From social experiment to digital gold: analyzing the value of Bitcoin from multiple perspectives

Analyze the attributes and value of Bitcoin from the perspective of currency assets, equity assets, and digital gold.

digital gold
Social experiment from the financial crisis

Looking back to 2008, the capital market was in an unprecedented crisis.

After the collapse of Lehman Brothers, the financial crisis broke out in the United States and spread to the world.

In response to the financial crisis, the Federal Reserve began to cut interest rates.

On December 16, 2008, the Federal Reserve announced that it would reduce the federal funds rate to an ultra-low level of 0% to 0.25%, officially entering the era of zero interest rates. Fund interest rates have dropped significantly.

Since there is no room for interest rate cuts, the Fed subsequently adopted large-scale purchases of U.S.

Treasury bonds and mortgage-backed securities and other unconventional monetary policy tools to depress long-term interest rates, stimulate the economy, and inject liquidity into the market, thus opening an unprecedented quantitative easing policy.

From the end of 2008 to October 2014, the Fed issued three rounds of quantitative easing policies, with a total of approximately US$3.9 trillion in assets purchased. The Fed’s assets as a percentage of GDP rose sharply from about 6.1% at the end of 2007 to 25.3% at the end of 2014, and the balance sheet expanded to an unprecedented level.

Figure 1 Changes in Federal Funds Benchmark Interest Rate in the Past 20 Years Unit:%

 

After thinking about this periodic economic crisis in human history, on November 1, 2008, a mysterious cryptography geek under the pseudonym Satoshi Nakamoto posted on a secret cryptographic review group The Bitcoin white paper “Bitcoin: A Peer-to-Peer Electronic Cash System”.

This is a new idea of ​​electronic money, and the concept of Bitcoin is born. Two months later, in January 2009, Satoshi Nakamoto personally created the creation block of Bitcoin on a small server in Helsinki, Finland, and received the first 50 Bitcoin reward. Thus, Bitcoin was officially born.

The revenue champion created in the era of big water release

In 2020, the once-in-a-century new crown pneumonia epidemic hit the global economy hard.

The blockade measures of various countries once caused a large-scale economic shutdown and the unemployment rate soared.

The GDP decline in the second quarter generally hit a historical extreme. The Global Economic Outlook issued by the International Monetary Fund in October predicts that the global economy will shrink by 4.4% in 2020, which is equivalent to 7 times the decline in 2009 and the worst recession since the Great Depression in the 1930s. The World Bank also predicts that the global GDP will grow negatively by about 5.2% in 2020.

Among the 189 countries, more than 170 countries will experience negative growth, and the decline will be more than twice that of the 2008 subprime mortgage crisis.

Looking back at March 2020, the U.S. stock market broke four times in 8 consecutive trading days.

This is an unprecedented situation; the Dow Jones Industrial Average fell by 13.7%, the price of Brent crude oil futures fell by 55.0%, and the yield on the 10-year U.S. Treasury fell by 1.13% dropped to 0.70%.

In response to the crisis brought by the new crown virus, central banks represented by the Federal Reserve implemented unprecedented ultra-loose monetary policies to inject liquidity into the market.

In March of this year, the Fed cut interest rates by 150 basis points twice in 12 consecutive days and lowered the benchmark interest rate to 0-0.25%. After the Fed cut interest rates, it also announced the beginning of an unlimited quantitative easing policy.

In the following few months, it issued an additional US$4 trillion, and the balance sheet expansion accounted for two-thirds of the total expansion of the global central banks. According to statistics, 22% of the historical U.S. dollar was printed in 2020. As can be seen from Figure 2 below, the Fed’s base currency supply will increase rapidly in 2020.

Figure 2 Changes in the base currency of the Federal Reserve Unit: million US dollars

Times make heroes. The era of big water release created the revenue champion of Bitcoin. In 2020, Bitcoin’s annual growth rate reached 318%, significantly outpacing all major asset returns.

Figure 3 The return on major asset classes in 2020 Data source: Messari, JP Morgan

 

The era of institutional investment in Bitcoin

In 2020, many countries have adopted a large-scale release to stimulate the economy.

Bitcoin, which has anti-inflation properties and is extremely scarce, is regarded as an investment choice to hedge against the declining dollar and long-term inflation risks.

Institutions began to rush into the Bitcoin market frantically, and there are many listed companies among many institutions.

Companies such as MicroStrategy and Square directly purchased a large amount of Bitcoin.

Bitcoin mining companies Riot Blockchain, Hive Blockchain and Hut8 Mining Corp participated in mining Bitcoin by purchasing mining machines; in October 2020, payment giant Paypal supported Customers directly purchase, hold, and sell digital assets such as BTC and ETH in Paypal and Venmo applications, opening up a wider range of retail channels for the industry, and Bitcoin has risen sharply.

PayPal CEO Dan Schulman said in an interview that there will be more and more use cases of digital assets, which will enable Bitcoin to gain a broader consensus.

MicroStrategy founder and CEO Michael Saylor stated that he has purchased 88,000 bitcoins through MicroStrategy and entities controlled by him.

