I recently wrote about a unique win-win opportunity with Bitcoin Investment Trust (OTCQX:GBTC) that generated a double digit return over a few days based on the approval or rejection of the Winklevoss ETF (Pending:COIN). Based on the SEC statement, they are still not ready to approve a Bitcoin ETF but there are still great reasons to make a long term investment in Bitcoin directly.
Bitcoin can be defined in several ways depending on how the user views it: currency, payment processor, or a commodity. My goal is to discuss a list of catalysts that may eventually affect the Bitcoin price in a bullish manner. Clearly, there are significant risks with this alternative investment but, in my opinion, the reward justifies the risk.
- Historically, in times of crisis, gold has been the safe haven investment. People feel it's a safe asset to hold even though it has very little intrinsic value. Bitcoin has now been coined digital gold. There are several key advantages of Bitcoin over gold. It is a much easier asset to hold in terms of weight. A million dollars' worth of Bitcoin weighs dramatically less than the equivalent of gold. Additionally, Bitcoin is more liquid and frictionless than gold.
- It's just a matter of time that a Bitcoin ETF will be approved. When the ETF is approved, a flood of new funds will invest in Bitcoins. There's a limited supply (capped at 21 million BTC) and an increase in demand will result in a price increase which is simply economics 101. I'm not even accounting for the lost supply since many early miners have lost their private keys. There are several reasons funds may invest in BTC. The most compelling case is that Bitcoin provides a high risk adjusted return (high Sharpe ratio). It has also been proven to be negatively correlated with many asset classes. This can help a fund better diversify its portfolio.
- Bitcoin is a form of money that is easily transferred. Although transaction costs for Bitcoin have increased recently, it is very minimal compared to transaction costs for fiat currency in cross-border exchanges. It takes a few minutes to transfer BTC versus the average of 3 days to wire funds to another country. Fees for the foreign transfer can be a flat fee but most immigrants in the US incur significantly higher costs to send money overseas. The fees can range from 5% to as high as 30% of the total transaction amount. Bitcoin can become the backbone of the remittance system where the user doesn't even know BTC is used to transfer foreign funds. BitPesa is a company that has already implemented this solution in many African countries.
- Bitcoin will eventually become the accepted global currency. This has been discussed significantly in the past and it still hasn't gained much traction because all these catalysts take time. Fortune 500 companies won't even touch Bitcoin until the media starts reporting on this cryptocurrency accurately. There's too much of a negative stereotype associated with it. Most people in the US still think of Silk Road (known as the Ebay for drug dealers) when Bitcoin is discussed. Once that's eliminated, adoption of the cryptocurrency will increase. Law enforcement now understands Bitcoin better so they can take advantage of the pseudo-anonymous nature of BTC. Many large Fortune 500 companies that are operating in high inflation countries such as Argentina and Venezuela have great difficulty maintaining the value in the local currency. In addition, foreign exchange transfers, using Bitcoin will increase the speed and decrease the costs for companies.
- To dovetail the previous point, the media will start reporting on BTC accurately. The average person's perception of Bitcoin is the negative stereotype associated with drug dealers, hired assassins, and money launderers. The United Nations Office on Drugs and Crime reports approximately $3 trillion dollars are laundered every year. Bitcoin, with a recent market capitalization of around $20 billion, doesn't even make a dent in that conservative estimate. I'm confident the majority of laundered funds are still using cold, hard ,US dollars and not Bitcoins. (Although, the few Bitcoins that were laundered make great PR headlines.)
- A country will decide to establish Bitcoin as the country's sovereign currency. This one may only come to fruition after the occurrence of the above catalysts. There are already other countries who have outsourced their central bank roles through the adoption of another nation's currency. Ecuador is a good example where they only use the US Dollar. There are also several countries currently experiencing high inflation such as Venezuela and Argentina where the local citizens have already started purchasing Bitcoin. Despite the BTC volatility, they believe it is a safer storage of value since their local currency is definitely losing value.
The internet analogy has been used several times. Piggybacking on it, I believe Bitcoin is currently in the late 1990s of the internet boom. With some patience, I believe the market cap of BTC will be in the trillions to closely match the market cap of gold. If Bitcoin reaches a market capitalization of $7 trillion, each BTC will be worth approximately $333,333 each. As stated earlier, there are risks with this new asset class but my recommendation to friends is to purchase 3 BTC (approx. $3,900 as of April 2017). Assuming the majority of catalysts come to fruition in 15-20 years, you'll have a million dollars. If I'm wrong, I still think it will be your best performing investment. And yes, I'm recommending a buy and HODL (inside joke for Redditors). With all that said, CAVEAT EMPTOR! In full disclosure, I do own Bitcoins and GBTC.
Disclosure: I am/we are long GBTC.