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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