5 Years in Crypto - Revisiting My Four Reasons for Investing in Bitcoin
If you are currently holding crypto, the recent price drop has been rough
If you are currently holding crypto, the recent price drop has been rough. With Bitcoin tumbling from $69K to $20K, you might ask yourself:
- Is the worst yet to come?
- Should I sell now?
- Is this a good time to buy more?
These are valid questions, but I don't find them helpful. As a long-term investor, I don't want to speculate. Instead, I'd look for evidence to support my investment thesis. So, after my initial investment into Bitcoin 5 years ago, I've revisited the four reasons I invested in the first place.
- Bitcoin adoption will explode
- Crypto is better than cash
- Governments will embrace crypto
- Crypto will become less volatile
So let's see how I did:
1. Bitcoin adoption will explode — TRUE
I was convinced that crypto would eventually see mainstream adoption. In 2017, there were 16.5 million Bitcoins in circulation and approximately 13 million users. Fast forward to 2022, and we have 19 million Bitcoin in circulation with 106 million users. As supply increased by 15%, consumer adoption increased nearly eight-fold. Moreover, because the supply of Bitcoin is fixed at 21 million and it becomes harder to mine (the process of creating Bitcoin, in which computers compete by solving complex mathematical problems), more investors are competing for fewer Bitcoins in circulation. This, in turn, will drive up the price and adoption further. And despite this impressive growth, adoption currently only stands at 1.5% of the global population.
2. Crypto is better than holding cash — TRUE
In 2017, central banks worldwide (especially the US Fed) were busy printing more money to keep the economy afloat. This quantitative easing policy is intended to lower borrowing costs and stimulate demand. It also meant that the money I had in my bank account was not growing due to low interest rates.
So what happened in the five years that followed? In 2017, the Fed decided to print even more money and increase the money supply from $14 trillion to $21 trillion, an increase of 50%. Meanwhile, the US economy only grew by 15%. What happened with all the extra cash? Many consumers decided to save money, and businesses did not produce more products and services. Not enough goods and services were created in relation to the money printed, so prices went up. This ultimately lead to remarkably high inflation — an increase in prices and a fall in the value of money. While we believe that our current system will eventually work itself out, printing more money can subsequently lead to hyperinflation and a run on banks. Let's not forget that in the last ten years, currencies in Turkey, Argentina, and Venezuela lost over 80% of their value due to poor monetary policies. In short, assets with a fixed supply like Bitcoin will continue to do well long-term in our current monetary system.
3. Governments and institutions will embrace crypto — TRUE
This is probably the most significant shift in the recent crypto cycle. Although we haven't achieved full adoption from governments, the recent shift to experiment with crypto at scale is a strong indicator that governments and institutions across the world will embrace crypto:
- El Salvador and the Central African Republic introduced Bitcoin as legal tender in their respective countries. Even though these are significant milestones for the crypto community, due to the volatile nature of crypto, they also drew heavy criticism from the international community, political opponents, and the local populations. On the other hand, it was also seen as an opportunity to provide financial access to its citizens in places where a large majority of people have no access to a bank account.
- In the US, the Securities and Exchange Commission (SEC) approved the first exchange-traded funds (ETFs) that would allow traders in financial markets to speculate on the price of Bitcoin. ETFs are investment funds that can be traded on the regular stock exchange as opposed to crypto exchanges, giving access to millions of non-crypto investors. The first Bitcoin ETFs were not direct investments into Bitcoin itself but structured as future contracts (contracts to buy or sell between two parties with an expiration date), as Bitcoin is still an unregulated asset and therefore considered to be riskier. Nevertheless, it was considered a massive milestone in the investment community to launch a Bitcoin ETF in the first place.
- In the UK, the government has announced that it will recognize stablecoins — crypto assets that are pegged to the US dollar — as a valid form of payment. This is part of a wider initiative to position the UK as a global hub for crypto assets. Although a global financial hub, the UK was perceived as a long-term crypto skeptic. This announcement was a clear shift in mindset towards the crypto industry.
4. Crypto will become less volatile — FALSE (for now)
I anticipated that crypto would become a less volatile asset once we saw mainstream adoption. I was wrong. I believe there are two reasons for this.
- We are still at the beginning of adoption. As of today, only 1.5% of the world population holds Bitcoin. In the last five years, Bitcoin adoption increased tenfold, from 10 to 100 million users (+90 million users). Many of these new Bitcoin holders were curious to make money, and only a portion of them became long-term investors. The sudden spike in demand and subsequent decrease in demand leads to high volatility. Now imagine Bitcoin is a lot more established and has one billion users. Just like in the case above, we are growing by 90 million users (+9%). Although we are increasing by the same amount of users, it will have much less impact on the price of Bitcoin because more people will have adopted Bitcoin and become long-term investors, resulting in much lower volatility.
- The crypto space moves in powerful adoption waves. Because crypto moves so rapidly in price, many people become curious at the same time and want to get involved. This, in turn, leads to more investment in the ecosystem and new innovations, which attract more curious people. But it also attracts speculators (and crypto scammers) who want to make money. And when some projects fail, the price becomes unsustainable and drops until a new equilibrium (a balance of buyers and sellers) is found. The important part is that this new equilibrium will be much higher than the previous wave of adoption. And this is the case with the current adoption wave.
- Crypto is a largely unregulated space. The recent collapse of Luna — and its linked stablecoin TerraUSD — is a stark reminder that the crypto industry would benefit from working alongside governments and governmental institutions to create clear rules that would prevent crypto projects from taking such large risks that ultimately harm consumers. Given the trajectory of crypto, I am more confident this will be the case.
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The information contained in this article is not financial advice and is for general informational purposes only. Please consult your financial, legal, or tax advisor before making any decisions.
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