Despite the fact that most of the media has questioned the viability of Bitcoin for more than 10 years, bitcoin has been “the highest-yielding asset in the 21st century,” says Ark Invest in the introduction of his study Bitcoin as an investment, published last Thursday, December 17.
In the first part of this research, reviewed by CriptoNoticias, Ark Invest described Bitcoin as a novel economic institution, which meets the four guarantees that allow the efficiency and predictability of a financial system.
In this second part, Ark Invest sets out to explore bitcoin as an emerging asset. “While many investors question its merits, in our opinion, bitcoin is the most attractive monetary asset, after gold.”
According to the study, Bitcoin’s market capitalization still has plenty of room to grow from its current level (about $ 331 million) if its adoption increases in its four main facets: a global settlement system, protection against seizures, a form of digital gold and a catalyst for demonetization in emerging markets.
The study gives details on how, in each of those capacities or strengths, Bitcoin has great market opportunities.
Currently, Ark Invest highlights, all international payments in dollars must be settled through the Real-Time Wholesale Settlement (RTGS) of the Federal Reserve. “Bitcoin obviates the need for intermediaries to mediate and settle transactions and is capable of settling high-value transactions.”
If it only captured 10% of the settlement volumes in the United States, which total $ 1.3 trillion, Bitcoin could scale 7 times, from $ 200 billion to $ 1.5 trillion.
In the face of financial problems or capital confiscations that some governments have carried out, citizens are often left unprotected, the study states. With Bitcoin, on the other hand, personal sovereignty is possible.
“We believe that, with good management of public and private keys, bitcoin cannot be confiscated,” say the authors.
In our opinion, a sensible allocation to bitcoin would approximate the probability that a corrupt or the wrong regime will seize assets, either through fiat money inflation or outright seizure.
Ark Invest. Bitcoin as an investment.
By allocating 5% of the fiat currency assets of emerging countries to bitcoin, the value of Bitcoin would go from $ 200 billion to $ 2.5 trillion.
In the comparison between bitcoin and gold, several advantages of bitcoin over that precious metal have been highlighted. For example, bitcoin is more efficient in terms of portability, divisibility, verification, and transferability, attributes that also protect against centralization.
Regarding the potential for the expansion of the value of Bitcoin, Ark Invest argues that, if it managed to grow to occupy 10% of the gold market, it would reach almost a value of 1 trillion dollars, which is equivalent to a multiplication by 5.
Regarding countries with high inflation rates or hyperinflation, Ark Invest affirms that the lack of confidence in the monetary authorities leads investors and those who want to save to seek safe haven assets such as gold or bitcoin.
Since it is not subject to capital controls, bitcoin can become an important savings vehicle in emerging markets, to the point that businesses could demand payment in bitcoin instead of fiat.
Although Bitcoin has not evolved enough to serve the entire economy of a country, Ark Invest believes that demand for bitcoin will grow in emerging markets, while its infrastructure should reach critical mass.
If bitcoin could capture 5% of the global monetary base outside of the largest fiat currencies (dollar, yen, yuan, and euro), its market capitalization would multiply by 6, and it could reach USD 1.2 trillion.
There are periods in which bitcoin has maintained a high correlation with gold, for example, after the declaration of the pandemic by the WHO. However, when compared historically with the main assets of the conventional economy, the correlation remains low: between -0.2 and 0.2.
The figures used by Ark Invest in the study of the correlation of bitcoin against each of the assets comprise 2,500 points collected over a decade. In addition to gold, oil, bonds, the S&P 500 index, and the real estate industry, it includes companies like Apple and Tesla.
In the table above, it can be seen that the only asset that significantly escapes this trend is the real estate industry, which reflects a correlation of 0.34 with bitcoin.
After the declaration of the pandemic, in mid-March, there were point increases in bitcoin’s correlations with gold and with the S&P 500, Ark Invest notes.
In the absence of pandemic-like shocks, we believe that the correlations between bitcoin and traditional assets will again trend toward zero, until those who allocate assets to portfolios routinely include bitcoin in portfolios and until the traditional financial system incorporates Bitcoin on your infrastructure.
Ark Invest. Bitcoin as an investment.
