5 Reasons to invest in Bitcoin in 2021

Is Bitcoin a good investment in 2021? Is the Bitcoin bull run over or just getting started? For new investors exploring Bitcoin for the first time, the landscape can be confusing, even intimidating. Perspectives on Bitcoin vary wildly from hardcore bullish zealots on the one hand to thoose who dismiss it as a worthless ponzi scheme on the other. If you’re asking yourself ‘should I invest in Bitcoin’, here are five reasons why it might make sense.

1. Bitcoin adoption is accelerating

Global adoption of Bitcoin is accelerating. For example, the number of users of the popular Blockchain wallet steadily increased throughout 2020, and the accelerated steeply last November at the pace it has maintained since.

Bitcoin wallet addresses continue to surge in 2021

The company’s data shows an increase from 47 million to almost 71 million wallets in the past 12 months.

However, wallet numbers are just one part of the story. The number of people holding BTC in their own wallets is dwarfed by retail investors happy to leave their Bitcoin with a custodian such as Coinbase, Square’s Cash App or PayPal.

Square promotes Bitcoin investing on an equal footing with sharemarket investment

Square says the Cash App generated $1.76 billion of Bitcoin revenue in Q4 2020 – up 10x year on year. Total Bitcoin revenue for 2020 was $4.57 billion – up 9x on 2019. In its Q4 report the company says it saw “more customers adopting bitcoin on their first day of onboarding” in Q4 than ever before. In January 2021, Square says more than one million customers purchased bitcoin for the first time.

Spurred on by the growth of the Cash App, PayPal fast-tracked its crypto rollout and now allows all eligible customers in the United States to buy, sell and hold Bitcoin, Ether, Bitcoin Cash and Litecoin. Crypto purchases are limited to $20,000 a week, double the originally announced $10,000 due to unprecedented user demand. Paypal says it will enable Bitcoin transactions on Venmo by the end of Q2 2021. On March 30th Paypal launched its ‘Checkout with Crypto’ service, which allows Paypal users with crypto in US accounts to seamlessy pay with Bitcoin, Litecoin, Ethereum or Bitcoin Cash at checkout.

As the Bitcoin bull market continues to heat up there are plenty of on-ramps for both retail and institutional buyers to chase that momentum, and many holders of other tokens and coins continue to exchange cryptocurrency to get Bitcoin back for their altcoins. If that demand continues to grow it could lead to even more explosive price movements as seen in past Bitcoin cycles.

2. Bitcoin’s value proposition is perfectly suited to the macro climate

Bitcoin was born out of the Global Financial Crisis of 2009. Against a backdrop of bank failures, government bailouts and quantitative easing, Bitcoin was quietly deployed into the wild where it was ignored by everyone except for a small but growing group of idealists.

A decade later, and we are seeing a new financial crisis with more bailouts, historically low interest rates and increased quantitative easing.

There is a growing awareness from both individuals and companies, of Bitcoin’s unique value proposition, and where Bitcoin sits in this macro environment. In 2020 prominent macro investor Paul Tudor Jones said that Bitcoin reminds him of the role gold played in the 1970s. In a report titled The Great Monetary Inflation, he explained why his Tudor BVI fund has invested between 1 and 2% of its assets in Bitcoin futures contracts.

“COVID-19 is a one-of-a-kind virus that has triggered a one-of-a-kind policy response globally,” says Tudor Jones. “It has happened with such speed that even a market veteran like myself was left speechless. Just since February, a global total of $3.9 trillion (6.6% of global GDP) has been magically created through quantitative easing. We are witnessing the Great Monetary Inflation (GMI) — an unprecedented expansion of every form of money unlike anything the developed world has ever seen.”

