Bitcoin, the product of a monetary experiment initiated by technology geeks, has skyrocketed since its birth, rising from a price of less than one cent per coin to a maximum of more than 60,000 US dollars. In just ten years, the increase is more than 10 million times.
In terms of returns, Bitcoin's return rate reached 57.31% in 2021, while the S&P 500's return rate was 25.95%, the CSI 500's return rate was 15.58%, the Hang Seng Index's return rate was -14.12%, and the gold price rose by -4.38%. Compared with traditional assets during the same period, Bitcoin is undoubtedly a risky asset with investment value.
In addition, data shows that Bitcoin has only had two cases in its history where its annual growth ended in negative values, namely in 2014 and 2018. The rest of the time it closed higher, which is far better than other global assets.
At the same time, news of Bitcoin's surge and its successive record highs frequently made headlines in major media outlets. Even Tesla CEO Elon Musk stated that he has become a Bitcoin holder.
So, what exactly is Bitcoin, and why does it have such a high return on investment? Why does it attract so much attention? What investment value does it have?
1. Bitcoin’s characteristics support its value growth
1) High scarcity and storage value
① As we all know, the total amount of Bitcoin is constant at 21 million. Currently, nearly 18.7 million Bitcoins have been mined, but not all mined Bitcoins will circulate in the market. Due to the loss of the private key that records Bitcoin and the damage of the hard disk, many Bitcoins have disappeared permanently from the network. From the flow chart of Bitcoin holders below, we can see that at least 22% of Bitcoins have not been moved for more than 5 years. Therefore, even if all Bitcoins are mined, the total amount of circulation will never reach 21 million.
② Bitcoin has previously experienced a period of supply exceeding demand. On May 12, 2020, Bitcoin ushered in its third halving, and the reward for each block dropped from the original 12.5 bitcoins to 6.25. Based on the average speed of one block produced every 10 minutes, about 900 bitcoins can be produced every day. When Bitcoin started to rise in October 2020, Grayscale alone increased its daily holdings of 1,286 bitcoins, far exceeding the daily output of Bitcoin in the same period, so the rise in Bitcoin prices is foreseeable.
2) Mining Bitcoin requires costs
Many years ago, Bitcoin mining was just a hobby. We could mine Bitcoin using home computers. However, as the competition in mining became increasingly fierce and professional mining machines became available, the cost of individual participation in Bitcoin mining became increasingly high. Bitcoin mining has entered a large-scale, centralized and professional era. From equipment procurement, finding favorable electricity prices, mining site selection and construction, to dedicated management and post-maintenance, each step requires considerable capital investment.
The output of Bitcoin is halved every four years, which means that the number of Bitcoins mined with the same computing power will decrease, which means the cost of a single Bitcoin will increase. In addition, OKLink data shows that the computing power of the entire Bitcoin network has been rising. The more computing power there is, the more difficult it is to mine, and the higher the cost of obtaining Bitcoin.
Historically, Bitcoin has rarely fallen below its mining cost price. Once it falls below this price, some miners will choose to stop loss and leave the market because they are mining at a loss. At this time, the computing power will decrease, the mining difficulty will also be lowered, and the cost of Bitcoin will also decrease accordingly. Therefore, some people believe that the mining cost has a certain reference significance for the price of Bitcoin.
3) Anti-inflation value storage investment products
Since Bitcoin does not rely on a specific issuing agency, but is generated through a large amount of calculations based on a fixed algorithm, its attributes such as "decentralization", "constant total amount", and "openness and transparency" make it accepted and praised by more and more people.
Previously, affected by the COVID-19 pandemic, most central banks started loose monetary policies. Against the backdrop of global money printing, inflation expectations have risen, and investors' demand for hoarding cash has shifted to "anti-inflation, higher returns", so gold has emerged as the "king of safe havens". Bitcoin, known as "digital gold", has been increasingly favored by institutions in recent years because of its much greater room for growth than gold, its scarcity, and its low correlation with traditional assets, as investment channels become more compliant.
Currently, we see that more and more listed companies, private companies, and fund companies are beginning to add Bitcoin to their investment portfolios. In addition to diversifying investment risks, it also plays a role in increasing returns. Bitcoin investment is becoming increasingly mainstream. JPMorgan Chase once said that as millennials gradually become a more important part of the investment market and they prefer "digital gold" to traditional gold, Bitcoin may surpass gold.
Ten years ago, the price of one Bitcoin was no more than $30, but now the value of Bitcoin has reached $60,000, significantly outperforming inflation.
