The approval of bitcoin ETFs this month was a watershed moment for crypto investors. But the unprecedented frenzy surrounding the launch of these ETFs might have investors wondering if prices are being driven solely by short-term speculation.
We think investors should step back and look at these approvals as a starting point for the mainstream adoption of crypto assets within traditional portfolios. There is a much longer-term narrative at play here supporting the investment case for crypto.
The acceptance of bitcoin ETFs in the US market, a decade in the making, will have important second-order effects across the globe and push this asset class toward further maturation. Bitcoin ETFs will open up a $50 trillion market in the US and help spur the integration of crypto assets into portfolios across the globe. This will not happen overnight, as most financial advisors and other professional investors are still learning about this asset class and how it may complement traditional investment strategies over time. But bitcoin’s history of performance and resilience across varying market conditions is slowly becoming more appreciated.
Bitcoin has outperformed every major asset class over 10 years
So what does the approval of ETFs mean for bitcoin’s investment case this year and beyond? In short, this milestone further strengthens the role of bitcoin as a macro asset that investors will increasingly turn to to bolster their portfolios. Let’s take a look at why we believe this is true.
Short-term speculation vs. long-term paradigm shift
Irrespective of short-term price action, we believe that the launch of spot bitcoin ETFs in the US is extremely bullish in the long run. This could prove to be a big asymmetry to the upside if you’re an investor willing to hold for a longer period.
As we've seen time and again, the short-term impact of prices is often overvalued while the long-term effects tend to be underestimated. To understand this long-term impact it’s important to remember some of the key aspects of bitcoin that set it apart from other investable assets.
Bitcoin is being viewed as an emerging store of value or “digital gold” because of its distinct attributes. It has a monetary policy independent of any central authority, so is protected against monetary debasement. And compared to another store of value, gold, it’s also more portable, divisible, and easier to trade, allowing users to store bitcoin without counterparty risk or huge costs.
While bitcoin becoming digital gold is currently its dominant investment thesis, its role as a global payment network is also developing. Unlike any other payment networks, it can be used to transfer bitcoin anywhere in the world 24/7 without using traditional intermediaries or gatekeepers. This reduces transaction costs and for the tens of millions of unbanked people worldwide, it provides an important alternative.
Finally, it’s important to keep in mind that rising demand, particularly from ETF investors, is coming at a time when bitcoin’s supply will be reduced. Bitcoin’s supply schedule is unique in that it has programmed scarcity (i.e., there will only be 21 million bitcoin), a monetary policy that cannot be adjusted, and is disinflationary. With regards to its disinflationary nature, bitcoin’s rate of expansion of supply diminishes over time. This occurs through “halvings” every four years, which cut in half the number of newly issued bitcoin. The next halving is scheduled in April of this year and, if history rhymes, this event will prove to be positive for bitcoin’s price.
Bitcoin’s supply and annualized inflation rate
Source: Hashdex Research according to the theoretical supply schedule of Bitcoin since inception, past halving years and projected future halving years assuming 10 minute average block times until 2064.
A generational opportunity
Our long-term investment case for bitcoin and other crypto assets is currently stronger than ever (read more about this here). We think investors with extended investment horizons will be rewarded over time, as they have been in the past. But in the near term, we believe this market is providing an exceptional opportunity for investors to get exposure to bitcoin and other crypto assets, as institutional interest and capital flows will continue to grow. There is never a way to find the perfect moment to invest, but the current dynamics of this emerging asset class are presenting investors what we believe is a generational investment opportunity.
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