Satoshi Nakamoto appears to have designed Bitcoin as a possible solution to this scenario. In 2009, shortly after the release of the Bitcoin white paper, the pseudonymous creator of Bitcoin posted to an internet forum. He stated, “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”

Similarly, back in May 2020, Real Vision CEO Raoul Pal said that as central banks adopt quantitative easing, the stage is set for hard assets such as Bitcoin and gold to perform well. “Huge quantitative easing of fiat meets the hardest money that automatically quantitatively tightens. Bitcoin wins. This is one of the best set ups in any asset class I’ve ever witnessed… technical, fundamental, flow of funds, and plumbing.”

The contrast between central bank quantitative easing and an ever-expanding money supply against the quantitative tightening of Bitcoin’s third halving is stark. Fiat currency supply is growing quickly, while the scarcity narrative of Bitcoin is growing in importance.

Money printing has found its way into asset prices – meaning that stocks, bonds, and real estate prices, have all been pushed up to unprecedented levels. A small reallocation of even 1% from other asset classes to Bitcoin would represent capital inflows greater than Bitcoin’s current market cap.

Given that Bitcoin’s protocol has a hardcoded limit of 21 million coins, this creates a unique digital scarcity. If demand rises, there is no ability to increase the supply. The supply can only come from existing holders of Bitcoin who are willing to sell.

3. What if the Bitcoin Stock to Flow model holds?

An investing concept called ‘stock to flow’ can be used to quantify the scarcity of a good. Stock represents the total supply in circulation and flow represents the amount of new supply per year.

Because Bitcoin is open-source software with a fixed supply schedule, it is possible to measure Bitcoin’s S2F with 100% accuracy. Following Bitcoin’s third halving in May, 2020, the current S2F of Bitcoin is 56 which is roughly the same as gold. However, after the next halving, Bitcoin will be twice as scarce as gold.

A pseudonymous quant trader calling himself PlanB created the Bitcoin Stock-to-Flow (S2F) model. He argues that Bitcoin’s growing scarcity will increase its value. PlanB has since updated his original model to a cross asset price model. In terms of a Bitcoin price prediction, this model says that the Bitcoin price could reach $288k in this cycle if the model continues to hold. While nobody knows if it will, given the possibility of such high returns, perhaps it would be prudent to have a small amount of Bitcoin, just in case?

While there are critics of the stock to flow model, other high profile investors have taken note. In a July 2020 report by Fidelity, the U.S. investment house said, “Commodities with a [high S2F] have historically served as superior stores of value. Bitcoin’s stock-to-flow will eclipse that of gold following the next halving (2024).”

Similarly, US based Grayscale Investment published a report stating that “Commodities with high stock-to-flow ratios such as Bitcoin, gold, and silver have historically been utilized as stores of value.”

There is some data to support the narrative that a supply crunch is building. A new block of transactions is added to the Bitcoin blockchain approximately every ten minutes. The miner that verifies each block receives the block reward. Following the third halving in May 2020, the block reward dropped from 12.5 Bitcoins per block to 6.25 Bitcoins per block.

An average of 144 blocks are mined per day, and 6.25 new Bitcoins are generated with each block. 144 x 6.25 = an average of 900 new Bitcoins mined per day.

With the launch of PayPal’s new service that enables customers to buy, sell, and hold cryptocurrency directly from their PayPal accounts, it appears that PayPal demand alone may exceed the daily supply of new Bitcoins.

As Pantera Capital points out in their December letter, PayPal’s crypto infrastructure provider is Paxos. Prior to PayPal’s integration of crypto, itBit, the Paxos-run exchange, was doing a fairly constant amount of trading volume — the white line in the chart below.

When PayPal went live, volume started exploding. The increase in itBit volume implies that within two months of going live, PayPal is already buying more than 100% of the new supply of Bitcoins.

4. Wall Street is going crypto

Bitcoin was the best performing asset class of 2020 as the chart below shows. Gold and equities were crushed in comparison.

