Bitcoin – acceptance and accessibility
An asset still in its infancy
Estimates vary, but it’s reckoned that there are about 60m Bitcoin wallets in existence. That seems like a lot until you consider there are around 3.5bn smartphone users on the planet. Assume that smartphone ownership is a pre-condition of digital currency ownership and you have a penetration rate, very loosely, of 1.7%. It might have a network value of US$265bn* but Bitcoin is very much in its infancy as a competing asset class. What might be the factors that define its outlook from here? Let’s look at this in two ways: acceptance and accessibility.
Gaining institutional acceptance as a store of value
We find that investors who have looked at Bitcoin in any sort of detail are now prepared to take it seriously. That wasn’t the case at the start of the year. A store of wealth that is secure, borderless, in which central governments have no influence and which has a verifiably finite supply is, conceptually at least, enormously compelling. In a world where governments have been driven into financial profligacy, Bitcoin offers a new “hard money” narrative to accompany gold.
There are several factors behind this mood-swing. The coronavirus pandemic has been a game changer. The damage to economies wrought by widespread business shutdowns has resulted in vast debt creation, collapsing interest rates and money printing. This is a classic inflationary set-up and has resulted in investors seeking hard assets for shelter. The conventional 60:40 equity:bond savings portfolio faces obvious challenges when both asset classes are exhausted in terms of valuation.
At an operational level there is increasing acknowledgement that the architecture surrounding digital assets has evolved to meet enterprise requirements. When you have Fidelity providing custody you know the grown-ups have arrived. The emergence of seasoned investors like Paul Tudor Jones, Stanley Druckenmiller and Bill Mason as Bitcoin enthusiasts adds a further stamp of approval. Adoption of Bitcoin as a treasury asset by Microstrategy and Square and support from Paypal adds further credibility. I am also aware of a number of wealth management companies who are starting to “do work” on digital currencies, although whether “doing work” equals “taking action” is harder to know.
The Bitcoin network is healthy and growing
So at an institutional level, interest in Bitcoin as a store of value is unequivocally stirring. However, Bitcoin has dual functionality: a means of transaction (cash) and a store of value (gold). For the network to continue to evolve healthily it requires adoption at both these levels. Hoarding by billionaires isn’t necessarily healthy for the network. However, we continue to see positive trends in network activity. The number of new addresses is gently accelerating, running between 400,000 – 550,000 per day (see Glassnode.com) while we see a notable acceleration in the number of unique wallets being created (see Blockchain.com). Our own proprietary data at Bytetree.com, which looks at on-chain data to establish the healthiness of the network, also delivers a robust picture.
Acceptance at an institutional level and adoption at a user level are both moving in a positive direction. To connoisseurs of technology investing, this is an even more powerful cocktail than it first appears. This is because of the “Network Effect”. Think of Amazon, Facebook or Google. The more people that use these services, the more valuable they become (and the more they dominate and overwhelm their sector). But what is not so obvious is that this value grows exponentially. Adding one more user to a network adds the potential of multiple additional interactions, not just one. In the case of Bitcoin, the “FAANG of internet money”, this impact will also be amplified. On top of this we have a myriad of activity in the Decentralised Finance (“Defi”) world, a laboratory of creativity which seeks to mimic real world financial entities in digital form. This is all highly experimental and commensurately risky, but noteworthy as we think about the broadening of the digital ecosystem, and by extension its dominant currency.
Ease of access remains a problem
So we see a growing acceptance of Bitcoin as both a store of value and a means of exchange. But investing in it is not easy, whoever you are. Institutions, understandably, have a hard time getting comfortable with custody of digital assets, or sorting through the array of service providers to work out how to trade. Individuals have similar problems; my age group certainly struggles with the concept of their hard-earned savings sitting on a USB drive in a safe under the stairs. Let alone how to get it there in the first place.
At ByteTree Asset Management we are building a bridge between the world of traditional investment and the world of digital assets, allying the discipline of the former to the potential of the latter. We will deliver operational peace of mind, by surrounding our investment products with top service providers, for instance with insured custody of digital assets. Through our research work we also bring a thorough understanding of the underlying assets. This is rooted in the work that ByteTree.com has done since 2014 in taking unformatted data from the blockchain, converting it into usable metrics and back-testing the data to understand the drivers behind price. This proprietary information enables us to dispassionately assess Bitcoin and formulate investment strategies accordingly.
Finally, we seek to provide professional investors with strategies that are simple to understand and speak to a long-term investment timeframe. In Bitcoin’s case we believe that in 5-10 years the price has the potential to be many times higher than it is today, and we want to be exposed to that. But history also tells us that nothing is certain. Bitcoin has a history of eye-watering volatility. With every day that Bitcoin appreciates and expands as a network, it ironically gets less risky, but this doesn’t mean that the risk has disappeared. Fortunately, we have the tools to understand and monitor the health of the network and invest accordingly.
Acceptance and accessibility will drive network growth
Bitcoin is the dominant digital currency, which is now gaining traction as an investable asset outside the digital world. Recent performance alone, when it has behaved with regal serenity while both equities and gold have fretted, points to a huge underpinning of support and there’s nothing like price action to turn heads. That support will only intensify as the channels to invest in it become easier to navigate. Greater accessibility is a key component in the next chapter of the Bitcoin story. It’s still very early days, but it is coming.
*Bytetree.com adjusted network value 12/11/20
Charlie Erith started his career as an equity analyst with Cazenove & Co based in the Far East and variously lived in Hong Kong, Malaysia and Singapore between 1994 and 1999. He moved back to the UK at the end of 1999 and a year later assumed the role as Director of Sales for the Asian desk, servicing institutional clients throughout Europe. In 2006 Charlie moved to Boyer Allan Investment Management and became co-manager of the Boyer Allan Pacific Opportunities Fund, a long-short equity strategy with a focus on small and medium size companies in Asia (ex-Japan). In 2012 Mr Erith co-founded Stone Drum Partners and started the Asia Focus Fund, a long only strategy investing in companies in Asia ex-Japan. In 2015 he moved to Coupland Cardiff Asset Management and in June this year took up the role of CEO of newly formed ByteTree Asset Management.
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