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Bitcoin Remains Top Investment Opportunity Despite SEC Denying Winklevoss ETF

March 13, 2017

On March 10th, 2017 the SEC denied what would have been the first-ever Bitcoin ETF listed on an exchange, citing the lack of regulation and risk of fraud present in the world’s Bitcoin markets. The much-anticipated decision was the culmination of a three-year quest by the Winklevoss twins to list the Bitcoin-tied product. Bitcoin investors speculated that approval of the ETF could send the price per Bitcoin skyrocketing, with hundreds of millions of dollars expected to pour into the fund and spike Bitcoin demand on a constant supply leading to price increases.

 

After the SEC announcement, Bitcoin volume shot up and the price plummeted around 20% in minutes (see Figure 1 below). However, less than a day later the price had recovered back to where it was the day prior to the decision and remained substantially above the 50-day moving average and 200-day moving average (see Figure 2 below). Although ETF approval would have accelerated Bitcoin’s prospects of growth and investment attractiveness short-term, Bitcoin remains my top investment pick over the next five to ten years for the plethora of reasons outlined in this article.

 

 Figure 1. Bitcoin’s price plummets on high volume after the SEC’s decision, but rebounds less than a day later

 

 

 

Figure 2Bitcoin’s price rebounded and remained significantly above the 50-day and 200-day moving averages post-decision

 

Increased Adoptions Among Professional Investors
 

Bitcoin was the top performing commodity of 2016 with over 100% gain, destroying all stock market indexes and gold (the S&P 500 rose 9.5% in 2016 and the SPDR Gold ETF rose about 8%). As of the writing of this article, Bitcoin is already up another 50% in the first couple months of 2017. Institutional investors have noticed Bitcoin is here to stay and want a piece of the action. Further, VC investments continue to pour into Bitcoin applications, such as payment apps, exchanges, digital wallets and commerce solutions all built to run over the Bitcoin blockchain or relevant sidechains. The influx of investment in the technology now will not begin to play out until the years ahead, which leaves many to believe the real growth of Bitcoin has not yet begun.

 

Public Adoption Potential
 

Bitcoin is in the early adopter’s stage of the technology adoption lifecycle and has yet to cross the chasm and reach the early majority. The barriers to entry into the Bitcoin universe have been immense thus far due to the technical knowledge required to participate. Understanding how to execute transactions on the Bitcoin blockchain and store private keys containing one’s Bitcoins not only required an understanding of the cryptography and steps to carry out a payment, but also required enough knowledge in the mathematics behind the Bitcoin protocol and cryptography to feel comfortable enough in risking money in utilizing the Bitcoin network.

 

However, with countless projects developing user-friendly, over-the-top applications, such as mobile phone wallet and payment apps, Bitcoin will reach a stage where users do not need to understand the mathematics or computer science behind a Bitcoin transaction, just like users do not need to understand the technical processes that run in the background when using Venmo or banking apps. Moreover, sidechain and lightning network transactions open a whole new door of opportunity for peer-to-peer payments and commerce solutions that do not require the relatively slow transaction and settlement times of the Bitcoin blockchain itself. To date, Bitcoin has served better as a store of value than as an everyday payment solution, but innovation and public adoption could manifest the luciferous properties Bitcoin is capable of.

 

First Mover Advantage
 

A plethora of altcoins have entered the market since Bitcoin’s inception. Some have gained traction because they improve upon some of Bitcoin’s shortcomings, but the likelihood of an altcoin taking over Bitcoin as the market leader remains minimal, at least in the coming five years. Bitcoin’s market cap is larger than the combined market caps of its altcoin challengers, which allows it to take advantage of network effects (more in the following paragraph) and draw in the top investors and developers in the cryptocurrency realm. Investors will continue allocating their money into Bitcoin projects and the world’s top crypto developers will remain committed to Bitcoin’s success because it has the largest return on investment potential of its crypto peers.

 

 Figure 3Bitcoin’s market cap is larger than the sum of its altcoin competitors’ market caps

 

Network Effects

 

Bitcoin’s user growth curve (Figure 4 below) looks very similar to that of the top networking platforms in the world. Take Facebook as an example. Why do most people join Facebook? Because they have friends who are on Facebook. The value of a network is directly related to the number of users on a network. It serves no purpose to be on a social media platform if none of my friends are there to be social with me. The same holds true for Bitcoin’s network from a payments standpoint.

