Bitcoin is a cryptocurrency, that has gained traction due to a number of key features including, limited supply, and has become increasingly important asset, that is seen as a monetary alternative to traditional currencies, and other asset classes. An increasing number of people have adopted Bitcoin and now the digital currency is increasingly moving towards becoming mainstream, especially as global monetary policy continues to weigh on investor sentiment
By: Yourstockresearch.com 1 st September 2023
Overview of Bitcoin
Bitcoin has been trading in a volatile fashion for a while, and during key events, it tends to retrace significantly, these events are usually followed by retracements. As a result, trading in Bitcoin should primarily be seen as a long-term endeavour, where an investor, is willing to see “paper losses” in the short term, for long-term gains. Furthermore, if Bitcoin becomes more prominent and mainstream, the long-term prospects remain strong considering the potential for a wider-body of use.
Circulating Supply and Hash Rate
Bitcoin is slowly creeping towards 19,500,000 in total supply. The current Bitcoin hash rate stands at around 380-390 million up from 150-170 million in the previous year. The hash rate has significantly increased over the years, increasing from almost 0 to 380/390 EH/s (Exahashes per second). This is equal to 1,000,000,000,000,000,000 (one quintillion) hashes per second.
A hash is a function that through a cryptographic operations that generates unique and unrepeatable identification from a given information. Essentially, the hash is a fixed alphanumeric code, and solving the code allows for the mining of Bitcoin.
Moving forward the EH/s required to mine Bitcoin will continue to increase, meaning it will take an increasing amount of computer power to do so, thereby continuing to keep individual Bitcoins scarce.
EH/s required to mine Bitcoin (Source: Counwarez)
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Cost of mining Bitcoin
The current cost of mining Bitcoin stands at around $17,000 this compared to $5000-$10000 a year ago. Bitcoin remains profitable, but is taking an increasing cost structure and initial capital investment in order to mine the coin. In theory, advanced devices can mine a single Bitcoin in about 10 minutes. But the overall, power and scale required is larger than ever, again keeping the operation scarce.
The increasing cost of mining has led many miners to shut down operations, including major operations such as core scientific which shut down over 30,000 rigs recently.
Bitcoin vs. Ethereum
Bitcoin and Ethereum remain the two most popular cryptocurrencies in the world. Bitcoin was primarily intended to be a digital currency and an alternative to traditional currencies, many of which have become unstable.
Bitcoin is slowly being adopted more widely because it is seen as a hedge and alternative asset to investment, despite the fact, it resembles a currency more than a commercial asset. This means that Bitcoin will continue to be adopted, and will continue to be seen as an alternative safe haven.
Ethereum meanwhile, has a wider use case, it is designed to allow it to fork (although Bitcoin has forks now also, to make transactions cheaper), and create protocols that are cheap enough to use in ‘smart contracts’. These smart contracts have a strong use case especially, in commercial situations where a blockchain record is needed. On the other hand, Bitcoin’s overall protocol, will continue to make it a primary source of alternative investing, where investors look to diversify their holdings, rather than a commercial use item (at least in the medium term).
Crypto Global Adoption
Currently, according to Triple-A research, there are over 420 million crypto users worldwide. This presents a significant case for an increase in the number of crypto users globally, and subsequently those using Bitcoin. Furthermore, a number of major brands have continued to adopt Bitcoin as a part of their overall ecosystem. Making Bitcoin increasingly viable.
Commercial cost of Bitcoin in Transactions
Currently, the commercial cost of Bitcoin for use in transactions remains a challenge with each transaction costing around USD 90-95 cents to transact in Bitcoin. This means that in countries where there is adoption, the use-case for Bitcoin becomes less obvious. Currently, anyone using around $100 in transactions will pay around 1% transaction fees. This makes it expensive to most people and until fees are lowered through another protocol it will not be as useful in wider use-case, as other cryptocurrencies.
One of the ways Bitcoin is trying to overcome this is by having a fork. Recently a number of separate protocols have been created alongside the original protocol of Bitcoin such as the lightning network, which has significantly reduced the transaction fee. The only downside is you need to have a certain number of Bitcoins staked on the network in order to transact on the lightning network, which is both good and bad in the end case. This is where transactions might become harder. But continued work on transaction protocols and fees will certainly make Bitcoin more viable in the future.
Lightening Network to Lower Costs
The lightning network is a layer-2 solution built on top of Bitcoin in order to reduce transaction costs. The lightning network solutions change the protocol, to bring down transaction fees, and allows for off-chain transactions. Off-chain transactions are those transactions that occur outside of the blockchain
Adoption of Brokers as intermediaries is also playing a key role, and by using these brokers as intermediaries transaction costs have also been lowered. This system has also been adopted albeit more slowly.
Use Case for Bitcoin and Global Adoption
Bitcoin’s adoption and use-case makes it a more prominent cryptocurrency. The limited supply and use as a store of value has been central to the asset class.
The adoption of Bitcoin largely depends on whether it has an end use-case. The ability to use Bitcoin more freely in transactions will play a key role in whether it remains purely an alternative currency or something more, specifically a currency that has commercial use is important for wide-scale adoption.
