Bitcoin: Poised to enter the mainstream?

The current economic uncertainty has resulted in investors searching for safe assets for shelter. Typically, we have seen gold provide this role, however, could Bitcoin serve as a future alternative?

Bitcoin has gained 60% YTD compared to gold’s 27%, jumping 5% last Wednesday upon the news that Paypal told customers they would be able to pay using BTC (and other cryptos) on its service starting from 2021.

The main case for investing in Bitcoin has been the continued increase in demand for the crypto, which is beginning to be acknowledged on an institutional level. This has been driven predominantly by the rising awareness in emerging nations, not to mention the realisation of potential investors.

Bitcoin is set to fulfil its supply limit of 21 million units by 2040, one of the crypto’s key features. This provides it with a stock-to-flow ratio rivalling that of gold, leaving some optimistic it will one day become a digital replacement. Stock-to-flow represents the number of years at the current production rate that is required to achieve the current supply. According to the Twitter commentator, PlanB, gold currently sits at a ratio of 62 compared to BTC’s 52. Whilst the anonymous user’s model has come under fire for assuming a “spurious relationship” between price and scarcity, he has continually defended his position, arguing assets with high stock-to-flow have a high value (e.g. gold, real estate).

Market Capitalisation of Bitcoin has seen a steady increase during 2020 to $199bn. With the rise of this, we may see a reduction in perceived risk by eager investors. The Securities and Exchange Commission is actively working on regulations that may permit crypto versions of ETFs, enforcing the positive sentiment surrounding bitcoin, proving that the demand is there from listed companies. Fidelity Investments has consistently supported Bitcoin, and in a recent report demonstrated its low correlation to other assets, providing ‘portfolio optimisation benefits.’

However, the volatility of Bitcoin will still prove to be a worry for traditional investors. On the 12 March 2020, we witnessed BTC lose 40% of its value amid a large equity sell-off. Events like these prove that Bitcoin is still prone to major corrections, and even though it isn’t necessarily correlated to other assets, it still doesn’t provide a perfect hedge against economic shocks.

Furthermore, Bitcoin is environmentally inefficient due to its complex mining process. This entails incredibly high-powered computers solving computationally complicated mathematical problems. According to Digiconomist, the Bitcoin network has an annualised electrical footprint of 74.38 TWh, and carbon footprint of 35.33 Mt CO2. This is comparable to the power consumption of Venezuela and the carbon footprint of New Zealand! With the growth in ESG investing, it is hard to imagine Bitcoin having a future in institutional investment due to huge environmental impact.

Overall, Bitcoin remains to be a disputed asset between investors. Buffet has branded it simply as a ‘mirage,’ whilst others such as Raoul Pal have called it ‘the next big thing,’ recently moving over 25% of his portfolio towards the currency. Bitcoin must still gain greater endorsement on an institutional level if it wishes to skyrocket as PlanB has predicted.