However, some people believe that although the price of Bitcoin continues to rise, it is highly volatile and has a high investment risk. But in fact, with the entry of institutions and the improvement of Bitcoin investment tools, such as the launch of Bitcoin ETF, JPMorgan Chase believes that the volatility of Bitcoin has tended to normalize recently. In addition, its correlation with other traditional assets is declining, which makes Bitcoin a more attractive target for diversified investment portfolios. Of course, if the time period of Bitcoin is extended, as we mentioned above, Bitcoin has only fallen twice since 2011. It can be seen that investing in Bitcoin is a cost-effective thing.
4) Multiple real-world application scenarios
In October 2020, PayPal, a well-known global payment service provider, allowed customers to buy, sell and hold Bitcoin and other digital assets, which may help Bitcoin and other digital assets gain wider adoption as viable payment methods.
In March 2021, Tesla's official US website supported Bitcoin payments for car purchases. Although Bitcoin payment only supports domestic US users, Tesla said it may expand into other markets in the future.
At the beginning of 2022, amid the chaotic situation between Russia and Ukraine, digital assets such as Bitcoin have become a tool for both sides to play against each other, and have been increasingly involved in the war, becoming a safe-haven option, an emerging war crowdfunding tool, and even a means of sanctions and counter-sanctions.
**Summary:** As the first application of blockchain, Bitcoin has exceeded a trillion-dollar market value after years of development, becoming one of the top eight global assets. Unlike previous bull markets, this round of Bitcoin bull market is driven by institutional investors and high-net-worth individuals. Against the backdrop of low global interest rates, institutions hope to obtain excess returns by investing in cryptocurrencies. Bitcoin and gold have many similarities in terms of inelastic supply, divisibility, and transferability. In recent years, it has tended to develop in the value reserve function. The low correlation and high returns of Bitcoin with traditional assets will further promote financial institutions to adopt Bitcoin in the future.
2. Bitcoin still has room for appreciation
1) Strong entry of institutional giants
As early as 2019, Wall Street financial giants sounded the clarion call to enter the blockchain field. At the beginning of 2020, the "Grayscale Bitcoin Trust" was successfully registered with the US SEC and became the first digital asset investment tool to report to the SEC. This milestone event paved the way for institutional compliance to enter the market, making Bitcoin more attractive to institutions. Since then, Grayscale has started a "buy, buy, buy" mode. Since Bitcoin started its full-scale rise in October 2020, Grayscale's Bitcoin holdings have increased from 450,000 to 650,000 in four months, with an increase of 200,000. Grayscale's daily increase in holdings exceeds the daily production of Bitcoin, which can be seen as the main reason for the rise in this round of bull market.
In addition to Bitcoin fund companies such as Grayscale purchasing Bitcoin, listed companies such as MicroStrategy, Tesla, and Square also bought a large amount of Bitcoin. According to Bitcoin Treasuries, as of April 2022, major listed companies, private companies, and fund companies held a total of more than 1.24 million Bitcoins, with a total value of US$57.2 billion.
It can be seen that more and more companies are beginning to use Bitcoin as a tool for storing value, which will further expand the popularity and influence of Bitcoin. The rising popularity of the Bitcoin market will be reflected in the price of Bitcoin, so the profit margins of institutional investment will continue to increase.
2) Well-known figures enter the market in a high-profile manner, and the market heats up greatly
As Bitcoin's influence grows, more and more celebrities have said they have invested in Bitcoin. Tesla CEO Elon Musk said in a chat on the social media Clubhouse that he is a supporter of Bitcoin and believes that Bitcoin will soon be widely accepted by traditional financial professionals. NBA Dallas Mavericks owner Mark Cuban said Bitcoin is a better alternative to gold and will continue to exist, which is why he owns Bitcoin and has never sold it.
Data shows that Bitcoin's on-chain transaction volume, number of active addresses, etc. have increased exponentially, showing that the market is still hot.
Conclusion:
Since its birth in 2009, Bitcoin has gone through more than ten years, from a niche toy that geeks are interested in to a popular investment product that ordinary investors can also participate in. During this period, Bitcoin has encountered countless moments of "death", but the attributes and characteristics given by the technology behind it have made the consensus of Bitcoin increasingly strong, and more and more investors regard Bitcoin as a hedging tool to deal with inflation risks and the weakness of the US dollar. Historical data shows that Bitcoin is the best performing asset in the past decade, and those who embraced Bitcoin early on have also reaped a higher rate of return than any other asset.
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