The Investment Case for Bitcoin

Please note that VanEck has exposure to bitcoin.

We often refer to bitcoin as “digital gold” because, like the metal, it is a potential store of value. Like gold, bitcoin’s characteristics include:

• Limited supply: Maximum supply of 21 million. This scarcity means that the price could move upward as adoption increases.
• Increasing adoption: Bitcoin has been gaining traction in terms of the number of merchants that accept it as payment. In 2021, El Salvador made headlines by declaring Bitcoin as legal tender. As the first country to do so, El Salvador serves as a good macro case study for bitcoin as legal tender.
• Potential inflation hedge: Monetary stimulus is currently eroding purchasing power globally and bitcoin might outperform as it’s not subject to the same inflationary manipulation as traditional currencies.
• Diversification benefits: Bitcoin is an uncorrelated asset.

However, unlike gold, bitcoin is:

• Divisible and transparent.

Bitcoin’s Limited Supply Creates Scarcity and May Increase Its Value Over Time

There will only ever be 21 million bitcoin in existence. This supply cap was designed intentionally and is one of the primary characteristics of bitcoin. Furthermore, bitcoin has “halvings” programmed into it. A halving is defined as a 50% block reward cut to the bitcoin production rate, and they occur roughly every four years. This means that the rate at which new bitcoins are introduced into circulation slows down over time until it eventually reaches zero (estimated to occur around the year 2140).

Bitcoin Halvings Typically Associated with Explosive Returns

Source: Bloomberg, VanEck research as of 31/03/24. Past performance is not indicative of future results. The information, valuation scenarios and price targets presented on Bitcoin in this blog are not intended as financial advice or any call to action, a recommendation to buy or sell Bitcoin, or as a projection of how Bitcoin will perform in the future. Actual future performance of Bitcoin is unknown, and may differ significantly from the hypothetical results depicted here. There may be risks or other factors not accounted for in the scenarios presented that may impede the performance of Bitcoin. These are solely the results of a simulation based on our research, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

These halvings increase the difficulty of mining bitcoin and will occur until the supply cap is reached. In addition, the built-in finite supply of bitcoin means that it is not subject to inflation in the same manner that fiat currencies are. Central banks around the world have ushered in unprecedented growth in money supply, effectively eroding their currencies’ purchasing value. In comparison, bitcoin’s limited supply and increased mining difficulty over time may support the idea of bitcoin as a long-term store of value and as an alternative to gold.

The fourth halving occurred in April 2024. Historically, the price of bitcoin has rallied leading up to and following a halving. The chart above indicates the explosive returns that are typically associated with following the bitcoin halvings.

Bitcoin Adoption Continues

In its early years, bitcoin was largely used by a small group of tech enthusiasts. It was difficult and cumbersome to obtain with limited use cases and very few merchants accepting it as a form of payment. In 2023, bitcoin adoption has grown substantially as it has become more mainstream. Now, more than ever, merchants and businesses are accepting bitcoin as a form of payment and infrastructure has been built to make it more convenient for the average person to use. The development of user-friendly wallets, exchanges, and marketplaces has removed the technical barriers to entry that existed in bitcoin’s early years.

Bitcoin interest among institutional investors has also increased. Hedge funds, asset management firms, and endowments are increasingly recognizing bitcoin’s potential as a store of value and as an effective portfolio diversifier, specifically, when looking through the lens of an uncorrelated asset that has the potential to hedge against inflation. Approximately $175B worth of bitcoin are now held by ETFs, countries, public and private companies.

BTC Holdings in Publicly Traded, Private Companies, ETFs and Countries

Source: Buybitcoinworldwide as of 31/03/2024. Past performance is not a guarantee of future results.

Layer 2s (such as Liquid by BlockStream) may be the next step in boosting bitcoin adoption as they allow for scalability and customizations while retaining many of bitcoin’s security properties. Built on top of the Bitcoin blockchain, we believe the Lightning Network pushes the boundaries of Bitcoin payment capabilities with lower costs and faster speeds.

One notable upcoming layer 2 development on the bitcoin network is RGB. This development is important because it enables the creation and management of digital assets on top of the Bitcoin blockchain. Assets such as stocks, bonds, real estate, or even other cryptocurrencies can be issued and traded on top of the Bitcoin network, adding a new layer of functionality. The RGB protocol is designed to be scalable and not resource-intensive, allowing users to create and manage digital assets without requiring extensive changes to the underlying Bitcoin network. It can be integrated into existing bitcoin wallets and infrastructure, thus making it easier for developers and users to create and manage digital assets. RGB has the potential to expand the use cases of bitcoin, making it a more versatile and useful platform for developers and users alike, ushering in new opportunities for innovation and growth within the ecosystem.

Potential Hedge Against Inflation

The unprecedented worldwide growth in money supply following the COVID-19 pandemic led to widespread inflation, eroding the purchasing power of established fiat currencies. Bitcoin’s role as a potential hedge against inflation has increasingly become a talking point central to investment decision-making. As previously alluded to, the cornerstone of this idea lies in its limited supply and decentralized nature. Unlike fiat, which can be printed by governments and central banks, bitcoin has a fixed supply, with supply growth decreasing by 50% roughly every 4 years with the halving events. Bitcoin is not subject to the same inflationary pressures caused by fiat money supply growth, making it an attractive option for investors concerned about the impact of inflation on their portfolios and their subsequent purchasing power.

Bitcoin’s decentralized nature makes it impervious to geopolitical events or economic policies that may lead to currency devaluation, such as QE (quantitative easing) or excessive government spending.

The Role of Bitcoin 

If bitcoin is increasingly used as an asset with monetary value, what role might it play?

Bitcoin may potentially increase portfolio diversification because of its low correlation to traditional asset classes.

Bitcoin Correlation with Nasdaq Has Fallen Considerably

Source: Bloomberg as of 31/03/2024. Past performance is not a guarantee of future results.

Bitcoin may also enhance risk-return profiles. As the chart below shows, a small allocation to Bitcoin significantly enhanced the cumulative return of a traditional 60% equity and 40% bond mix while only minimally impacting overall volatility.

Source: Morningstar. Data as of 31/03/2024. Equities are represented by the S&P 500 Index, Bonds are represented by the Bloomberg Barclays US Aggregate Index, Bitcoin is represented by the MarketVector Bitcoin Index. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities mentioned herein, to adopt any investment strategy, or as any call to action. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see important disclosures at the end of this commentary regarding hypothetical performance.

Source: Morningstar. Data as of 31/03/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities mentioned herein, to adopt any investment strategy, or as any call to action. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see important disclosures at the end of this commentary regarding hypothetical performance.

Bitcoin’s History of Robust Performance

Despite its infamous volatility, bitcoin has managed to outshine other asset classes over the past decade. In fact, it has been the best-performing asset class for eight out of the past eleven years.

Let's take a closer look at bitcoin's historical returns for various holding periods (as of 31 March 2024):

• 1 year: 147.89% return
• 3 years: 19.46% return
• 5 years: 1,598.56% return
• 7 years: 7,654.74% return
• 10 years: 18,719.44% return

These figures underscore the incredible growth potential that bitcoin has exhibited over time, making it an attractive option for investors seeking high returns.

Bitcoin Has Been the Best Performing Asset Class in 8 Out of the Past 11 Years

Source: Morningstar, as of 31 March 2024. Bitcoin is represented by MarketVector Bitcoin PR USD; US Equities are represented by the S&P 500 TR USD; Gold is represented by the S&P GSCI Gold Spot; Emerging Markets is represented by Fidelity Emerging Markets TR; Real Estate is represented by the NASDAQ Global Real Estate TR USD; US Bonds are represented by Bloomberg US Aggregate Bond USD; Treasuries are represented by the Bloomberg Aggregate Bond Treasury TR USD; Commodities are represented by the Bloomberg Commodity TR USD.

How Might Bitcoin Shine Brighter Than Gold?

While bitcoin shares some of the characteristics attributed to gold, below are differences that, in our view, potentially make it superior.

1. Divisible: As a physical asset, gold can only be divided into smaller units to a certain extent, making smaller transactions cumbersome and, in some instances, impractical. Bitcoin, on the other hand, is divisible up to eight decimal places (with the smallest unit called Satoshis), making it easier to use for microtransactions.
2. Transparency: All transactions that have ever occurred or will occur are publicly available on the Bitcoin blockchain. This feature makes it difficult to manipulate and impossible to counterfeit Bitcoin, increasing trust in the network. Gold lacks the same level of transparency – when it is traded, the details of the transaction, such as the buyer, seller, and price, are often not publicly available. This lack of transparency may make it more difficult to verify the authenticity of the gold being traded and may lead to an increased risk of fraud and manipulation.

Overall, while gold has been used as a store of value and in transactions for centuries all over the world, its lack of transparency can make it more challenging to verify and track compared to digital assets like bitcoin. As inflation poses challenges to investors globally, both gold and bitcoin are likely to come front and center as potential hedges to protect purchasing power. With bitcoin’s benefits like divisibility and transparency, we see it as a competitor to gold, and believe it is likely to garner even more adoption among retail and institutional investors alike.

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