In the article The Trade Of The Decade: Betting On Bitcoin, we have argued that investing in Bitcoin is a winning strategy. The recent macroeconomic conditions further support the argument for investing in digital assets relative to fiat currencies. The unprecedented global liquidity increase across all major currencies starting with the US dollar raises the question of the long term viability of fiat currencies. In an attempt to stem off the economic risks of the coronavirus pandemic and the subsequent global recession, all major central banks and governments have engaged in a coordinated effort to print money and buy assets. The sheer volume of the 2020 liquidity infusion has never been seen before. In comparison, the Federal Reserve expanded its balance sheet by about $1.3 trillion in six months in 2008, which corresponded to an increase from 6% of US GDP to 15% at the peak. However, this time around the Fed increased its balance sheet by almost $3 trillion in only three months, which equates to an increase from 18% of US GDP to 33%. Central Banks have even ventured into new ways of stimulus buying corporate credit and equities, assets that have traditionally been left to market forces. The Fed took a page out of the European Central Bank’s book and announced that it would buy both investment grade and junk bond ETFs. Afterward, the Fed decided to create its own index of bonds which gives the central bank power to purchase more bonds that are outside of the ETF market — some of which are not even American companies. Here are the top constituents of this index:
Therefore alternative assets that are both unlevered and of limited supply such as gold and bitcoin appreciated dramatically and will likely continue to appreciate. In April last year, we predicted that Gold Will Outperform Both Equities and Bonds and indeed, gold has appreciated spectacularly reaching $2080 and is likely to continue to appreciate.
Bitcoin, however, despite our prediction and the macroeconomic backdrop has not appreciated as expected and has maintained a correlation to equities.
To understand what is going on and further explore the future of digital assets, I had a conversation with Mike Kessler, the CEO of Tokenise. Mike has more than 20 years of experience in investment banking, hedge funds, compliance, private equity, and stock exchange solutions using blockchain technology and can provide a holistic analysis of digital assets.
Stefanova: Mike, why do you think bitcoin is not appreciating as much as expected?
Kessler: Bitcoin has appreciated by 24% since March 2020. Yet in my view, Bitcoin has not reached its potential price. One of the major difficulties in crypto is the lack of liquidity. A relatively small group of holders can manipulate the price of bitcoin and create huge volatility. Second, the lack of mature, safe, and transparent infrastructure to trade bitcoin for both retail and institutional investors is lacking, deterring many from entering the market. Finally, the lack of a clear and consistent regulatory approach adds additional confusion.
Stefanova: Historically, we have compared the disruptive innovation from cryptocurrencies and digital assets to the other disruptive technologies. What analogies can we draw and what lessons can we glimpse from other disruptive technologies?
Kessler: I see similarities between the rise of cryptocurrencies and the evolution of the smartphone, from a fairly mundane mobile phone to a device more powerful than the technology that first put a man on the moon. A whole new set of business models and unimaginable services appeared as a result. Similarly, cryptocurrencies created a new way of storing data on a distributed ledger which has the potential to democratize access to assets previously only available to the economic elite.
Stefanova: Where are we in the development of digital assets?
Kessler: The market for digital assets is maturing. Technology innovation and creative business models are not enough. We also need the right regulatory framework. The ICO market is only now attracting the attention of the regulators who are putting in place laws to ensure investors are protected. Before that, there was no regulation and early-adaptors raised hundreds of millions of dollars with just a crazy idea in their head. 95% of those never came to fruition.
I believe that the future development of digital assets is being able to offer regulated securities offerings through a regulated platform. Some major players, serious credentials, and capital are entering the market. For example, Fidelity has amassed over $13 billion AUM in digital asset custody adding legitimacy and security to…
Read More: The Digital Asset Revolution: Beyond Bitcoin