Undervalued Report: Bitcoin
Remarkably cheap at less than 5% of the market cap of gold
Bitcoin has rocketed ~70% since the lows at the start of the year. Amid a banking crisis and signs that the Fed’s rate hiking cycle could be all but over, the bottom could be in. If I didn’t own a position, I would begin dollar-cost-averaging here, and I would back up the truck around the $20,000 mark.
Contents
Macro support for bitcoin
Sound money technology
Where are we in the Bitcoin cycle?
Have you missed it?
Final thoughts
Macro support for bitcoin
Growth of money supply assured
There has to be a growing number of currency units in the system to attempt to service the spiralling national debts. The supply of bitcoin, however, is completely fixed. There will only ever be 21 million bitcoin. As the money supply increases, scarce assets go up in price. As this continues to play out, and as the Bitcoin network gets built out, more people will realise the benefits of using bitcoin as a long-term savings vehicle. Simultaneously, the supply of new bitcoin is halved every four years. What does this do to the price?
Fed tightening cycle ending
Why is bitcoin outperforming year-to-date, amid a banking crisis? Most likely, the market is pricing in an end to the tightening cycle, lower terminal rates and a rising Fed balance sheet. Bitcoin still trades as a risk-on asset. In the case of a policy pivot, rate cuts or QE, bitcoin should benefit.
Banking crisis
It’s also possible that more investors are looking for alternatives to storing their money in banks: suddenly a self-custodied store of value doesn’t seem such a redundant idea! Bitcoin was born for such an event, being created out of the 2007-8 Global Financial Crisis.
A banking crisis always comes as a shock, as we are reminded just how fragile the system is: “an unsecured loan to a leveraged bond fund” (or loan portfolio) according to Custodia Bank CEO Caitlin Long. If the current value of a bank’s investments fall, combined with increased withdrawal requests, the bank can be forced to realise losses – resulting in insolvency and failure, as we saw in the collapse of Silicon Valley Bank.
We have seen some contagion from the US to Europe, with the demise of Credit Suisse, but it is as yet unclear just how much of a problem the unrealised losses on the banking sector’s bond portfolios are going to be. It may be that bitcoin is a beneficiary of banking crisis as people look for alternative ways of storing part of their money. If taking ownership of one’s private keys (as one should), bitcoin is self-custodial, it is a bearer asset – meaning it is not someone else’s liability – and there is no counterparty risk.
Admittedly, you have to be comfortable with the volatility, but for part of someone’s savings it is attractive as an insurance policy against financial crisis – rather like having a safe deposit box containing gold, although there are no costs to store it and it can be sent instantly and for a low fee.
Sound money technology
Limited supply
“Bitcoin is the hardest money ever created.” Hear me out.
The bitcoin supply is truly limited, with an all-time cap of 21 million units, of which over 19 million have already been mined, and access to some has been lost. Every four years, in what is known as the halving, the supply of new bitcoin – the mining reward – is halved.
Bitcoin is something that they are making less of every four years. What is more (and unlike gold) however high the price goes, no more bitcoin than the pre-set amount can be mined. If the gold price were to go to $5,000 per ounce, there would be a mining boom as new projects that were previously unprofitable suddenly became lucrative. The new gold supply, in turn, would exert downward pressure on the price until, once again, supply/demand was in equilibrium. This dynamic does not exist for bitcoin: however high the demand, there can be absolutely no relief from increased supply.
Bitcoin is unique
A common counter argument is that, although you can’t create more bitcoin than 21 million, you can create an unlimited amount of “crypto currency” – one can copy the Bitcoin protocol. This is true – it is possible to create more and more copies, but it is not possible to create more bitcoins recognised by the Bitcoin Network. Copies are not limited and therefore they do not challenge Bitcoin – limited supply is really the most essential point about sound money!
Bitcoin also has the greatest network effect, the longest track record, the best brand recognition, the best security, the most trust, the best developers working on the network… to the extent it would be very difficult for any crypto currency to overtake bitcoin at this point, especially as a store of value.
The history of the foundation of the Bitcoin network is that the lead developer (or team of developers), going by the pseudonym Satoshi Nakamoto, subsequently disappeared to let the network be truly decentralised. It has been running without him since 2011 and, were he to reappear, he would have no special power to alter the protocol. This state of affairs allows for a unique level of decentralisation, with no one able to alter the monetary policy of the Bitcoin network.
Where are we in the Bitcoin cycle?
We are only one year from the next halving, where the new supply of bitcoin that must be absorbed by the market is cut in half, from 900 per day to 450. Looking at past cycles below, the bear market bottom could be in, as in 2019 before the 2020 halving.
We likely still have some way up to go before tracking sideways until the 2024 halving. We are still well below the stock-to-flow line above. And, in my view, the last bull market was hampered by macro events – China banning bitcoin mining in 2021 and then rising interest rates in 2022. The macro now seems favourable, and it may be possible to get back close to all-time-high levels even before the next halving.
Have you missed it?
If wondering if you’ve missed it, considering the ~70% year-to-date gain and the $28,000 price tag per unit, I’d say that bitcoin is still very cheap and that we’re still early.
The market cap of bitcoin is only ~$535bn, where the value of total global assets is $900 trillion. Of that total, the $300tn in bonds and the $120tn in currency seem particularly vulnerable to outflows to bitcoin during a sovereign debt crisis.
For what bitcoin is – digital gold, protection against currency debasement and insurance against financial collapse – it is remarkably cheap at less than a twentieth of the market cap of gold.
Final thoughts
If interested in learning more about Bitcoin, Vijay Boyapati’s long-form article, The Bullish Case for Bitcoin, is an excellent introduction. Note, before taking ownership of bitcoin, it is necessary to research bitcoin security and self-custody to ensure you are prepared to store your private keys safely.
Thank you for supporting The Undervalued Newsletter!
With best wishes,
Timothy Lamb.
Blog: www.retailbull.co.uk
Twitter: @theretailbull
Disclosure:
The writer owns bitcoin at the time of writing.
Disclaimer:
This article is for informational purposes only, does not offer investment advice and does not recommend the purchase or sale of any security or investment product. Please see the full disclaimer on the About page.