We sit at an unprecedented time in the macro-economy, and I've been wanting to write my "best idea" down to give to the people I care about.
Since I wrote my article about Bitcoin in August 2019 (saying it is the investment of a generation), I've learned so much more. The more you learn about bitcoin the more you realise it's genius.
Bitcoin has the potential to make huge positive change.
You can read this article by Robert Breedlove for more on that.
The most powerful tools in human history are language and money (which is the language of communicating value and incentive). And Bitcoin is the best money ever. We are only at the beginning and for anyone wanting to join the Bitcoin Revolution the train is about to leave the station.
Anthony Pompliano published a newsletter today that EXACTLY expresses my thoughts. His article nailed it, and so it's saved me writing this post from scratch. I hope he doesn't mind me plagiarising most of it. Here goes:
The US's Federal Reserve has cut interest rates to 0% and the Bank of England has done similar. They plan to keep us in a zero-rate environment for the foreseeable future. Multiple stimulus packages in 2020 now total more than $3 trillion in QE, with another $2 trillion on the way. That's just the US. They've printed more than a quarter of the money that ever existed in the US before 2020, since January 2020. Europe and the UK are going down the same path.
The average investor fears inflation right now, and this fear has driven significant capital flows into inflation-hedge assets (Gold, Bitcoin, Real estate, etc). The combination of the Fed’s asset price manipulation and inflation fears has driven gold and Bitcoin to drastically outperform equities and other commodities.
I’m writing this specifically to call out my thesis for the next 15 months of Bitcoin’s performance. Many investors will look at the historical price increase of the digital asset and believe they "missed it." That couldn’t be further from the truth in my opinion. I believe we are at the start of another boom cycle in Bitcoin, which is likely to drive us 10-20x higher in the 15 month window.
Let’s first look at the demand side of the equation. The macro environment is serving as a tailwind. Bitcoin is up more than 50% year-to-date. The continued 0% interest rate environment and QE will continue to drive demand. Additionally, we are seeing traditional asset management firms start to make the leap into owning Bitcoin. Fidelity Investments recently published a paper showing positive impact for 1%-5% Bitcoin allocation in clients’ portfolios. Stone Ridge ($10B asset manager) now owns $115M in Bitcoin. Legendary trader, Paul Tudor Jones, publicly revealed that he has put 2% of assets into Bitcoin. Multiple public pensions in the US have now gained exposure to Bitcoin via fund managers. Grayscale, the largest digital asset investment manager, saw record inflows of $1B+ in 3Q20 and now has almost $6B in total Assets Under Management.
The list goes on and on. Wall Street has woken up to the Bitcoin trade. But the increase in demand is not only happening with traditional asset managers. We are also seeing a new trend emerge where corporations are using Bitcoin as a reserve asset for part or majority of their treasury. It started with publicly traded digital asset focused firms like Galaxy Digital and others. Then we saw MicroStrategy (a large $1.2B+ market cap company) put 85% of their $500M balance sheet ($425M) into Bitcoin. And most recently, financial technology company Square announced that it had purchased about $50M of Bitcoin for their balance sheet (approximately 1% of assets).
This increase in demand is just starting.
We can list all of the leading, forward-thinking firms in only two paragraphs. Eventually their peers will join them and the list will get much longer. The demand outlook is strong, and it shows signs of actually accelerating into the first half of 2021.
This brings us to the supply side of the price discussion.
Bitcoin only has 21 million total Bitcoin that will ever be available (just to be clear if you want to buy some, you can buy part of a Bitcoin). There are approximately 18.4 million currently in circulation.
Bitcoin is effectively the scarcest investable asset in the world.
New Bitcoin enters the market on a pre-determined schedule that is coded into software and cannot be changed without the Bitcoin community (that's miners and Bitcoin holders who run their own Bitcoin nodes) agreeing to the change. It will almost certainly never change because no-one holding bitcoin wants that for the simple reason it would devalue their holdings: the supply cap is fundamental to Bitcoin's use as a store of value. That programmatic monetary supply schedule started in 2009 with 7,200 Bitcoin entering circulation every day. That continued for 4 years, before the 7,200 daily Bitcoin was cut to 3,600 Bitcoin each day. 4 years later it was cut to 1,800 Bitcoin per day. Most recently, in May 2020, we experienced the latest "Bitcoin halving" which now has 900 Bitcoin per day entering the circulating supply.
Historically, these supply shocks have led to significant price increases of 20X+ in the following 18 months post-halving. So to recap, we have significant increases in demand and a material supply shock that has historically led to price increase. Just those two factors alone should be compelling enough to ensure that you have some exposure (1-10% of your portfolio) to Bitcoin. The asymmetric risk-reward scenario is unlikely to be present in any other asset you are currently invested in.
There is a third factor that you should understand, which further cements the bullish argument for Bitcoin over the next 15 months or so. More than 60% of all Bitcoin in circulation today have not changed hands in the last 12 months. This means that the majority of Bitcoin investors stomached multiple double-digit price movements, both up and down, and continued to hold the asset. They even weathered a 50% drop in price during a single day of the liquidity crisis in March 2020 without selling (yes, I was one of them - I forecast that might happen so was mentally prepared for it). So the likelihood that the 11M+ Bitcoin that is currently being held by strong hands will trade in the short term is very low.
You could evaluate this situation as (a) demand is increasing significantly, (b) the supply shock is making Bitcoin more scarce, and (c) the available float that anyone can buy is much smaller than people actually realize - a lot less than the 18.4M Bitcoin that exist. This framework leads me to believe that we are going to see a violent upward movement in the Bitcoin price by the end of 2021. My base case is approximately 10x to $100,000 and the bull case is around $250,000 per Bitcoin.
The asset is volatile, and it won’t be a straight line up. There will be many 15-30% drawdowns along the way, but I remain convicted that these price levels are attainable in the next 15 months. Lastly, if we take a longer outlook at Bitcoin, it becomes even more interesting.
Both gold and Bitcoin are currently serving as applications of sound money principles where you can't just print some more out of thin air. This compares to the 'monopoly money' that fiat currencies like the US Dollar and British Pound have become - most people haven't twigged yet that the government can just add as much money to the pot as they want by adding some zeros onto their spreadsheet at the Central Bank.
Gold is the analog application and Bitcoin is the digital application. Gold’s market cap is $8+ trillion and Bitcoin’s is only $200+ billion. It is likely that Bitcoin’s market cap will eventually match, and then eclipse, gold’s over time. When this happens, Bitcoin will have experienced a 40x increase in price. If the historical four year market cycles (that match the 'halving cycle I mentioned above) continue playing out, there will be a significant double-digit price increase over the next 15 months or so, followed by a nasty decline in price in a multi-year bear market before the next cycle which brings another significant price increase that would push us closer to gold’s market cap.
The market is the ultimate referee in the game of investing, and it has emphatically told us, and is still telling us this year, that Bitcoin is worth holding.
My reason for writing this is not to convince you of the 10-year outlook for Bitcoin. That is complex and requires multiple inputs/assumptions to be correct.
I just feel very strongly that I want to share this view with anyone who is open minded enough to listen - this is not just about investment - this is about freeing ourselves from the never ending rat race caused by Central Bank money printing - which literally steals the time we work - because the savings that come from our graft get inflated away before we can enjoy them in our retirement.
I am urging my family and friends to take another look at Bitcoin as a potential 1-10% allocation in their portfolio over the next 15 months.
This is (of course!) not financial advice. Start learning about bitcoin and make your own decision.