Why Bitcoin at $100 000 Is A Big Deal
To Investors,
Last week the price of bitcoin breached the long-awaited $100 000 per coin mark. This was a big deal for the bitcoin industry and for bitcoin as an asset class because it means real money is going to flow into bitcoin.
Whales like institutional investors and national treasuries play the investing game on their own level. If you’re moving around billions of dollars, the deals need to be billion dollar deals because that's what it takes to compound billions.
Bitcoin at $100 000 puts the market cap of bitcoin at $2 trillion - which means bitcoin as an asset class will now seriously be considered by big money investors.
Since the U.S. election there’s growing sentiment for bitcoin to be added to the U.S. national reserve assets because of the country's troubled financial state; and around the same time that that conversation started in the U.S., El Salvador announced that they will for the first time in decades, no longer need to finance their national budget through foreign loans–thanks to the country accepting bitcoin as legal tender and adding it to their national reserves.
Gold has been the traditional reserve asset for countries for decades.
Even though bitcoin at $100 000 a coin puts the market cap of bitcoin at $2 trillion, bitcoin is still a smaller asset class than gold at $17 trillion.
That means there’s still a lot more room for the value of bitcoin to grow especially since the world’s largest buyers (G20 national treasuries) are yet to enter the market.
The U.S. needs bitcoin as a hedge against their seemingly never ending debt driven spending problems.
In this previous investor letter I had laid out that a national bitcoin program like adding bitcoin to a country’s national reserves will unlock a wealth of growth opportunities in that country’s economy.
In that same light, the U.S. adopting bitcoin will unlock tremendous opportunities for growth that can enable the U.S. to grow out of its expenses.
For a clearer picture, see the chart below where I’ve compared the performance/growth of the U.S. federal debt to bitcoin, the S&P 500, the Nasdaq, and to gold.
Because it would be akin to interference in free markets if the U.S. government bought public equities (not to mention the additional problems that would bring), we can ignore the S&P and Nasdaq data and look at Gold (orange) and Bitcoin (dark purple).
The U.S. federal debt (yellow) has grown by 153% and the price of gold has grown by 85% since 2010. That's why the U.S. needs bitcoin.
Is bitcoin the new gold?
I created this table below a while ago that compares bitcoin to gold.
Bitcoin is not the new gold, bitcoin is just digital gold.
As the world becomes increasingly digital, payments and wealth are increasingly digital. We send money digitally to each other and across the world, and we increasingly want it to be cheaper, faster, and more convenient. We see this in the adoption and usage of digital wallets.
In China for example, according to research by Ark Invest, the value of mobile payments grew 15x in 5 years, from $2 trillion in 2015 to $36 trillion in 2020–nearly three times the size of China’s GDP in 2020.
In another example, in 2020 Ark research showed us that in the U.S. the number of digital wallet users is surpassing the amount of deposit account holders at the largest banks.
However this is a global phenomenon–money and wealth are increasingly stored and moved digitally.
And that means that it makes sense to have a digital store of value similar to the role gold bullion plays in the physical world. Bitcoin is that store of value.
The points laid out above apply to every country in the world, not just the U.S. Some countries like South Africa have highly volatile and ever depreciating domestic currencies vs the U.S. dollar which makes it difficult to manage international trade and foreign investment. Other countries like Argentina have stubbornly high inflation which hinders economic growth.
Every country has a reason to adopt a national bitcoin program.
All that considered, I have a working theory for this hype that bitcoin received since the approval of the first bitcoin ETFs earlier this year in the U.S.
Call it a conspiracy, whatever, but I think there’s something there.
Looking at the returns of assets from countries that are supposed to be outperforming, the picture isn't as rosy as it may seem.
If you look at the charts below showing the S&P 500 and the Nasdaq respectively, denominated by M2 U.S. dollars, you can see that returns are relatively flat. This suggests that the returns on the S&P and Nasdaq respectively are inflated, i.e. the phenomenon where too much capital is chasing too few goods.
Chinese stocks have also been flat since around 2010, at the same time that the Chinese government seems to be making a push to remind the world that they control everything in China (so there really isn’t a free market to price your assets in China) so why invest there?
India is entering a renaissance in GDP growth but there are a number of uncertainties that remain because the country is relatively young in its growth cycle. Since around 2008 the Nifty 50 and the SENSEX have returned a relatively modest 175% and 168% respectively in U.S. dollars.
So if U.S. dollar returns for U.S. equities are distorted because of currency debasement, China is kind of uninvestable at the moment, and India is too young to pour real money into; where can whales look for high returns over a 10+ year period?
Well, other than venture capital (because the risk parameters that venture capital falls into and the illiquidity of venture capital means that venture as an asset class may not be an option for some institutions), the answer is public market ETFs - and bitcoin is perfect for what whales are looking for = high returning, inflation hedged liquid assets.
It’ll be interesting to see how this space plays out and which of the major global economies or wealth funds will be the first to invest in a national bitcoin program now that bitcoin has breached $100 000.
I hope you enjoyed reading this letter
On my journey to becoming a master capital allocator, one lesson down, a billion more to go
Hope you all have a great day
-Mansa