Bitcoin’s strong performance has not escaped the notice of Wall Street analysts, investors and companies. In August 2020, business analytics firm MicroStrategy announced that it had invested $250 million in Bitcoin, purchasing 21,454 Bitcoin as part of a capital allocation strategy. Since August the company has increased its total investment in Bitcoin to $1.145 billion.

MicroStrategy CEO Michael Saylor said “This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy.”

Following MicroStrategy’s lead, in October payment platform Square announced that it had invested $50 million in Bitcoin, buying a total of 4,709 Bitcoins. Square said the investment represents about 1 percent of its total assets. Square said it was making the purchase because “Bitcoin has the potential to be a more ubiquitous currency in the future and an instrument of economic empowerment that provides a way for the world to participate in a global monetary system.”

Telsa revealed it had piled into Bitcoin in early February when it let the SEC know in a filing on February 8th that it had purchased $1.5 billion in Bitcoin as part of its corporate treasury strategy. The filing said that Tesla made the buy so the company could have “more flexibility to further diversify and maximize returns on our cash.”

Last December eyebrows were raised after headlines suggested that a senior analyst at U.S. financial giant Citibank has an extremely bullish target price for Bitcoin. Thomas Fitzpatrick, head of CitiFXTechnicals market insights wrote a report for Citibank’s institutional clients. The report says there are marked similarities between the 1970s gold market and Bitcoin today.

The whole of Bitcoin’s existence has been characterized by major price swings, “exactly the kind of thing that sustains a long-term trend,” said Fitzpatrick – who included a Bitcoin chart and used technical analysis (TA) of prior highs and lows to determine a target Bitcoin price of $318,000 by December 2021.

“A decoupling of gold from fiat currencies, the COVID-19 pandemic and the desire for central banks to pursue aggressive quantitative easing policies could lead to future explosive price growth in Bitcoin” said Fitzpatrick.

Whether or not this price target is realistic is unknown, but the fact that this kind of bullish analysis is being presented to Wall Street investors is bullish in itself.

5. Bitcoin has always surpassed its previous all-time high after a price crash and recovery

Finally, for anyone asking ‘should i buy Bitcoin’, it never hurts to look at historical price data. Bitcoin has seen many peaks and troughs in the last 10 years and has been reported “dead” over 383 times in mainstream media. However, it has always managed to surpass its most recent all-time highs so there is no reason to think that the same will not happen again.

In mid-2011, the price of Bitcoin hit $30 on the most popular exchange at the time, Mt.Gox. Following a hack of the exchange, the price collapsed to a low of only $2 by November 2011 before recovering again in 2012.

In April 2013, Bitcoin briefly hit the $260 mark, before tanking by over 50 percent within hours as Mt.Gox was unable to handle the increase in trading volumes and was hit with a DDoS attack. Despite a drop in investor confidence in the Bitcoin trading ecosystem, it only took Bitcoin seven months to surpass its most recent high again.

In late 2013, Bitcoin hit the symbolic $1,000 mark for the first time, but the price gradually collapsed to a low of $175 in the two years to follow. Two years after that, at the start of 2017, Bitcoin hit the $1,000 mark once again and surpassed its previous all-time high to hit its famous December 2017 all-time high of $20,000 per coin.

Historical price data suggested that Bitcoin was poised to exceed its most recent all-time high again – which it did in December, before setting a new all time high of almost 61,000 in March.

Whether or not the stock to flow model holds is beside the point, there may already be enough interest in Bitcoin to sustain a slow and steady price increase. In the meantime, quantitative easing and increasing government debt levels will contribute to asset price inflation, and currency debasement. With gold already stalling, Bitcoin may yet prove itself the ultimate hedge.

Bitcoin appears to be an asymmetric bet. If one only invests what one can afford to lose, there is a limited risk of loss with the benefit of substantial upside. Based on Bitcoin’s network effects, growing adoption, the supply shock following this year’s halving and the volatile macro backdrop, Bitcoin appears set to outperform in 2021. How long will you stay on the sidelines?

Contributed by Brave New Coin.