The 3 Themes of My Cryptocurrency Investment Thesis
The cryptocurrency market continued its slide today, down around 10%. Now about 50% off the market highs, the total market cap sits around $1.2 Trillion. Additional news from China and continued pressure from energy critics have reverted months of positive sentiment in markets. In addition, the onboarding of corporate treasuries to the Bitcoin protocol hasn’t happened at the rate that makes such tremendous growth sustainable. Unlike prior cycles, the Bitcoin demand was driven by institutions, rather than retail investors. This makes the case for broader Bitcoin adoption stronger, but could prove to be a significant hurdle for price in the short-term.
It seems that Bitcoin needs a fresh narrative to spur a new cycle of growth. There are some exciting recent and future events that could serve as catalysts for Bitcoin to revisit previous highs: the impending Taproot upgrade, El Salvador’s success with Bitcoin as legal tender, China miner relocation, and renewable energy projects.
Despite the sell-off in the cryptocurrency markets the past month, I’m still just as excited about the future of digital assets and financial systems. In my assessment, the fundamental value propositions of Bitcoin and cryptocurrency hasn’t changed. This conviction is how I’ve been able to separate short-term price fluctuations from my long-term investment thesis. There are three key contributors that drive my continued interest in Bitcoin and other cryptocurrencies.
1) Technology Development and Growth
Moore’s Law is the idea that computing power, speed, and storage double about every two years, while simultaneously reducing the cost of computing resources. In addition, the COVID-19 pandemic thrust our economy into a reliance on digital communication and exchange. Paul Silverglate, vice chairman and US technology leader for Deloitte offered that 2020 “saw faster adoption of technology by enterprises and consumers than at any other time in contemporary history”. With adoption and reliance comes additional waves of ideation, investment, and development.
Deloitte recently published its ‘2021 Outlook for the US Technology Industry’ paper noting a significant trend of technology infrastructure investment. The driving forces behind these investments are not surprising. Speed, agility, flexibility, automation, and security are central themes that contribute to a need for businesses to research, invest and educate.
Blockchain applications are part of the puzzle for the technology age as they can bring unparalleled speed, efficiency, reliability, security, and scalability across the globe. As a society, we will inevitably transition to more convenient and cost-effective methods of communication and exchange. We’re just getting started.
“The new economy will serve the old economy, finally providing a transition into the digital age in which value is embedded into the computer program. It’s the same battle as in the early 2000s but with an alternate ending: the new prevails as we enter the long-awaited deployment phase of the digital era.”— Mattia Gagliardi
2) Monetary Policy
The Federal Reserve announced this past Wednesday (6/16/21) that there could be two rate hikes in 2023, but that it will depend on the economic recovery. In addition, Federal Reserve Chair, Jerome Powell, said that the Fed hasn’t made a decision about ending its bond purchasing program, a key contributor to propping up the US economy during the COVID-19 pandemic. Lastly, Powell admitted that inflation could “turn out to be higher and more persistent than we expected.”
In addition to these comments, there has been growing concern over the existing money supply. Commonly referred to as the ‘M2 Money Stock’, the world is watching as the Federal Reserve manipulates the money supply to balance unemployment and inflation. The M2 Money Stock, while not a perfect calculation, is an important indicator for forecasting issues like inflation. From January 2020 through April 2021, the Federal Reserve has added nearly $5 Trillion dollars to the money supply, an increase of around 30% in just 16 months. Ultimately, inflation will disproportionately hurt the middle and lower class as cost of living rises considerably faster than wages.
Bitcoin’s protocol offers a stable, predictable, and capped money supply. While new bitcoin is being distributed to miners as rewards for creating new blocks, there will only ever be 21 million bitcoin in existence. No person or organization has centralized control over monetary policy and can manipulate markets to the benefit of the elite.
3) User Growth
Ultimately, the value of Bitcoin (and several other cryptocurrencies) is a result of market demand and utility of the protocol. Therefore, it’s important to see continued growth of network participants and ongoing development of accompanying technology.
For on-chain metrics, I use a popular blockchain analytics tool called Glassnode. Without a subscription, users can monitor active addresses, new addresses, and total addresses to see historical growth.
Since January 2017, Bitcoin has gone from 8.7 million active addresses each month to 20 million in May 2021.
Since January 2017, Bitcoin gone from 10 million new addresses each month in January 2017 to nearly 15 million in May 2021
Ethereum, cryptocurrency’s second largest protocol, is also gaining immense popularity. In January 2017, there were only 122 thousand active addresses each month; in May 2021, there were 19.3 million.
In addition to growing network participation, it’s important to look at investments from entrepreneurs, businesses, and corporations in cryptocurrency that support future scalability. There are a few highlights to mention here as well:
- NYDIG / FIS partnership - NYDIG Has Partnered With FIS to Offer Bitcoin Trading (businessinsider.com)
- Papal Merchant Payment - PayPal Launches Crypto Merchant Payments, Pay With Bitcoin, Ether (businessinsider.com)
- Coinbase IPO - Coinbase IPO: Everything you need to know about the ‘watershed moment’ in crypto — MarketWatch
- Expansion of DeFi and NFTs - DeFi Pulse — The Decentralized Finance Leaderboard
- Visa - Exclusive: Visa moves to allow payment settlements using cryptocurrency | Reuters
- Venture capital investment - Venture capitalists flock to crypto startups, increase investments in 2021 By BTC Peers (investing.com)
Blog sources and additional reading material:
- Moore’s Law Definition (investopedia.com)
- 2021 Technology Industry Outlook | Deloitte US
- Federal Reserve meeting full recap: Chair Jerome Powell’s market-moving comments (cnbc.com)
- M2 Definition (investopedia.com)
- What is Debasing the Currency? — Herold Financial Dictionary (financial-dictionary.info)
- Gagliardi: How the Crypto Supercycle Could Shape the Next Decade — CoinDesk
- Bitcoin: New Addresses — Glassnode Studio
