Bitcoin is Back, With a Vengeance

Bitcoin, the ‘nothing’ asset is back, and it continues to rally after a strong 2023, but still not quite at all-time highs. Many are focusing on this rally to argue for bitcoin as a legitimate asset, but there are better reasons for that consideration.

Bitcoin is often promoted as ‘digital gold’, a scarce asset that, like gold, will be a safe haven from disasters and de-valuing fiat currencies. We have long viewed Bitcoin skeptically on several grounds:

• • The existence of Bitcoin as a currency not tied to any government. The key power that keeps governments intact is the power to control money. Without that, it is virtually impossible for a government to stand. The power of money in government lies with the respective central banks. If central banks hold gold as reserves for their currency, as they do, then gold is money. Thus far, the major central banks are not holding bitcoin as reserves. This is a strong argument against Bitcoin.
  • Bitcoin has also been a “go to” currency for illegal activity. Ransomware attacks, as an example, are largely perpetrated from other countries with ransom payable in Bitcoin, or some other crypto currency. Without some secure method to extract the ransom, these attacks are far less likely to occur. Because of the illegal activity, we suspected that government could eventually look to make bitcoin illegal.

For several years, there was plenty of saber-rattling regarding bitcoin and its regulation.  It was often difficult to envision Bitcoin or other crypto currencies as legitimate assets, although there were some market successes for cryptos, such as the establishment of a futures market.

Bitcoin ETFs Drive Mainstream Acceptance

All that changed recently with the regulatory approval for spot Bitcoin ETFs. With this decision, the idea that bitcoin could be made illegal went out the window. These new spot ETFs have been raising assets at a rapid rate, increasing the legitimacy of Bitcoin as an asset class. In Canada, Fidelity has begun including Bitcoin in its ‘all-in-one’ diversified funds. If that trend carries over to the U.S. at Fidelity, Blackrock, etc., the demand for Bitcoin from re-balancing 401(k) and 403(b) plans could be enormous. In short, the acceptance of Bitcoin into mainstream retirement investing by major firms would mark a milestone for Bitcoin. Although Bitcoin is still subject to regulation which could alter its value, it no longer appears to be vulnerable to extinction. At this point, the cost to the voting public is simply too great for Bitcoin to be outlawed.

The Next Halving

At predetermined intervals (which have been roughly two years), Bitcoin experiences a ‘halving’. Here is what that means. Bitcoin was developed as a ‘proof of work’ token. To mine bitcoin, you must complete complex computations using computers. Upon completion, some amount of Bitcoin is earned. When a halving occurs, the amount of bitcoin that is earned is cut in half. This continues until the maximum 21 million Bitcoin are mined, which could take another 100 years or more.

Historically, when a halving has occurred, it has been followed by a rally in the price of Bitcoin. The next halving is expected in April, but this time Bitcoin has been rallying before the halving. It’s possible markets are jumping the gun a little bit, but the natural demand created by the Bitcoin ETFs is clearly playing a role as well, so there are two fundamental drivers of the recent rally.

The game has changed. It’s now, Bitcoin, for better or worse. If the large Wall Street investment firms are going to add Bitcoin to generic, index portfolios, you no longer have to be a crypto hero to invest and there is potential for demand to be robust. With bitcoin up roughly 25% this week, it’s possible that is what we are seeing now.

We have held off for several years awaiting more evidence of acceptance by regulatory authorities, and recent events have led us to believe that Bitcoin is here to stay. As a result, we are now looking for opportunities to make small allocations in client portfolios.

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By: thinkhouse