The year 2020 is coming closer to the end, and we all look forward to 2021. On the subject of investing, the first question that raises my mind is, “How should we be investing right now based on how market economies and technologies are evolving?” So, to that end we will need to ask the question:
Bitcoin is many things to many people around the world. Why they chose to hold Bitcoin depends on their circumstances and views about Bitcoin is today, and what it could become in the future. To begin exploring the validity of Bitcoin as an investment in 2021, let’s start by talking about the difference between return and risk.
Return & Risk
A Yale study conducted by economists examined whether the returns of digital assets like Bitcoin, Ethereum (Ether) and Ripple behave like the returns of other asset classes, i.e. stocks or traditional metal commodities. Based on their analysis, the return behavior of all digital assets including Bitcoin could not be explained by the risk factors that account for the returns in stocks, currencies, precious metals, commodities or by macroeconomic factors. Rather, economists found that Bitcoin’s performance is driven by cryptocurrency-specific factors such as the momentum effect, proxies for average and negative investor attention.
The Momentum Effect means that an asset is likely to continue increasing in value if it has already just increased in value. This further means that Bitcoin’s price and the sentiment surrounding Bitcoin experience a self-reinforcing effect. We can measure the Twitter post or Google searches about Bitcoin and correlate them pretty strongly against Bitcoin’s price. So something to really consider about Bitcoin, and other digital currencies or digital assets in totality, is that what drives their price — their narrative — changes and potentially matures over time.
For example, performance has not been connected historically to the change in Bitcoin’s fundamental metrics. If you have followed cryptos for in any length in time, you know that the performance of crypto assets (digital assets) hasn’t been driven by fundamentals. It has instead been driven by speculative trading activity. However, over time, as the attitude of investors and participants analyzing and participating in Bitcoin market evolves, Bitcoin’s performance may be tied to a greater extent to fundamental adoption variables and to the lesser extent, reflexivity and sentiment.
I think in 2021, this phenomenon is definitely something to pay attention to, because global investor sentiment does have an impact Bitcoin’s price; however, Bitcoin has distinct underlying fundamentals that are not affected by market health or by the economic situation created by the pandemic and lock downs. Compare that to the traditional economies and economics, where we have demand shocks (the decline in consumer demand for goods and services due to the lock downs and unemployment).
On the one hand, wee have supply shocks (production limitations and supply chain shutdowns) and the ensuing policy response by governments and central banks (quantitative easing or record low interest rates). On the other hand, Bitcoin’s fundamentals and utility are not directly affected by the decline in profitability or production or an increase in the money supply. Instead, the headwinds may increase the attractiveness of investing in Bitcoin and I do believe that many investors are taking note.
Bitcoin Evolving Narratives
This is where it gets really interesting….
We need to look into the history Bitcoin and the study Bitcoin’s evolving narratives. Another angle in Bitcoin’s lack of movement with traditional assets is the absence of an agreed-upon narrative at any given time. These narratives have ranged from Bitcoin as the peer-to-peer electronic cash system/payment system, to reserve currency for digital assets, to store of value or even to its role as a safe haven. The list of potential narratives goes on and on, but the lack of consensus could be an important reason why Bitcoin has not traded in line with other assets today. Something we have seen this year and is a salient narrative, i.e Bitcoin as is an emerging store-of-value asset. But most recently, Bitcoin’s behavior has not followed the traditional rules for other asset classes from week to week.
This is an important evolution for Bitcoin, even though the media detracts from Bitcoin. If Bitcoin is not maintaining this consistent narrative (i.e: if one week it looks like a store-of-value asset and then the next week it doesn’t), I personally do not think this detracts from its value, especially as its narrative is still emerging. In the early days of Bitcoin’s existence, events and sentiments affecting traditional markets had little to no impact on Bitcoin’s markets.
In the early days, Bitcoin’s trading infrastructure was completely independent of traditional market infrastructure, and Bitcoins ability to react to current events affecting traditional markets in real time was limited because Bitcoin’s trading was not integrated into traditional markets. But, as the infrastructure has matured, participants in Bitcoin markets and those in traditional markets have begun to overlap. This is why we see so much noise about institutional investors now being able to trade Bitcoin futures and options on the same platform they use to trade derivatives of other assets. At the same time, retail investors can now buy and sell Bitcoin on certain platforms that allow them to trade stocks.
I think this is one of the most important things to note, because as Bitcoin matures and the profile of the market in Bitcoin expands to include more participants from traditional markets, Bitcoin could well become more correlated with other assets, increasing its overall value. As Kathy Wood from ARK Invest has said,
“Most people have an over-allocation to bonds relative to where they should be. It can’t go all into equities and people are thinking about inflation to begin with. It will be very natural for bitcoin to absorb some of the money flowing out of bonds.”
As Bitcoin’s narrative becomes more consistent and as it proves itself capable of standing alone from the fiat monetary system, Bitcoin will really shine as an investment. I really love this perspective from Chamath Palihapitiya,
“Bitcoin to me is the only that I have seen so far that is really fundamentally uncorrelated to that decision-making process and to that decision-making body, because, at the end of the day, any other asset class, equities, debt, real estate, commodities, they’re all tightly, tightly coupled to a legislative framework and an interconnectedness in the financial markets that brings together many of the governments that are sort of behaving this way.”
Bitcoin is unique in that it continues to be influenced by retail investors’ sentiments and can capitalize on the shift in the way that retail investor interact with traditional markets and consume financial information. I think this is one of the best reasons why Bitcoin could continue to serve as a portfolio diversifier — if not become the best investment in 2021. Bitcoin’s fundamentals are relatively shielded from the economic impact of the pandemic as its functionality is not predicated on profitability or production and Bitcoin is natively digital.
I really think that the simple explanation as to why Bitcoin is the best investment in 2021is that it simply does not fit into any defined asset categories, making it the ultimate alternative asset. As Bitcoin grows and matures, as investors study its characteristics and as institutional investors and retail really get on board, I think that opens the doors for helping Bitcoin mature into an independent asset class.
This I believe is the most important narrative surrounding Bitcoin in 2021: Bitcoin is not just an alternative asset or investment anymore. It is an alternative Asset Class that stands alone and above many others. Bitcoin is an unique investment asset with compelling differences relative to traditional asset classes. I think in 2021, with the way economics are developing, there is nothing better you could ask for than that.
So what do you think? Based on what I have shared, is Bitcoin the best investment in 2021? Do you think Bitcoin is maturing? What do you think will happen next year… and how are you planning for it?
Let discuss discuss on the comments below.
If you are looking for guidance to how to acquire cryptocurrencies like Bitcoin or Bitcoin Cash, or Ethereum or other cryptos — I have prepared a Beginners Buyers Guide which can be found at the my website, The Cryptocosm, to help you to buy cryptocurrencies like Bitcoin the easy, fast and reliable way.
Now let’s discuss in the comment section below: