By Thom Lachenmann with Parke Shall
We have to admit that we didn't take Bitcoin seriously when it first hit the scene. Like many investors, we simply didn't understand it, nor did we understand what the appeal would be of a type of currency that was not regulated and not widely accepted. Here we are, eight years later, and Bitcoin is having arguably the most shining moment in its history as it is actually being used as somewhat of a safe haven by both Chinese investors looking to exit local currencies and investors that are looking to avoid the volatility of the Pound, post-United Kingdom exiting the European Union.
We say that this was Bitcoin's first real moment in the sun because the price of BTC appreciated more so than gold (on a percentage basis) after the European Union referendum.
In addition to moving to a two-year high due to the United Kingdom exiting the EU, BTC also has the advantage of the supply being cut in half in July of this year.
Miners will only be able to produce half of what they were previously able to produce. This limiting of supply is of course being done on purpose and is part of the mathematics that govern how BTC is created and when. Coindesk writes:
Of all the rules in bitcoin's code, few are as revered as the hard limit of bitcoin production.
The code dictates that 21 million coins will be released over the course of bitcoin's lifecycle. By limiting the total amount of bitcoins that could be created, Satoshi Nakamoto was able to establish a defined amount of available data, a revolutionary accomplishment in and of itself.
The limited production of bitcoins was, in a way, aimed at counteracting the endless printing of paper currencies.
The cryptocurrency's wide acceptance across the globe and continued constitution against a volatile economic backdrop continue to lend it credibility. When retail investors finally get an easy way to purchase BTC, we believe that this demand will still push prices even higher.
Don't get us wrong, we like gold a lot as well. We think gold is an "old-school" asset to be held as a hedge against catastrophe, and BTC could be the "new school" way to also hold a commodity that is increasing in use and acceptance and that has the potential to appreciate significantly over the course of the next 10 or 20 years. Some speculate BTC could eventually reach $1 million:
I have no doubt a Bitcoin will be worth $1 million USD, not so much because of the strength of Bitcoin as a global currency, but because of the inherent weaknesses in the US dollar going forward. Global support and confidence in the dollar is fading while Bitcoin continues to rise. "The Third World" hasn't even grasped the value of Bitcoin yet.
The billions of dollars invested is still 1-2 years from bearing fruit, making Bitcoin easier and more capable to use, worldwide. Bitcoin has proven its mettle, and it's still in the foundation-building stage of its development arc. It may take a decade, but Bitcoin value is not something worth worrying about, over the long run.
But we're not there just yet. We also have to realize the risk of loss in BTC is 100%. We are cognizant of that and have allocated our capital to BTC accordingly.
As major banks and central governments start to realize that block chain may be the next step for digital currency, Bitcoin will continue to appreciate. Bitcoin has the unique advantage of being the first widely excepted cryptocurrency and while others exist and are in use, Bitcoin is likely always to be the front runner and most sought out cryptocurrency in our lifetime (barring a disaster).
Bitcoin will have to withstand many further trials and tribulations before it can prove itself as a rock solid haven for capital in the face of volatility. Therein lies one of its major caveats. Bitcoin is dependent on the infrastructure that makes transacting it available. Unlike gold, which you can take home and physically store in a closet, Bitcoin relies on the global technological infrastructure to be in place and operating with efficiency at or above where it currently is today.
We think it's reasonable to take a small stake in Bitcoin that we are willing to put away and not think about for many years to come. We are not asking investors to allocate significant amounts of capital in Bitcoin, but we do think that it is prudent to have a percent or two allocated to precious metals and Bitcoin together to get the best of both "safe haven" worlds.
For the peace of mind that investors will get holding both of these assets as a small portion of their total holdings, we think it is worth the potential risk. We obviously realize that neither Bitcoin nor gold pay dividends and neither earn cash or generate cash. However, unlike equities, both of these financial assets are truly at the behest of supply and demand, as there is limited supply of each. For this reason alone, we believe it is worth having a small position in Bitcoin for the long term.
Disclosure: I am/we are long BITCOIN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We own Bitcoin and also have a long position in GBTC