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Bitcoin, the result of a currency experiment initiated by tech enthusiasts, has skyrocketed since its inception. Its price has surged from less than a cent to over sixty thousand dollars in just a decade, marking an increase of over ten million times.
In terms of returns, for the entire year of 2021, Bitcoin's return rate reached 57.31%, while during the same period, the S&P 500 had a return rate of 25.95%, CSI 500 had a return rate of 15.58%, Hang Seng Index had a return rate of -14.12%, and gold prices increased by -4.38%. Compared to traditional assets, Bitcoin is undeniably a risk asset with investment value.
Moreover, data indicates that in its history, Bitcoin has only experienced two years where its annual return ended in negative values, namely 2014 and 2018. For the rest of the time, it showed positive returns, outperforming other global assets.
Simultaneously, news of Bitcoin's surges and continuous setting of historical highs has frequently made headlines in major media outlets. Even Tesla CEO Elon Musk has stated that he has become a Bitcoin holder.
So, what exactly is Bitcoin? Why does it offer such significant investment returns? Why does it attract so much attention? And what investment value does it possess?
**I. Characteristics Supporting Bitcoin's Value Growth**
1. **High Scarcity and Store of Value**
- It is widely known that the total supply of Bitcoin is fixed at 21 million. Currently, nearly 18.7 million Bitcoins have been mined, but not all of them are in circulation due to factors like lost private keys and damaged hard drives. At least 22% of Bitcoin has not moved for over five years, as indicated by the chart showing the movement of Bitcoin holders.
- Bitcoin previously went through a stage of high demand and low supply. On May 12, 2020, Bitcoin experienced its third halving, reducing the block reward from 12.5 to 6.25 Bitcoins. Considering the average rate of one block every 10 minutes, approximately 900 Bitcoins can be produced daily. When Bitcoin entered an upward trend in October 2020, Grayscale alone increased its Bitcoin holdings by an average of 1,286 Bitcoins per day, surpassing the daily production of Bitcoin. Hence, the increase in Bitcoin's price was foreseeable.
2. **Mining Bitcoin Requires Costs**
- Many years ago, Bitcoin mining was just a hobby, and one could mine Bitcoin using a personal computer. However, with the increasing competition in mining, the advent of specialized mining machines, and the rising difficulty of mining, individual participation in Bitcoin mining became costlier. Bitcoin mining has entered a professional and centralized era, involving significant capital investment in equipment procurement, finding discounted electricity prices, selecting mining farm locations, building and managing the facilities, and providing ongoing maintenance.
- Bitcoin undergoes a halving every four years, meaning that the quantity of Bitcoin mined with the same computing power decreases. This implies that the cost of a single Bitcoin will rise. Additionally, OKLink data shows that Bitcoin's global hash rate has been consistently rising. As the hash rate increases, mining difficulty also rises, leading to higher acquisition costs for Bitcoin.
- Bitcoin has rarely fallen below its mining cost in history. If it does, some miners may choose to exit due to mining at a loss. At this point, the hash rate decreases, mining difficulty adjusts downward, and the cost of Bitcoin also decreases. Therefore, some believe that mining costs have a certain reference significance for Bitcoin prices.
3. **Value Storage Investment to Resist Inflation**
- Due to its reliance on a specific issuing institution but rather on a fixed algorithm, Bitcoin has attributes such as decentralization, fixed total supply, openness, and transparency. These qualities have made it increasingly accepted and admired by more people.
- Due to the impact of the COVID-19 pandemic, most central banks initiated loose monetary policies, leading to global flooding of money. In this context, with inflation expectations rising, the demand for hoarding cash transformed into a demand for "inflation resistance and higher returns." As a result, gold, known as the "king of safe-haven assets," emerged. Bitcoin, often referred to as "digital gold," has gained popularity in recent years because of its substantial upside potential, scarcity, and low correlation with traditional assets. As investment channels become more compliant, Bitcoin is increasingly favored by institutions.
- Presently, more and more publicly listed companies, private enterprises, and fund companies are incorporating Bitcoin into their investment portfolios. Apart from diversifying investment risks, it also contributes to enhancing returns. Bitcoin investment is becoming increasingly mainstream. JPMorgan has stated that as millennials gradually become a more important part of the investment market, and they prefer "digital gold" over traditional gold, Bitcoin may surpass gold.
- Ten years ago, the price of one Bitcoin was no more than $30. Now, the highest value of Bitcoin has reached $60,000, significantly outperforming inflation.
- However, some opinions suggest that while Bitcoin's price continues to rise, its high volatility poses significant investment risks. Nevertheless, with the entry of institutions and the increasingly sophisticated Bitcoin investment tools, such as the introduction of Bitcoin ETFs, JPMorgan analysis indicates that Bitcoin's volatility is tending to normalize. Additionally, its correlation with other traditional assets is decreasing, making Bitcoin a more attractive target for diversified investment portfolios. Of course, if the time frame for Bitcoin is extended, as mentioned earlier, Bitcoin's annual returns have fallen only twice from 2011 to the present, demonstrating that investing in Bitcoin is a cost-effective venture.
4. **Various Real-World Applications**
- In October 2020, globally renowned payment service provider PayPal allowed customers to buy, sell, and hold Bitcoin and other digital assets, potentially helping Bitcoin and other digital assets gain more widespread adoption as a feasible payment method.
- In March 2021, Tesla's U.S. website began supporting Bitcoin payments for vehicle purchases. Although the Bitcoin payment method is only available to U.S. customers, Tesla has stated that it may expand to other markets in the future.
- At the beginning of 2022, amidst the chaos between Russia and Ukraine, digital assets such as Bitcoin have become tools for both sides in their power play. They have become increasingly involved in the conflict, serving as a safe haven, a crowdfunding tool for emerging warfare, and even a means of sanctions and counter-sanctions.
**Conclusion:**
As the first application of blockchain, Bitcoin has broken through a trillion-dollar market value after years of development, becoming one of the top 8 assets globally. Unlike previous bull markets, this round of Bitcoin bull market is driven by institutional investors and high-net-worth individuals. In the context of a globally low-interest-rate environment, institutions hope to obtain excess returns through cryptocurrency investments. Bitcoin and gold share many similarities in terms of non-elastic supply, divisibility, and transferability. In recent years, Bitcoin has leaned more towards developing its function as a value reserve. The low correlation and high returns of Bitcoin relative to traditional assets will further drive financial institutions to adopt Bitcoin in the future. |
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Post time 23-12-2023 21:00:57