Digital Assets: Why It Is Still Early

While 2020 and the New Year have been a boon for Bitcoin prices, the setup within global markets has been favorable for some time. The rise of the Blue-Chip digital asset, Bitcoin or BTC, has been greatly boosted by a global investment landscape massaged by Central Bank intervention and broad fiat currency depreciation (a fiat currency is the government-sponsored medium of exchange that we all hold in our pocket, i.e., the U.S. dollar for example).
Global Central Banks, in a coordinated effort, have decided economic cycles should not solely be driven by private investors and have interjected themselves as major market participants over the past few cycles. What this means is that the former “Lender of Last Resort,” i.e., the Federal Reserve’s former status for any major economic storm (like the Great Depression, for example) has been swapped for a “Lender of First Resort” stance, meaning that even temporary speedbumps in the cycle conjure immediate and massive “stimulus” from Central Bankers.
This includes the drastic lowering of benchmark interest rates, which lowers the cost of money for mortgages, credit cards, and auto loans, and also injecting substantial liquidity into securities markets to ensure that banks and brokerages can maintain operations in highly levered global securities markets.
With this broad-brush stroke of the current market setup and the new “influence” of Central Bankers, it is no surprise that investors have been looking for a new store of wealth. After +$10 trillion in additional intervention since the Global Pandemic started early last year, 30% of global debt continues to have negative yields (that means if you buy $1,000 in bonds, you get back less than $1,000 back) and 1 in 5, or 20% of all U.S. dollars in circulation have been printed in the past year.
This New World of rampant asset impairment and debasing of both bond and currency markets is funneling new capital into alternative stores of wealth
Here is where the shift is happening and why it is still early.

Digital gold

Historically, monetization of the debt – the government simply printing currency to fund spending which devalues U.S. dollars and also eventually leads to inflation – funnels capital into Gold, which with a relatively fixed supply avoids “debasement” and also rises in price with eventual inflation.
Gold coins have been used as a store of value since before Christ, so for thousands of years, this commodity has been ingrained within global commerce as a medium of exchange. That said, times are changing, and with similar attributes to Gold, Bitcoin is becoming the next generation of wealth preservation. With a fixed supply, ease of transferability, and the insulation of not being debased by bankers, BTC is becoming “digital gold.”
While the meteoric rise of BTC has totaled 950% over the past year (or 9.5x its starting value) and tallied 52,000% since its inception a decade ago, the $50,000 price of a Bitcoin may just be the beginning. As depicted in the chart below, a market share shift between BTC and Gold is becoming more apparent. Both assets were rising for the first half of 2020 as the government embarked on its stimulus programs: Gold, as proxied by the GLD ETF, moved up from $140 to over $190, and BTC, as represented by the Grayscale Bitcoin ETF, appreciated from $5 to over $13. However, Bitcoin has gone parabolic since August 2020 as an apparent market share shift appears to be underway.
digital2
In the red highlight, GLD prices peaked at $190 at the end of last summer and have been consistently dropping to current values of just above $160. Meanwhile, BTC prices have been picking up this drawn-down capital with BTC prices moving up 4x, from $13 in August 2020, to over $50 at current day. Simply put, with intervention and debasement having accelerated in the recent $1.9 billion stimulus package, both Gold and BTC should be benefiting. However, Bitcoin is thriving, and Gold is being sold.
This market share shift since the end of last summer is almost happening dollar-for-dollar with the Grayscale Bitcoin ETF picking up +$11.6 billion in new inflows compared to the -$10.6 billion that has been drawn down from the gold ETF. This shift only represents investor capital within exchange-traded funds and doesn’t represent the direct investments into digital assets on an exchange or the physical holdings of precious metals, so the market share move has likely been more demonstrative.
digitalassets1
With this ostensible re-allocation underway, if this move is secular (meaning long-term in nature) there are trillions of dollars that Bitcoin can capture from Gold.
Currently, the total market value of Bitcoin is $1.1 trillion or just 9% of the $11.0 trillion in value in all Gold markets (represented below by red 9%, which is the $1.1 trillion on the vertical column representing Bitcoin total market value and the $11.0 trillion in Gold markets on the horizontal row). As we assume the further growth of Bitcoin markets (in the cascading bolded Bitcoin market shares), Bitcoin markets can continue to grow at an exponential rate. As we translate these market share gains into Bitcoin token prices on the right table, a doubling of the current 9% market share against Gold to 18% share translates into a $116,000 price for Bitcoin (the second orange value in the vertical column). At parity, or close to 50% share to Gold, Bitcoin values would be $291,000 per coin at 45% share to Gold and $349,000 per unit at 54% market share.
digitalassets3
The environment for the debasement of traditional asset classes including fixed income and global currency markets continues to point to investor support for Alternative asset classes including private equity, Gold, and Bitcoin. That said, a market share shift out of Gold and into Bitcoin could make the current $50,000 BTC value not a missed opportunity, but a starting point. BTC will not be without its investment risks, however, including technology glitches, government regulation, and its cyclicality. That said, one doesn’t have to stretch too far to see that investment merits for the Blue Chip of digital assets are in an early stage and not even close to even middle or late phases.

Where to invest

Here are exchanges where cryptocurrency is available.

Coinbase

While there are many venues to invest in digital assets including Square, PayPal, and a variety of global exchanges, Coinbase in my opinion has the easiest and most user-friendly funding and portfolio management tools. With the company completing its IPO, the public market listing will allow the company to maintain its technology advancement with access to new capital.
Coinbase supports more than 30 cryptocurrencies and is licensed in all states but Hawaii. Trading and transaction fees vary between 0.5% to 4.5%, depending on cryptocurrency type, transaction size, payment method, and platform.

Kraken

The fourth-largest exchange by volume, Kraken supports 60 different currencies and seven fiat currencies. Easy to use and with a multi-tier approach for KYC validation, the only complaints are some features being unavailable in the U.S. based on regulations.
Fees for transactions begin at 0% with stable coins at 0.9% and an additional 1.5% if using crypto to purchase. If using an online bank, fees are 1.7%. Purchasing with a credit card is 3.75%.

Binance

One of the largest exchanges is Binance, with more than 500 assets supported in the U.S. Fees on Binance.US vary between 0.02% and 0.10%. Using a debit card requires a 3 to 4.5% fee. It is not supported in seven states, however: Connecticut, Hawaii, Idaho, Louisiana, New York, Texas, and Vermont.
Another hindrance to this popular exchange is it doesn’t have a built-in digital wallet. Instead, you’ll need use Trust Wallet or another platform for digital asset management.

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