In just over 10 years of history, says Ark Invest, bitcoin has been the best performing asset of the 21st century. “An investment of USD 10,000 in bitcoin 5 years ago, today would produce 119% compound annual return, the equivalent of having approximately half a million dollars today,” says the study.
With a capitalization market that exceeds 200,000 million dollars, the commercialization of bitcoin is carried out in exchanges or centralized cryptocurrency exchanges, not between banks, Ark Invest highlights.
The commercialization of bitcoin occurs at different levels, according to the asset for which it is exchanged. Ark Invest estimates that the average daily volume of bitcoin exchanged for USD is 200 million, but that it can triple if the rest of the main national currencies are considered. Fiat currencies thus represent 600 million dollars of the average daily volume.
By adding another popular asset class for trading bitcoin, stablecoins, you can reach $ 1.9 billion in daily volume. The next step in bitcoin volume is in the rest of the cryptocurrencies that add 700 million dollars. The volume of bitcoin exchanged with all fiat currencies and all cryptocurrencies, reaches USD 2.6 billion.
Finally, the most important contribution to the daily volume of bitcoin, almost 80%, comes from the so-called derivatives: bitcoin futures and options. With this important contribution of USD 10,300, it reaches USD 12,900 million in average daily volume.
When the daily spot volume of bitcoin is analyzed against the main traditional asset classes, it becomes clear that bitcoin is moving in an order of magnitude much lower than that of traditional equity markets.
All bitcoin spot markets, considering average daily volume, do not exceed $ 3 billion, Ark Invest notes. By comparison, the sum of the spot markets for traditional stocks is 160 times larger: $ 496 billion. The bond and forex markets go much further: $ 893 billion and $ 1.99 trillion, respectively, in daily spot volume, on average.
It is prudent to clarify that the above comparison is made by Ark Invest between Bitcoin and various traditional asset classes. “In other words, bitcoin trading is comparable in size to that of a large market capitalization company, not the volume of an entire asset class.”
In search of a segment in which Bitcoin can be measured against comparable companies, according to its trading volume, Ark Invest proposes to FANG, the acronym of the well-known technology companies that lead the web, the birthplace of Bitcoin: Facebook, Amazon, Netflix, and Google.
Compared with the shares of “FANG,” highlights the study by Ark Invest, the trading volume of Bitcoin exceeds that of Netflix and Google, but is less than that of Facebook and Amazon.
Bitcoin trading volume has grown exponentially, the authors note. “Since the beginning of 2013 the compound annual growth rate has been 215%, which means that volumes are tripling each year,” says the study.
The study dedicates a section to the strategies for allocating bitcoin to investment portfolios, and for this, it simulated 1 million portfolios with different allocations of bitcoin.
Taking into account the scenarios mentioned above about the possible growth of Bitcoin, three groups of simulations were considered, over a period of 5 years. For each group, it is assumed that the investment covers a certain percentage of the total target market for bitcoin. In 5 years, that total target market is estimated by Ark Invest at USD 110 billion.
In the first case, the investment in bitcoin is assumed to be 1% of the total target market, or $ 1.1 trillion. Then 5% (USD 5.5 trillion) and 10% (USD 11 trillion) scenarios are addressed.
The following graphs show that the returns in the second case increase considerably, although at higher levels of volatility.
In its conclusions, the study considers that the rapid growth of bitcoin as a monetary asset has positioned it to be included in diversified investment portfolios.
By offering the most attractive risk-reward profiles in the market, the study notes, “it should scale from $ 200 billion today, to between $ 1 trillion and $ 5 trillion in capitalization within the next 5 to 10 years.”
Bitcoin allocation strategies were addressed by CryptoNews, with details on analyzes conducted by CoinShares and BitWise. The emphasis in these analyzes was on the variation of the percentages between 1% and 5% of bitcoin allocation, applying a quarterly readjustment of the portfolios according to volatility.
A recent case of institutional investment that achieved notoriety was carried out by the company MicroStrategy. After investing 250 million dollars in bitcoin on September 11, this company became the first private corporation to establish part of its treasury reserves in bitcoin. Last Monday, the 14th, this firm doubled its bet in bitcoin, dedicating an additional USD 175 million to increase its strategic reserve in bitcoin.