Wednesday, March 31, 2021

Bitcoin is a better investment than bonds or gold -- new charts

 Quicker post than usual confirming my early 2018 post on the promise of bitcoin.  The title was confusing because unsophisticated readers would understand only 1  bitcoin vs 1 once of gold, though "worth more" was a reference to the value of all of the bitcoin compared to all of the gold.  All of the major arguments for bitcoin were made then and are still valid today.

The major thesis of this paper is that for the next 70 years, bitcoin value will at least double every 4 years.  This schedule is premised on the mining reward adjustment (halving) that takes place every 4 years, that value equals utility and technology and adoption increases utility and value.

Charts and graphs

The charts in this paper are calculated from daily data provided at from August 20,2010 to March 28, 2021.  A price of $0.01/btc is added for August 19.  Most of their data points are separated by 3 days.  The highest price in their data is $57,665 on March 12, and last price in data, $55863.

Bitcoin Price History

The x axis ticks in these charts each represent 1 year from the start of the data.  The x axis numbers are days since day 0 (august 19, 2010).  Y axis, price in USD.

Number of days it took bitcoin to increase 900% in price

Not apparent due to scale of first chart, but bitcoin price increased by 10x (900%) very quickly in the first 2 and half years.  Averaging under 1 year from any date.  In 2013, it would take up to 4 years before a 10x price increase from some dates.  This fell back under 1 year for some dates in 2017 and 2020.  The data has been stripped of dates where a 10x price increase has yet to occur.  The 2017 high will require a $192,000 bitcoin price in order to hit its 10x increase on that date.  The very straight line segments towards the right of the graph indicate interpolation between missing (yet to be achieved) and real 10x achievements.

The sawtooth pattern in the graph underlies the exuberant/fast value increases that take place every 4 years mostly as a result of the mining reward adjustment. Bitcoin's history of volatile crashes is publicized more than the point that it has grown 10x+ over any 4 year period.  Better shown in this next chart.

4 year bitcoin return on investment (Price as multiple of 4 year earlier price) -start date of spring 2015

Data earlier than 2015 is omitted because it includes returns over 100000x.  The 2017 peak was only a 20x return over 2013 peak that occurred around the same date.  There were higher 4 year returns earlier in 2017.  March 28,2021 has a 4 year return of 60x.  The 2 occasions where the 4 year return on bitcoin was "only" 10x/900%, were short lived, and precipitated strong/steep rallies.  These returns exclude dividend/airdrop/forks.

If every other investment is stupid, then 50% of global wealth should move to bitcoin, and $8m/btc reflected 50% of 2017 global wealth.  There is no visible end to central bank action attempting to inflate global wealth.  The rise of bitcoin does not detract from global wealth, and in fact adds to it.

At $100k/btc, bitcoin will approximate gold's total private investment value.  Gold will always have poorer transactibility, security and transportability.  Gold's supply increases as its price does:  Miners get more active, and the "cash for gold" pawn shops recycle the jewelry market.

Government Bonds, in the US, will provide a 17% return over 10 years if everything goes perfectly.  Less in Europe.   There are only 2 reasons to buy 10 year bonds.  Either confidence that rates will go down even more, or a simplistic intent to hold the full 10 years. It is unlikely for government bonds today to have returns higher than inflation, and unlikely that rates go down further.

 It is possible to earn interest on bitcoin that is higher than government bond interest, with or without locking a deposit, as well as inherently being protected from inflation, and as well as having the conservative expectation of 400%/5x gains over 10 years.

Stocks are a stupid investment if they are valued for perfection.  Facebook can turn into My Space.  Apple can turn into Blackberry/Nokia, Microsoft can turn into IBM.... over a 10 year period, or at the end of that 10 year period, concern that it may come true in the next 10 years.  Compared to bitcoin there is always more uncertainty around companies ability to 5x in value over 10 years, and as an outsider, you are at a huge disadvantage compared to self dealing insiders and the wealth able to control them.

Price variability/volatility of an investment does not imply speculation.  Hoping a stupid investment goes up in the shorter term is speculation.

Projected bitcoin high price by year (in thousands) as function of 2021 high
Past price appreciation has been much faster than these projections, and its reasonable to hope that price appreciation exceeds this pace in short term (first few olympic periods).  But this pace is sufficient to invalidate the attractiveness of alternatives, and the real ultimate limit is global wealth % based.

Other crypto currencies
Several alternative crypto currencies provide value through different utility, but the utlimate utility is being able to send large transactions securely.  The major fault typical of newer projects is centralization and self dealing of their tokens.  Proof of stake blockchains are further self dealing to initial card holders, validating the blockchain without effort or "external" cost.  Delegated proof of stake further offers mining rewards using other people's money, and may open cheating vectors.  Reputable project directors are a vector for geopolitical control and corruption of projects. Bitcoin, on the other hand, has significant external validation cost, that guarantee security and a price floor, and no geopolitical control vectors.

The stable value of alternative crypto is relative to bitcoin.  Many projects are worth using due to their utility, especially DEFI disintermediation of financial services, but a relatively small allocation is advised.