At the current price of about 33,000 U.S. dollars, its Bitcoin holdings are worth more than 2.9 billion U.S. dollars.

According to the data of The Block Research, the bull market of Bitcoin in 2020 has made the stocks of listed companies related to digital assets fruitful. Among them, Galaxy Digital rose by 952%, Microstrategy rose by 166%, and Square rose by 239%.

It can be seen that the purchase of bitcoin by listed companies can not only obtain the value-added income of bitcoin, but also improve the performance of stocks. It is believed that more listed companies will enter the digital asset market in the future.

Figure 4 Share price growth of Bitcoin and related companies in 2020

 

Counterattack against traditional finance

According to real-time data on January 4, the market value of Bitcoin reached 612 billion U.S. dollars, and this market value has ranked among the top 10 listed companies in the market value list.

On December 26, the price of Bitcoin rose to 25,000 U.S. dollars, and its total market value surpassed the global market value.

The market value of Visa, a credit card clearing service network; on December 31, the price of Bitcoin exceeded $29,200, and its market value surpassed that of Berkshire Hathaway founded by Buffett.

Traditional financial views on Bitcoin have also changed with its performance. The previous report released by JPMorgan Chase believes that there is still a lot of room for growth in Bitcoin in the future. Visa is also actively cooperating with cryptocurrency companies around the world. More traditional financial capital is involved.

Figure 5 Comparison of the market value of Bitcoin and listed companies Data source: AssetDash

 

Digital gold

Currency is naturally not gold, but gold is naturally currency.

From 560 years ago to the end of the Bretton Woods system in 1971, countries around the world have used gold as a single currency or one of its currencies.

Gold is a metal discovered and used earlier by mankind. Because gold is rare, special and precious, it has the title of “King of Metals” and enjoys a reputation unmatched by other metal species.

With the development of society, the economic status and application level of gold continue to change, but it still occupies a place in the international reserves of various countries.

It is a special commodity with currency, commodity and financial attributes at the same time.

According to international financial statistics in December 2020, gold has a relatively high proportion of foreign exchange reserves in the United States, Germany, Italy and France. As the scarcity of Bitcoin surpasses that of gold, central banks in the future may include Bitcoin as a reserve asset.

Ray Dalio, Co-Chairman of Bridgewater Fund, said in an interview that Bitcoin and other digital assets have established themselves as alternatives to gold assets in the past decade; JP Morgan Chase pointed out in a report that Bitcoin is Cannibalize the demand for gold ETFs. Since 2019, the market’s demand for Grayscale’s Bitcoin trusts has exceeded the sum of all gold ETFs.

Figure 7 Comparison of demand between Grayscale Bitcoin Trust and known gold ETF Data source: Bloomberg, JP Morgan

 

Bitcoin future price outlook

The perspective of monetary assets

Judging from the comparison of the market value of the money supply in circulation in major countries around the world and the market value of Bitcoin, the current market value of Bitcoin is at the 16th place; the money supply of central banks is adjusted according to economic development.

The maximum supply is unpredictable, while the maximum supply of Bitcoin Only 21 million pieces are available.

According to static data calculations on January 4, if Bitcoin reaches US$41,000, it can surpass the current market value of Russian rubles and Thai Baht; if Bitcoin reaches US$100,000, it will surpass the market value of Australian dollars.

Figure 8 Comparison of the issuance scale of Bitcoin and other countries’ currencies. Data source: FiatMarketCap

 

The perspective of equity assets

Compared with the current top-ranked companies in market capitalization, if Bitcoin rises to $36,000, it can surpass Tesla’s market value; if Bitcoin rises to $121,500, it can surpass Apple’s current market value.

We believe that as a new type of asset, Bitcoin has greater value than traditional equity assets.

In addition, the blockchain has guided the technological direction of the Internet’s development from the Internet of Technology to the Internet of Value. Digital assets such as Bitcoin and Ethereum will become the biggest value carriers in the Web 3.0 era.

If the market value of the current IT giant FAANG is used as a reference, the price of Bitcoin may be able to exceed $290,000 in the future.

The perspective of digital gold

As a means of storing value, gold is often not a good circulation medium.

Similarly, currencies that are more excellent as a means of circulation, such as legal currencies used around the world, are not so reliable as a means of storing value. Bitcoin has both the attributes of stored value and circulation.

At present, the average daily transaction volume of the Bitcoin market is close to 100 billion U.S. dollars, a year-on-year increase of about 560%. With the institutional development of the market and the construction of a multi-level capital market (spot, futures, options and other derivatives trading markets), the liquidity of Bitcoin will gradually follow the gold market. Currently, the market value of physical gold is approximately US$9 trillion.

If the market value of Bitcoin reaches this level, its price will exceed $420,000.

In the 2008 financial crisis, the only asset people could choose to hedge against inflation was gold.

Now, Bitcoin, which was conceived in the economic crisis, has become a better choice, especially after this year’s halving, its scarcity is once again known to the world. As an emerging asset, Bitcoin has gained more and more consensus on Wall Street.

In addition, the current demand and supply relationship of Bitcoin has changed significantly, and the long-term appreciation potential of Bitcoin is expected to be recognized by more mainstream institutions and investors.

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