Bitcoin had an insane run in 2020. With the halving event in 2020, and as more and more retail and institutional investors alike pile into the world of cryptocurrency, the investment thesis for the alternative asset class has seen a surge in demand and interest more so than ever.
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Most people that are not invested or simply do not understand Bitcoin would think that it is currently a bubble and that it will crash once again just like in 2017. While hindsight bias cloud our better judgement, it is better if you can understand why people are investing into Bitcoin and just what is so valuable about it.
Bitcoin first started trading back in 2009 when a mysterious figure known as Satoshi Nakamoto created the blockchain and the Bitcoin ecosystem. Back then, you could buy one of the new digital tokens for less than 1 cent. Prices steadily rose , albeit with some volatility over the years and in January 2021, Bitcoin hit an all-time high of nearly $42,000 USD.
Ethereum on the other hand, debuted in 2015 at less than $3 and soared to more than $1,400 by 2018. At the time of this writing, Ethereum trades at slightly more than $1,700 USD.
Although they’re the two biggest cryptocurrencies by market capitalization, Bitcoin and Ethereum are totally different animals, developed for different reasons and with different internal dynamics, and hence, the purpose of the 2 coins are very different which is something you need to keep in mind.
The King of Crypto
Bitcoin is the largest cryptocurrency by market-cap, and for a very good reason. Bitcoin is also known as digital gold due to its limited supply of 21 million in circulation. At the point of writing, there are around 18.3 million Bitcoins already in circulation, which means there are around 2.7 million Bitcoin left before all the Bitcoin are out in the open.
Due to it’s algorithm parameters, Bitcoin goes through halving every 4 years, which basically means that the number of blocks (of Bitcoin) that miners get rewarded with will reduce by half every 4 years, making it harder and harder to mine Bitcoin the longer the time drags. At the point of writing, one block mined takes 10 minutes on average through its Proof-of-Work model and at the point of writing, yields 6.25 Bitcoin as reward for the miner every time he successfully mine a block. (It will become 3.125 Bitcoin/Block in 2024 and 1.5626 Bitcoin/Block in 2028 so on and so fourth.)
By 2040, it is estimated that the entire 21 million worth of Bitcoin will be in circulation and no more Bitcoin can be mined or created. Hence, the fundamental value of where Bitcoin derives its value is due to the scarcity of it. Just like physical gold which becomes more and more difficult to mine over time, the value of Bitcoin depends on many factors such as the global interest rate environments, the demand of Bitcoin, the regulatory environment, fiscal action by central banks etc.
As mentioned by Ark Invest CEO Cathie Wood, their research shows that if all S&P 500 companies were to allocate 1% of their cash to Bitcoin, its price could increase by approximately $40,000! (At the point of writing, Bitcoin is valued at around $37,000 per coin).
As more institutions and big fund houses adopt Bitcoin into their balance sheets, we could see increased demand for Bitcoin (and therefore price increases) in the near future.
Couple that rising demand with Bitcoin halving every 4 years and the unlimited money printing by Central Banks all over the world, the Bitcoin thesis is becoming stronger and better each day. Whether you are a skeptic of Bitcoin or not, the fact is Bitcoin is here to stay and it’s growth will keep on getting better as it becomes harder to mine and more institutional participation.
The King of Altcoins
Ether, the native currency of the Ethereum chain, is also known as an alternative coin (altcoin) which basically refers to any cryptocurrency that is not Bitcoin.
To put it simply, Ethereum is a decentralized, open-source blockchain featuring smart contract functionality. It is the second largest cryptocurrency by market cap, and is the most actively used blockchain which uses the ERC-20 token.
Ethereum is interesting because its goal is not to become digital gold like Bitcoin, but to become programmable money which basically created decentralised finance (DeFi) and utilised for many initial coin offerings.
Simply put, the Ethereum blockchain is a platform for many other crypto projects to build decentralised apps (dApps) and to build on many other blockchain and more initial coin offerings, using Ethereum’s ERC-20 token standard. In order to send ERC-20 tokens , users have to pay Ether for all transactions, which is what makes Ether so powerful.
Since late 2020, Ethereum has started implementing a series of upgrades called Ethereum 2.0, which includes a transition towards proof of stake (from proof of work) and an increase in transaction throughput using sharding.
