2013 huge bull market.

If merely 1% of these funds sitting in bank deposits fled to Bitcoin even if only as speculation or a place to store value that is $220 Billion in funds versus the current market cap of about $10 Billion for BTC.  China is only one nation, granted a very large one, in a world where nations such as Japan and others are starting to see Bitcoin trading volume pick up speed.  Capital flight to evade devaluations and currency controls has the potential to make an enormous impact on BTC as a Store of Value.

More and more citizens in China, and any other nation, will see that governments have a horrendous track record of protecting the Store of Value component of state-sponsored currencies.  Inevitably more people will understand that the core tenets of Bitcoin enforce scarcity and that it is an excellent asset that can be saved, retrieved, exchanged, and predictably useful at a later time.  This will lead more people to ask why they are leaving fiat stored in traditional checking and savings accounts.  Just shifting 1% of the funds residing in such accounts in only China could vault Bitcoin’s market value, and performance as a Store of Value, higher by a factor of more than 20x.

The intent of this analysis is not to proclaim that instantaneously trillions and trillions of dollars will all try to flood into Bitcoin at the same time starting right now.  Rather, part of the intent is to revisit how very basic mathematics and very conservative assumptions can create scenarios where mathematically there is immense upward pressure on the market cap of Bitcoin.

Historically people used currency, precious metals such as gold and silver, physical assets, and securities like bonds or equities as a Store of Value.  The world has never seen another option whose scarcity is guaranteed by mathematics and not manipulated by a small, select group of humans.  Just very small adjustments made by more people and institutions over time will mathematically create demand for Bitcoin that overwhelms the supply of Bitcoin available at the current price.  The result will be a further resumption of the upward trend in Bitcoin’s market value thus reinforcing an increasing appreciation for and use of Bitcoin as a Store of Value.

David Young