Warren Buffet, the oracle of Omaha, famously called it rat poison squared and predicted that it will come to a bad ending with almost certainty. And JP Morgan CEO Jamie Dimon informed the markets that he has always been opposed to bitcoin as the only true use case is for criminals, drug traffickers, money laundering, and tax avoidance.
Mr. Market seems to have a different opinion. Since Satoshi Nakamoto first published the White Paper entitled ‘Bitcoin a Peer-to-Peer Electronic Cash System’ on October 31, 2008, Bitcoin has undergone an impressive transformation. From an illiquid and speculative niche asset jumping from $7.000 at the start of 2020 to over $64.000 in November 2021, only to plunge by 65% to below $17.000 in early 2022, it has transformed into an asset class that has started to become mainstream and where liquidity and volatility are poised to improve drastically over time.
The defining event was the approval by the SEC of 11 spot Bitcoin ETFs (exchange traded funds) including applications from Blackrock, Fidelity and Van Eck on January 11 this year. This has given enhanced legitimacy to the asset class and allowed these institutions to offer Bitcoin to their clients for the first time, carrying the price from around $16.000 at the beginning of 2023 to more than $70.000 last month. Calls for a price level of at least $500.000, in the optimistic case even of $1.000.000, are making the rounds. Where it will eventually settle, and when, is everybody’s guess. What is clear is that Bitcoin has started becoming mainstream and is here to stay.
The effect of the introduction of ETFs on the demand of an underlying commodity is illustrated by a look at the SPDR Gold Trust. When it was first launched in 2004 it had just over $1.5 billion dollars in assets. Seven years later it had grown by 47 times to more than $70 billion. The ETF transformed investment into gold from buying bars and coins and storing them in a safe place to a financial market product easily accessible and with low transaction costs. Although, of course, other factors came into play, the price of gold increased from around $450 to nearly $2000 per ounce during that time.
Bitcoin’s value is derived from the fact that it stores encrypted monetary information safely in a finite number of accounting units. That information is perhaps the most important basic commodity of our times is a truism. The scarcity value results from the fact that, according to its code, there will never be more than 21 mil. Bitcoins to trade. The daily price of Bitcoin is determined by supply and demand, i.e., its adoption in the markets.
Today Bitcoin represents around 10% of above ground gold, 1.6% of the assets managed by the top 100 asset managers, and 0.4% of all global financial assets. It needs only small shifts out of these asset pools into Bitcoin to significantly increase adoption levels and asset appreciation, constituting one of the most attractive asymmetric bets in the market.
Bitcoin has started becoming mainstream and in the medium term a portfolio allocation of 1-3% by institutional and high net worth investors is likely to become mainstream too.
