Essentially, Bitcoin introduced the first viable alternative financial system, which institutions and retail investors alike are now recognizing. Overall, it’s electronic cash that’s truly peer-to-peer and therefore, decentralized as well. What that means is anyone can send Bitcoin to anyone else, anywhere, at any time, with no middlemen of any kind involved in the transaction. This is revolutionary because it effectively allows people of all backgrounds to actually hold the bitcoins they own and therefore, be their own bank at all times.
Before we dig further into what makes Bitcoin valuable, let’s look at how its price has changed since its launch. From 2009, when it was launched with a $0 value, it grew to $0.08 a coin in July of 2010, then became equal with the US Dollar at $1 a coin in 2011. From there, Bitcoin skyrocketed to $20,000 by the end of 2017, which remained as its all-time high until recently.
Despite a nearly 2-year bear market from early 2018 to mid-2020, since October, Bitcoin’s been on a tear, most recently hitting a new all-time high of $24,209.66 on December 21. Now heading into 2021, it’s well-above 2017’s all-time high and working its way towards new levels. All in all, Bitcoin’s explosive long-term price growth is only one of its value drivers. For that reason, below, we’ve compiled a quick analysis of the 3 remaining drivers as well, to give you a full picture of what makes Bitcoin valuable.
Back in 2009, when Satoshi Nakamoto launched the Bitcoin network, he did so with the stipulations that only 21 million bitcoins would ever be sent into the world and their issuance would be controlled by a measure called the “block reward”. The most important elements of them to remember are that they’re controlled by Bitcoin’s code and not any single individual and this creates the first instance of “digital scarcity”. Digital scarcity, in turn, refers to verifiably perpetual (immutable) scarcity that is outside of the hands of human actors. If you compare Bitcoin’s performance to gold’s, for example, over the last decade, then you’ll be able to clearly see just how powerful of a framework digital scarcity is.
A snapshot of its ROI compared to just about everything else’s over the same period illuminates just how powerful Bitcoin’s rise in value has been. From 2011 Bitcoin has risen 203.5 % (after accounting for volatility). On the basis of its price, what this means is that 1 Bitcoin has gone from $4.50 in value at the end of 2011, to $18.814.98 as of December 11, 2020. If we then move to the annualized returns of other assets, gold gained 2.2%, with US large-cap and small-cap stocks gaining 13.5% and 10.9%, respectively. All in all, with both ROI and overall price growth in mind, it’s easy to see that over the course of Bitcoin’s history, no other asset comes close to matching up to its status as the world’s leading store of value.
The key impetus for Bitcoin’s rise in 2020 has been increased institutional adoption. Beginning with Square Inc. investing $50 million in Bitcoin in October, and Microstrategy inc. purchasing $250 million of Bitcoin before that in August, the number of publicly traded institutions now holding Bitcoin as a treasury reserve has moved to 15, with more reportedly buying in through over-the-counter trading desks. As institutional interest continues to rise, Bitcoin’s correlations with traditional assets like stocks and gold have begun to break down in a significant fashion.
Though the future is bright for Bitcoin, it’s still early. New value drivers are likely to arise over time as crypto’s leading asset attains further longevity on the global financial markets.
This text is intended to inform and is not an investment recommendation.
