The Rise of Bitcoin
Since our first publication in 2015, blockchain continues to evolve as a key digital platform from transactions, records, tokenization of assets and, perhaps most famously, cryptocurrencies. With cryptocurrencies considered too speculative in the early days of blockchain, our primary focus had thus far been on enterprise blockchain, with opportunities growing rapidly as companies design, build, and migrate their services and operations onto blockchain platforms as part of the digital economy. After several years of encouraging enterprise blockchain developments, we remain confident the market will continue on its trajectory toward an expected $3 trillion long-term economic opportunity.1
Cryptocurrencies are part of the digital ecosystem. They have rapidly matured in kind with the evolution of the digital world with increasing validity supported by the rising number of global constituents. Progress across regulatory agencies, increasing enterprise blockchain use cases, and a payment ecosystem helping address the banking needs of a blossoming younger generation. Virtually all of these trends were accelerated by global digitalization efforts pulled multiple years forward to help solve for challenges created by Covid-19. In our view, these developments further validate blockchain as an integral component of future technological infrastructure.
Covid-19 forced tremendous change across the globe for both consumer and enterprise behaviors. Fortunately, the digital transformation was well underway prior to the pandemic, which helped solve many of the challenges. Remote work, distance learning, video conferencing, online shopping, and digital banking have become integral applications and services help sustain a functional society. The resulting generational and societal transformations have extraordinary implications.
Monetary and economic systems are not immune to the changes we are experiencing in our own personal lives because of the pandemic. In our view, the current circumstances have increased the relative attractiveness of some blockchain technology, notably Bitcoin. Bitcoin’s utility as a currency has been openly scrutinized for a decade—with good reason in the absence of a digital society. A viable medium of exchange must be a store of value and must be stable and liquid. In other words, it must have low risk and low transaction costs. This has not historically been the case for Bitcoin. However, we believe that is changing.
Today, touchless payments, digital banking, and an entirely new generation of investors using applications to transact have emerged. Together these build a convincing case for evolving viability. Making matters even more interesting, we have seen central banking authorities print trillions of dollars and dollar equivalents since the outset of the pandemic resulting in an explosion in the global dollar money supply. As stated above, a medium of exchange needs to be a store of value. The willingness of central banks to expand the money supply in such an aggressive manner could raise questions about the long-term soundness of fiat currencies. Bitcoin attempts to solve that problem with a finite supply of Bitcoins, which can be mined. It is decentralized, there is no single authority and, importantly, it is becoming more broadly accepted as a financial instrument as tender for goods and services.
Bitcoin is gaining acceptance by both retail and institutional investors not only as a disruptive technology but also as an attractive store of value that could act as a hedge against currency devaluation. Gold is the traditional inflation hedge. Currently, there is an estimated 190k tons of above-ground gold, or 6.1bln ounces, with a market value of roughly $11.6 trillion valued at $1900/oz. Compare to Bitcoin where there are currently just over 18.5 million mined. This is already 88% of total market due to the nature of its source code that stipulates it must have a limited and finite supply, which in this case will cap at 21 million, which will be reached sometime around the year 2140. This is due to the halving concept embedded in the code that regulates that every four years the total number of bitcoin that miners can create is halved. The current Bitcoin market value is 339.9billion (2.88% the size of the gold market and 6.66% of US M1 money supply.
We believe the key characteristics of Bitcoin—decentralized, supply constrained, secure, and increasingly accepted—present an attractive risk/reward opportunity in the face of significant fiscal liabilities that central banks will be tempted to inflate away as well the ongoing digital transformation occurring across the financial sector.
1Gartner: Blockchain Will Deliver $3.1 Trillion Dollars in Value by 2030. June 6, 2019. Accessed at: https://media.consensys.net/gartner-blockchain-will-deliver-3-1-trillion-dollars-in-value-by-2030-d32b79c4c560?gi=8b055fb843ba
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