Between 2015 and 2023 there has been a 172,000% increase in the adoption of Bitcoin according to the World Bank. There number of people adopting Bitcoin is increasing at a rate of around 54% and seems to be following a correlation similar to that of the internet in the late 90s. Therefore, the number of users of Bitcoin could easily hit a billion by the end of the decade.
Bitcoin has continued to be adopted by some major global brands as well. The adoption of major brands makes Bitcoin a lot more viable. And commercial use of Bitcoin remain key and according to research by Deloitte 85% of e-commerce players are hoping to adopt cryptocurrency as a part of their payment platform.
Source: (Triple-A research)
Countries that have adopted Bitcoin
Several countries have adopted Bitcoin, the adoption of Bitcoin as an alternative to the U.S. dollar and a medium of exchange with countries like El-Salvador officially adopting the coin remains pivotal in the global use-case analysis. But in countries such as El-Salvador, the usage remains low owing to the poor infrastructure and transaction costs that affect Bitcoin.
Beyond that, Bitcoin is legal across many countries as a tender, even if it hasn’t been adopted legally. It is unlikely most major countries adopt Bitcoin as a legal tender since local currencies will always take precedence.
Millions of users have used Bitcoin in countries such as Argentina, Lebanon, and Turkey. These countries have consistently faced economic downturns, and usage in these countries as a result has increased significantly. The latest statistics show around 8-9 million people likely own cryptocurrency in Turkey almost tripling from a year before. As economies continue to face turmoil, the usage of Bitcoin will only increase, especially if inflation remains high, which is currently an issue in many developing and developed countries concurrently.
Institutional adoption of Bitcoin
Many major institutions on top of individual users, retail, and countries have started to use Bitcoin. Bitcoin ETF’s have become a major source of business for large -scale operators, many of whom are looking to provide their clients with investing methods into the asset.
Therefore, total ETF level tend to hover around $1.5 billion but could double in the recent future as the number of institutional investors investing in Bitcoin increases. The asset class could see billions of inflows in the coming years, which should send the asset class much higher.
How will Bitcoin trade moving forward?
Bitcoin is largely driven by liquidity; that means a large part of Bitcoin is dependent on the global money supply. Recently global money supply has been rising with increasing levels of money supply out of emerging and semi-developed markets, while it has been under pressure in developed markets, and outright decreasing in countries such as the United States. Bitcoin witnessed a significant price increase during the pandemic phase after widespread adoption led to the first spike in the 2017-2018 period. The second increase in price was primarily led by monetary intervention, which led to widespread speculation on the asset. The third increase is once again a result of wider adoption and therefore, is likely to be far more sustainable and less volatile than the recent increases.
Considering that global adoption of Bitcoin is achieved, there is a potential in the trillions from retail, which will play a key role should adoption be successful. The global retail market is around 27 trillion USD, and Bitcoin has the potential to capture some small part of that.
Going forward, the type of monetary intervention we have seen in the recent past is unlikely. But on the other hand, wider adoption of Bitcoin across the globe has meant that Bitcoin price is slowly heading back up after falling below 20,000 USD recently. As a result, the monetary conditions may not be enough to keep Bitcoin elevated, but wider adoption will be central to continued price appreciation.
Global adoption has meant that Bitcoin is likely to see further gains in 2023. Adoption remains key to Bitcoins’ fortunes as current dollar strength puts downward pressure on the coin.
US Dollar and Bitcoin
Meanwhile, the U.S. dollar continues to strengthen, in the short term with debt under control, and interest rates continuing to remain high, as Central Banks continue to fight inflation. This has meant that in the short term, M2 continues to remain under control, and in fact, has been falling slightly in the short term.
Should the U.S. economy continue to struggle in the future, and important indicators such as manufacturing and consumption tumble, combined with high unemployment there is a potential to return back to monetization, which means the long-term fate of the U.S. dollar remains uncertain. This bodes well for the likes of Bitcoin, where uncertainty leads to higher adoption and an increased in money supply, both of which are bullish for the asset.
Furthermore, should debt increase once again it would require increasing monetization to ensure that the whole process is fiscally viable. Therefore, even if the U.S. government can ensure fiscal expansion is viable, at least in the short term, the effects will be bullish, and debt is likely to go up should any sign of an economic downturn occur.
Should you invest in Bitcoin? And risks to consider.
Considering Bitcoin as a part of your portfolio might be prudent if you are willing to see some paper losses in the short-term some of that money to volatility. Bitcoin remains a relatively volatile asset, which is still in the adoption phase in terms of technology. This adoption phase means there are two main risks, the more obvious risk is mark-to-market losses stemming from volatility.
But since the asset class is in the adoption phase the long-term adoption of the asset might either stagnate, or outright fail, but this is unlikely, but it should be considered a risk.
Otherwise, Bitcoin is an asset class that might be useful for certain types of investors, those who have a bit more stomach for short-term risk and also wish to diversify their assets. Putting a small percentage of overall assets towards the asset class might be useful, for improved long-term performance of assets.
Consider Bitcoin an alternative method for investing that could be useful improve portfolio performance.
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