In the first block in the Bitcoin blockchain, the genesis block, Satoshi put the message that was the news headline from that week:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
-Bitcoin Genesis Block
This was during the global financial crisis in 2008 and 2009, with widespread bank failures, huge government bailouts, and the beginning of quantitative easing as a policy tool deployed by central banks. The Bitcoin protocol was conceived to store and transmit value in a way that was both verifiable and scarce. A ‘hard’ money like gold for the digital age, the polar opposite of the ‘soft’ money that central banks could print and debase at will.
Over a decade later, we have an even larger crisis on our hands, with larger bailouts, bigger quantitative easing, and direct cash handouts to companies and consumers which are paid for by central bank deficit monetization.
The broad money supply in the United States, for example, has gone up massively. Here is the year-over-year percent change rate:
Chart Source: St. Louis Fed
The U.S. federal government is set to run a deficit around 20% of GDP this year, by far the largest deficit since World War II. And most of this deficit is being monetized by the Federal Reserve, by creating money to buy Treasuries from primary dealers and elsewhere on the secondary market.
Dollars, euro, yen, and other fiat currencies are in limitless abundance and their supply is growing quickly, while things like gold and silver and Bitcoin are inherently scarce.
This is an era of near-zero interest rates, even negative nominal interest rates in some cases, and vast money-printing. Key interest rates and sovereign bond yields throughout the developed world are below their central banks’ inflation targets. This has led to stock prices, bond prices, gold prices, and real estate prices, all being pushed up over the past 25 years.
Even a 1% spillover into Bitcoin from the tens of trillions’ worth of zero-yielding bonds and cash assets, if it were to occur, would be far larger than Bitcoin’s entire current market cap.
In early May 2020, Paul Tudor Jones became publicly bullish and declared he had invested 1 to 2 percent of his net worth in Bitcoin, describing it as a hedge against money-printing and inflation. He drew comparisons between Bitcoin in the 2020’s and gold in the early 1970’s.
Smaller hedge funds have already been dabbling in Bitcoin, and Tudor Jones may be the largest investor to date to get into it. There are now firms that have services directed at getting institutional investors on board with Bitcoin, whether they be hedge funds, pensions, family offices, or RIA Firms, by providing them the enterprise-grade security and execution they need, in an asset class that has historically been focused mainly on retail adoption. Even an asset manager as large as Fidelity now has a group dedicated to providing institutional cryptocurrency solutions.
Many major businesses are already on board, apart from the ones that grew from crypto-origins like Coinbase. Square’s (SQ) Cash App enables the purchase of Bitcoin, for example. Robinhood, which has enjoyed an influx of millions of new users this year, has built-in cryptocurrency trading, making an easy transition for Robinhood users if they happen to shift bullishness from stocks to cryptos. Paypal/Venmo (PYPL) might roll it out one day as well.
So, if Bitcoin’s halving cycle, or the fiscal/monetary policy backdrop, lead to bull market in Bitcoin within the next couple years, there are plenty of access points for retail and institutional investors to chase that momentum, potentially leading to the same explosive price outcome that the previous three halving cycles had. Again, I’m not saying that’s a certainty, because ultimately it comes down to how much demand there is, but I certainly think it’s a significant possibility.
Conclusion
Bitcoin is an asymmetric bet for part of a diversified portfolio, based on Bitcoin’s demonstrated network effect and security, where we are in Bitcoin’s programmed halving cycle, and the macro backdrop that favors Bitcoin as a potential hedge.
If a few percentage points of a portfolio are allocated to it, there is a limited risk of loss. If Bitcoin’s price gets cut in half or somehow loses its value entirely over the next two years, and this fourth cycle fails to launch and totally breaks down and completely diverges from the three previous launch/halving cycles, then the bet for this period will have been a dud. On the other hand, it’s not out of the question for Bitcoin to triple, quadruple from current levels over that period if it plays out anything like the previous three halving cycles.
Ways to Buy Bitcoin
Some people have asked me what I think the best places to buy Bitcoin are, so I’m adding this last section.
Plenty of people have strong feelings about where to buy it or what companies they want to do business with; ultimately it comes down to your country of residence, how much you want to buy, how hands-on you want to be with it, and whether you want to accumulate it or trade it. There are trade-offs for convenience, security, and fees for various choices.
Exchanges like Kraken and Coinbase are popular entry points for people into buying some Bitcoin, especially if they want to trade it. Do your homework, and find one that meets your criteria that operates in your jurisdiction. You can read our guide on how to buy your first Bitcoin by clicking on this link.
Ultimately, it comes down individual needs. In general, if you want to minimize fees and maximize security for a large Bitcoin purchase, then maintaining your own Bitcoin wallet and private keys is the rock-solid way to go. If you want to just buy a bit and maybe trade it, some of the exchanges are a good way to get into it.
Featured image is from Tim van Helsdingen ‘Money printer go brrr’