Bitcoin in 2020: Why it's different this time
When videos like these are circulating around in your (non-crypto) group chats, you know that Bitcoin is literally, *ahem*, "back alright!":
At the time of writing, one bitcoin trades circa $19,000 - close to double in value from $10,000 two months ago, and almost four times its price in March at $5,000. Skepticism typically ensues: "Surely we've seen this story once before. Isn't this the same pump and dump we've seen in 2017?" The short answer is no - it is incredibly different. What's different this time specifically is BTC's (growing) relevance in the traditional financial world. Existing institutional demand is already significant in 2020, with its growth further accelerated by the advent of core crypto infrastructure solutions for institutional custody and adoption, similar to those in traditional financial markets. The Bitcoin market is also at a state of never-before-seen supply imbalances.
Bitcoin in 2017
Before we dive in, let's rewind the clock back to 2017. The Bitcoin and crypto market was mostly filled with retail money - speculators, tech enthusiasts, early adopters - and was largely unregulated during that period where we saw the rise of the ICO boom between 2017-2018. With this new and seemingly unrestricted means of fundraising, words like "scams", "Ponzis" and "funding of illicit activities" very quickly became almost synonymous with Bitcoin and crypto. Needless to say, telling your relatives that you work in crypto during Chinese New Year family gatherings was not my favorite type of conversation to have.
Let's now compare that world with 2020, starting with the bitcoin demand side of the equation.
Bitcoin in 2020
Growing institutional interest. Grayscale is the world's largest privately offered investment vehicle for cryptocurrencies (loosely put, think of Grayscale as the "Vanguard of crypto"). Its assets under management (“AUM”), a bellwether for tracking institutional investor activity in crypto, is up 134% over the past six months at over $8.4 billion. In comparison, Grayscale only had $250 million in AUM back in July 2018. The trust now holds more than 500,000 bitcoin, an amount that represents over 2% of all 21 million bitcoins of finite supply that will ever exist (as stipulated in Bitcoin’s source code).
Never mind Grayscale - just last week, the S&P Dow Jones Indices announced and confirmed that it will launch cryptocurrency indices next year. Crypto assets will officially hit Wall Street data feeds in 2021. And Wall Street will care.
Smart money is buying Bitcoin. Some of the largest fund managers in the world are turning bullish on Bitcoin, if not already holding positions. These include industry influencers such as Raoul Pal (former GLG), Paul Tudor Jones (Tudor) and Larry Fink (BlackRock). Funds like Guggenheim are even willing to pay a significant premium in order to be able to get BTC exposure quickly.
You just don't see these types of moves from smart money on an asset that has "no value".
Investment banking and prime brokerage type businesses are now in crypto. In August, MicroStrategy (NASDAQ: MSTR) became the first publicly traded company to acquire a large allocation of Bitcoin to hold on its balance sheet as a primary treasury reserve asset. Selected as its primary execution partner, Coinbase secured the largest landmark deal in crypto and facilitated the transactions with a combined investment amount of $425 million into Bitcoin, providing value-added services that typically only traditional prime brokers and investment banks would.
Now, let's take a look at the bitcoin supply.
A market with never-before-seen supply imbalances. At its current halving cycle, the Bitcoin network produces around 900 bitcoins a day from mining activities. Square (NYSE: SQ), a US financial services company, operates Cash App, a mobile payment service which derives over 50% of it's Q3 2020 revenues ($3 billion) from Bitcoin purchases alone. Square together with companies like PayPal and Grayscale will soon be buying out the entire new bitcoin supply in the market. In a recent broadcast, Raoul Pal provided a very good explanation on this topic, and mentioned how he has "never seen a market with this type of supply imbalance before". I would highly recommend watching the entire session if you can afford the time.
Remember, there can only be a maximum of 21 million bitcoins. No one person can ever change that. No one. Ever.
So yes, this time it is different. Demand is growing exponentially while Bitcoin's new supply is becoming increasingly scarce. The infrastructure developments in crypto are also being accelerated with the entry of key traditional payments and finance players into the space. While many are taking profits at these levels, for others the target climbs even higher.
Bitcoin in 2020 is a totally new beast, and it has only just begun.
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