2021 will be the year of Cryptocurrencies
In 2021, we have already seen Bitcoin and Ethereum breaking their previous all time highs and for a very good reason. As the global money supply increases due to unlimited money printing by central banks, investors are becoming more afraid of the inherent risk of inflation which would be imminent in the future. Money printing do not come without long term side effects.
Aside from money printing, the low interest rate environment meant that cash is trash, which meant that investors, be it retail or institutional, will be desperately looking for inflation hedges, and because a huge amount has already been allocated to the equities market, cryptocurrencies as an alternative asset class will be able to diversify systemic risk and improve overall Sharpe ratio for many investment portfolios out there.
As the combined market cap of crypto assets cross the 1 trillion mark, it signifies the significance of this asset class as a viable option for institutional investors. Square, Microstrategy and Paypal led the charge into the asset class as they started reporting a part of their cash allocation as Bitcoin under their balance sheet and buying Bitcoin aggressively and offering Bitcoin exchanges for their customers. As more institutions swap Bitcoin for cash, we could see further rise in the price of Bitcoin in the future as well.
While some may argue that the current price is a bubble, they may be right or may be wrong, but bubbles can grow for a very long time and you are better off riding the wave than the miss the opportunity of a lifetime. Every minute wasted is millions worth in opportunity cost, so think wisely and think rationally.
Where To Buy Bitcoin and Ethereum?
Now you may ask, just where is the best place for us retail investors to buy Bitcoin or Ethereum?
I have used many different platforms such as Binance.SG and Binance Global, and I find that for both of the exchanges, there are certain things I dislike about both. Firstly, SG has very limited options and only offers a desktop platform with many technical issues such as Xfers having difficulty processing our money or other problems. Binance Global is extremely confusing for beginner crypto investors, and although both have pretty low fiat to crypto fees of around 0.6%-1%, when I want to send my crypto over to a crypto savings account, they took another bite off my holdings which amounts easily to around 0.001 BTC or more per transaction (which is hefty!)
Gemini, on the other hand, offers best in class security with high levels of protection and best in class custodian which puts you crypto assets in a separate Cold Storage encrypted by multiple signatures and having one of the highest security in the crypto field. You can read more about Gemini in my post here.
If you value security above all else like me, Gemini is one of the best exchange out there. They have not been hacked before since its inception, compared to Binance/Coinbase or any other platforms which are susceptible to hackers.
Fiat to crypto fees are much more significant at 1.49% + convenience fees but you get 10 free crypto to crypto transfers every month which I find particularly attractive. Let me explain why.
After purchasing Bitcoin/Ethereum, I will transfer my crypto assets over to Nexo.IO, which is a crypto savings and lending platform with high levels of security and a similar Cold Storage custodian with industry renowned BitGo. By putting my idle assets in Nexo, I effectively get 5% per annum (compounded daily) on my Bitcoin and Ethereum just by buying and holding.
As the value of my crypto asset increases, it is boosted by the daily accrued interest which is amazing. There are no fees at all when it comes to depositing or withdrawing from the Nexo wallet. All you need to do is to send the crypto asset from Gemini to Nexo and vice versa.
You can read up more about Nexo here.
Gemini Referral Code
For those who are interested to sign up with Gemini and invest into Bitcoin and more, you can click on this referral link here and receive US$10 in Bitcoin after you top up at least US$100 on Gemini!
Cryptocurrency is here to stay and this time it is different. Whether you want to call it a speculation or investment, it is totally up to you and your level of understanding of the asset class. If you understand the thesis behind it, you can go long term, ignore the short term volatility and noises, and simplying HODL until Bitcoin breaks new highs and more institutions take part.
Understand the risk of the asset class as well, such as regulatory risks and the difference between a hot and cold wallet, the level of security of different wallets. The post today merely scratched the surface of what Bitcoin and Ethereum actually is, and there are more complicated concepts and jargons at play here, so please do your own due diligence when it comes to investing and research properly before putting money into any asset.
For now, I will be allocating 10% of my assets into Bitcoin and Ethereum and depending on the future trend and environment, I may increase or decrease the allocation accordingly. It is definitely worth it to diversify into crypto as they have 0 correlation to the stock market and I think the thesis as an inflation hedge is extremely strong on Bitcoin especially, which is why I feel that in the long run, Bitcoin will be a good hedge against inflation and of course, the capital appreciation that comes along with it. 😉
Happy investing and all the best!
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment.
Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stock broker or financial advisor. (Or contact me!)