Bitcoin – an investment evolution?

The global economy is in chaos. The EU announces the second lockdown in a year. On the territory of the stronghold of political and economic stability – in the United States – a political crisis is brewing, and the stratification of society is close to the level of civil conflict.

Against this background, the growth in the value of shares of the world’s leading corporations, which pull up stock indices, looks especially strange. Just a few years ago, and a quarter of the negative that the global economy has received lately, would be enough to drive the indices “below the plinth”.

For many years, the US dollar has been a symbol of stability and a “safe haven”: it was there that smart investors waited out the storm in case of bad weather in the financial world. What has happened to the dollar that the capital has ceased to perceive the American currency as a safe haven and is now ready to run into “overbought” Tesla shares rather than into USD?

Where to run from the endless emission?

The answer to this question is most clearly demonstrated by the money supply growth graph (M2) of the US Federal Reserve.

Many large corporations that keep their savings in the form of cash dollars are well aware that they are not able to provide capital growth comparable to the speed of printing the dollar and, as a result, its depreciation. And the level of inflation (in the US it is measured on the basis of the core consumer price index, excluding food and energy) can calm the average consumer, but not “smart money”.

A flight into stocks is a short-term reaction of capital to excess money, but it is not at all an ideal strategy in the long run. Because both Google and Apple are heavily tied to and overly dependent on the current fiat system, and its self-destruct mechanism is already in place.

And not a single company is able to provide an increase in the profitability of its product (neither due to an increase in the volume of sold products, nor due to an increase in price) comparable to the growth rate of the value of their shares due to the issue of money supply. And without this, the exchange “bubble” will only inflate.

Save capital with bitcoin

One of the first public companies to break the stalemate was MicroStrategy, which had about $500 million in cash on its balance sheet. According to CEO Michael Saylor, they began to look for a way out when they realized that the corporate “treasury” was irretrievably eaten by the state “printer”.

MicroStrategy experts have considered and analyzed many options: real estate, bonds, stocks, gold, derivatives and cryptocurrencies. Among all this, Bitcoin was the undisputed leader. Most of the mentioned capital preservation opportunities are closely related to the fiat system, and gold is very expensive to store and inconvenient to logistically. In comparison, bitcoin – according to Sailor – looks a million times better.

Based on the analysis of the situation, the company’s management decided to transfer most of the cash assets ($425 million) to bitcoin. And not for the purpose of a speculative sale in the future, but as a means of long-term preservation of value.

Michael Saylor believes that in the near future we will face “the most aggressive monetary expansion” – and regardless of the domestic political situation in the United States. Other companies will inevitably face the question of how to maintain the purchasing power of their assets.

“Ultimately, you need to find something that cannot be printed anymore. Something that does not have a fundamental basis tied to a fiat currency. And the only thing I can name right now is bitcoin,” Michael Saylor summed up.

When the disadvantages of the alternative are better than the advantages of tradition

Another well-known investor and analyst, Ray Dalio, claims in one of his latest public interviews that the fiat system has entered the final stage of its development. He is sure that the final stage of the big cycle of the fiat system was launched in 2008, when the accumulated system problems began to be solved using the printing press.

The global cycle itself originated in 1944-1945, when the dollar acquired the status of world reserve currency, and the unlimited quantitative easing announced by the Fed became the apotheosis of the cycle, because the dollar loses its status properties. The investor advises to get rid of cash, as the end of the cycle will be followed by the inevitable collapse of the fiat system.

Ray Dalio considers gold and bitcoin as alternatives, preferring the former. Among the shortcomings of bitcoin, the expert pays special attention to the fact that it is not a medium of exchange. Here I agree, since a deflating system cannot be a medium of exchange. Few people want to buy a car for 1 bitcoin if they understand that in a couple of years they will be able to buy this car for 0.1 bitcoin.

Dalio sees the second drawback in the too high volatility of bitcoin. This is what prevents it from being used as a store of value. Here it is worth arguing. It is difficult to assess the volatility of an asset that has only a decade of market history. As the market capitalization grows, its volatility will decrease.

Even if you are willing to factor in market volatility, try comparing two assets (gold and bitcoin) in terms of capital savings over a decade. It seems to me that not a single asset in the world could cope with such a task better than bitcoin.

The third problem of this asset, according to Dalio, is as follows: as the first two are solved, bitcoin will begin to show signs of an alternative financial system. And this fact will face the opposition of centralized financial structures or “masters of money”. One could agree with this thesis if bitcoin was evenly distributed among market participants – ordinary people. Take a look at the distribution of Ethereum (ETH):

The top 1% of addresses control more than 97% of all issuance. And this ratio does not change drastically – neither with an asset price of $1,200, nor with a correction to $80. But with this level of control in the corrective phase, the realized capitalization of Ethereum was reduced by 56% in order to take the asset away from the “extra” owners.

And for bitcoin, a 16% correction of realized capitalization was enough with a decrease from $20,000. So what threat will bitcoin pose to the “masters of money” if they consolidate 97-99% of its emission in their hands?

Bitcoin is not a threat, but the mainstream

In addition, Ray Dalio sees great prospects in the development of centralized cryptocurrencies of the Central Bank – CBDC – and in the transition of the global financial system to digital rails. And here I agree with him, and bitcoin is not a threat, but the mainstream of such a transition, since the term “cryptocurrency” in the mass consciousness is associated with bitcoin. And the absence of an emission center will create the illusion of independence. And the fact that 99% of its emission will be controlled by the “right people” – who will think about it?

In conclusion, I would like to note that the growth in the value of bitcoin that we are seeing on the market is not a speculative “pump”, but an organic influx of new investment capital that does not find any other form of preserving the value of their assets. And the more aggressive monetary expansion on the part of the Central Banks, the more powerful will be the influx of capital fleeing fiat. Smart capital!