 

The value in Bitcoin’s network comes from both consumer and merchant adoption. A consumer has no reason to join a payments network if the stores she shops at or if her friends she wants to send money to do not accept that form of payment, just like an individual would not join Venmo if her friends were not also using it. But as Bitcoin has grown exponentially over the years, the network effects have begun to take hold and heighten the chances for further growth. Bitcoin is now accepted on many e-commerce platforms and is seeing increasing adoption by merchants and consumers alike as they become more educated on the technology and as more user-friendly applications are rolled out.

 Figure 4Bitcoin’s user growth has increased exponentially and should continue this trend as network effects take hold

 

Bitcoin is a Better Store of Value than Gold
 

Bitcoin is often likened to gold in that it shares many of the same attributes. It is scarce, it is fungible, there is a finite supply, it cannot be counterfeited, and it is highly divisible. However, Bitcoin is superior to gold because of its utility. While gold has some real-world applications, such as its use in jewelry and in industrial production processes, it is also plagued by the fact that as price increases, it becomes less useful for both of those applications. On the other hand, Bitcoin becomes more useful as the price increases because its uses as a means for money transfer and as a ledger for financial transactions. Thus, Bitcoin proves far superior as a store of value over gold.

 

Cutting out the Middle Man
 

Blockchains (distributed ledgers) are of the more advanced and profound technologies emerging in the market today. The use case opportunities for blockchain are vast, and blockchain disruption potential is often compared to that of the Internet. Any industry where a middle man is in play has the potential to be disrupted. Banking, lending, capital markets, governments, health care and insurance are just some of the industries that could be disrupted by peer-to-peer blockchain technology illegitimizing the need for a central intermediary. Why pay extra fees to a middle man and trust the middle man to keep information secure when the fees can be cut and the blockchain can provide the most secure data storage available?

 

Computer Science is more Trustworthy than Human Decision
 

One concern often raised around cryptocurrency adoption is the lack of user trust due to users not understanding how the system works technically. Skeptics cannot comprehend why mathematical code should be trusted. However, the beauty of the blockchain is that absolutely no counterparty trust is needed. Individuals only need to trust the system, which is exactly what they are doing each day when they are using Chase QuickPay, Venmo or PayPal, but with these applications there are centralized honeypots prone to hacking and prone to human error. The Satoshi white paper defining the mechanisms of the Bitcoin blockchain is often described as far advanced for its time. The fact of the matter is, blockchains are far more secure than any centralized or human-interfering solution.

 

This also holds true with fiat currencies where a centralized group has control over the entire system. India and Venezuela caused economic chaos when they abruptly banned their largest-circulating bank bills. China’s attempts to wholly dictate its economy and manipulate its economic markets caused a sharp decline in the value of the Chinese yuan, which in turn shot up demand for Bitcoin. The examples of political corruption and human ignorance in decision making are endless. A fiat currency is less secure than a blockchain currency because it is deflationary and has substantial human error risk. I trust math more than I trust people’s decision making abilities, especially with a technology like Bitcoin where most individuals in political power do not have the knowledge to comprehend it.

 

Discounting the Naysayers
 

Time and time again, the big news outlets speculate that the Bitcoin price run up over the past couple years is just a repeat of what happened at the turn of 2014. However, the numbers completely refute this theory. The figure below shows the number of daily Bitcoin transactions and daily price since inception. It is clear the price spike in 2014 was related to speculation and not backed by any sort of fundamentals. However, the fundamentals now support the higher price that Bitcoin has achieved. The transaction and user growth, on top of all the network effects and other advantages presented throughout this article, prove the strength of the Bitcoin network and justify its price.

 

 Figure 5Bitcoin transaction growth supports the price increases over the past three years

 

Investment Conclusions
 

The reasons outlined above work in parallel to continue to drive Bitcoin’s success and expansion worldwide. This list is not comprehensive, but rather serves as a framework for the bull case for Bitcoin in the years to come. As with any investment, one should not invest more money than she is willing to lose. Diversification across investment types and within investment classes is key. A rule of thumb expressed by many money managers is to allocate 5-10% of one’s total portfolio into gold as a safe-haven, which I would swap out with Bitcoin instead. Although I am tempted to allocate much more than this percentage to Bitcoin due to extreme confidence of a high reward to risk ratio in the years to come, there are still risks that cannot be managed away. Wishing that one could go back to invest more in an asset because it has performed incredibly is always a better problem to have than wishing one had not invested as much. I will continue to thoroughly enjoy watching my Bitcoin value double again and again over the years to come.

 

 

Originally published on LinkedIn

 

Written by Chris Robertson

 

Disclaimer: The author is long Bitcoin and Ether. This article represents his opinion and should not be used as the sole source of an investment decision.

 

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