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The recent rebound in cryptocurrency prices proves that even investors skeptical of cryptocurrencies should recognize that, compared to completely ignoring the asset, allocating a small amount of Bitcoin in their investment portfolio would be a more prudent choice.
This week, the price of Bitcoin surpassed $44,000, more than doubling from the price on March 13. According to market analysis, Bitcoin's performance in price is not surprising. Going back to 2014, Bitcoin has historically doubled in value every nine months and twenty-one days; however, this time, it achieved this milestone twenty-eight days ahead of the average.
What is somewhat surprising is that, during this doubling process, Bitcoin did not drop below the lowest point on March 13. Typically, between each doubling, Bitcoin experiences an average drop of 27% (for example, dropping from $1,000 to $730 and then rising to over $2,000), and the maximum drop can even reach 83% (i.e., the price drops to $170 before rising to $2,000).
Nevertheless, the roller-coaster-like price fluctuations of Bitcoin are no longer a novelty. Since the peak volatility during the COVID-19 pandemic, Bitcoin's annualized volatility has stabilized around 50%, comparable to many large-cap tech stocks. More importantly, despite scandals, bankruptcies, legal prosecutions, and regulatory controversies in the cryptocurrency space, Bitcoin has shown relative price stability.
Does this mean that Bitcoin can take a seat at the table during this year's holiday feast and have its place in a standard investment portfolio? For most investors, the answer remains "no." Bitcoin may have enough upside potential to attract investors, and its volatility seems no longer to be a daunting factor. Issues like asset custody security, tax treatment, and legality seem to have mostly been addressed. However, Bitcoin's unstable correlation with other major assets—especially stocks, currencies, and gold—makes it challenging to integrate it into a portfolio, similar to a left-handed guest struggling to fit in at a dinner party.
As early as 2011, I estimated that the cryptocurrency market would account for 3% of the global economy. As an efficient market investor, regardless of the size of market volatility or the soaring or plummeting of cryptocurrency prices, I consistently allocate 3% of my net assets to cryptocurrency. However, most investors prefer investment categories with some predictability in their fundamental events and tend to hold long-term rather than engage in frequent short-term trading. (Disclosure: The author has a risk investment and advisory relationship with cryptocurrency companies.)
Bitcoin was initially conceived as a transactional currency, and that was its original value proposition. Bitcoin is far more efficient in handling international transfers, serving the unbanked, and assisting those oppressed by the financial system than traditional financial systems.
Additionally, Bitcoin has facilitated certain activities, such as the sale of entertainment NFTs, prostitution, and other activities rarely prosecuted for, such as gambling. Despite a common misconception that Bitcoin is frequently used for nefarious criminal activities like terrorism or hiring hitmen, the truth is that Bitcoin transactions are public and immutable. While Bitcoin transactions are anonymous activities, investigators can often easily trace individuals through transaction pattern analysis. Malicious criminals typically use assets issued by governments, such as cash, gold, or diamonds, or privacy-focused cryptocurrencies like Monero or ZCash, to conceal their identities.
During a Senate Banking Committee hearing this week, Senator Elizabeth Warren, along with JPMorgan CEO Jamie Dimon and other bankers, unanimously agreed on the need for anti-money laundering controls on cryptocurrencies. While laws can make it difficult to deposit or withdraw fiat currencies associated with criminal activities, there is no way to prevent or trace direct transfers between privacy-protected cryptocurrencies. The financial repression system to combat money laundering is one of the reasons people—both good and bad—use cryptocurrencies.
However, this is not crucial for Bitcoin, as its use case as a transactional currency has faded away. Fundamental improvements in traditional finance, ZF's regulation and crackdown on cryptocurrency use in criminal activities, all contribute to Bitcoin no longer being positioned as a tool for transactions and transfers. However, beyond this, the erosion of Bitcoin's original transactional attributes is mainly due to the emergence of innovative cryptocurrencies like Ripple or Nano, which outperform Bitcoin in terms of transactional performance.
Around 2015, Bitcoin's value proposition shifted from a "transactional currency" to "digital gold." Bitcoin would become the value anchor for cryptocurrencies, used for the conversion of traditional currencies into and out of cryptocurrencies—just as gold has been the value anchor for paper currencies for centuries, used for inter-central bank settlements.
From this perspective, Bitcoin's value depends on three factors: the ultimate value of cryptocurrency projects, the quantity of traditional currencies entering and leaving cryptocurrencies, and whether financial services in the crypto economy (alternative to traditional banking systems) are superior.
The first factor, the ultimate value of cryptocurrency projects, is essentially a form of venture capital for technological entrepreneurship. On one hand, many exciting ideas may change the world and be worth trillions, but on the other hand, the actual income or profit of these projects, measured in traditional currencies, is often minimal.
The quantity of traditional currencies entering and leaving cryptocurrencies has always been influenced by economic prosperity and recession or, in crypto terms, summer and winter. In crypto summer, a large influx of funds occurs, but many crypto enthusiasts also cash out during this period. Additionally, people use Bitcoin to switch from one crypto project to another. In crypto winter, the flow of funds in both directions is minimal, and the demand for Bitcoin financial services in the crypto industry is also small.
The most stable element lies in competition in the financial services sector. Bitcoin has rapidly strengthened its connection with various aspects of the modern financial system, including trading public futures and options, efficient lending, secure custody, and more. If, as the market expects, the U.S. Securities and Exchange Commission approves a Bitcoin ETF in January |
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Post time 15-12-2023 08:01:27