One of the hottest trends in recent years has been the growing interest in cryptocurrencies. This should come as no surprise. Bitcoin and many other cryptocurrencies have appreciated significantly in value in recent years. Since Bitcoin’s inception about 10 years ago, it has appreciated in price by 255% per year. This is from 8/31/2010 to 12/31/2020 based upon data from https://www.coindesk.com/price/bitcoin. These returns have come with significant volatility though. The annualized standard deviation of returns over this time has been 135%. This is much higher than the volatility investors typically experience with a diversified stock portfolio. Still, the rates of cryptocurrency exchange tend to draw people’s attention.
The Digital Marketplace
There are thousands of different cryptocurrencies that each serve a different purpose. Bitcoin is by far the largest cryptocurrency with roughly 68% of the market capitalization. Bitcoin is a cryptocurrency whose strengths are security and transparency. All transactions are viewable by the public. There are no customer names associated with ownership of any Bitcoin tokens. The only thing allowing a customer to control specific Bitcoin tokens is a username and password. Just make sure you do not forget your password. There is no customer service to help you like you would have with a typical bank account.
Unlike traditional banking, Bitcoin uses something called blockchain technology. This approach accommodates cheaper and faster transactions for Bitcoin and other cryptocurrencies compared to traditional banking. A transaction in the traditional banking system involves two banks needing to verify information from each other. This slows the processing of transactions. There is only one blockchain network for Bitcoin. That makes this extra step unnecessary. This is what makes blockchain technology so revolutionary. Some people believe blockchain technology may replace traditional banking someday.
Store of Value
One other thing Bitcoin enthusiasts love about Bitcoin is that it is a currency with no ties to any sovereign entity. Its supply is fixed. There will only be roughly 21 million Bitcoin ever mined. Fiat currencies, like the US dollar, have a connection to a sovereign entity. The sovereign’s associated central bank will persistently look to increase the supply of the currency. Doing so supports economic growth. It also depreciates the value of the currency. Bitcoin has no such problem. This is why many people consider Bitcoin to be a store of value much like gold.
Unlike gold though, Bitcoin has a known supply. There were about 18.6 million units as of February 4 as per https://www.blockchain.com/charts/total-bitcoins. This supply will never grow beyond about 21 million. White Oaks estimates that there are roughly 5.7 billion ounces of gold above ground. No one knows the amount of gold that is still underground. Bitcoin is also cheaper to store and transport than gold.
Bitcoin has only been in existence for about 10 years though. At this point, Bitcoin is still very much an emerging asset class. No one knows for sure how long it will take for the market to mature and develop. No one even knows for sure whether or not that will ever happen. Gold, on the other hand, has been used as a store of value for thousands of years. Like any asset, it has its doubters. The size of the market and the trading volume suggest that it is far from being an emerging asset class though.
Some day, Bitcoin’s market capitalization will exceed that of gold. At least that is what Bobby Lee and Anthony Pompliano think. Famed hedge fund investor Paul Tudor Jones has made the comparison between gold and Bitcoin’s market capitalization as well. Gold’s market capitalization is currently about $10 trillion (5.7 billion ounces multiplied by the current price of $1,898 per ounce). Bitcoin’s supply will only grow to 21 million. Imagine a $517,000 Bitcoin price. That is a 15x increase from current levels! This is how Bitcoin’s market capitalization would equal gold’s. Obviously Bitcoin’s market capitalization exceeding gold’s implies even higher prices.
The return potential in cryptocurrencies is unquestionably phenomenal. Are the risks too great though? White Oaks is still evaluating cryptocurrencies. As of the time of this writing, White Oaks does not have any directional exposure to cryptocurrencies.