Investment thesis

Why I'm investing now

crypto investment thesis

[Intro] [The global problem] [The crypto solution] [Investment thesis]


If you've made it this far, you already understand the basic premise for investing in bitcoin:

  • The global monetary system has gone past the point of no return and is on the path to inevitable failure.
  • To buy time, central banks are now trapped in a vicious cycle of increasing 'money printing' and government debt.
  • They can keep doing this because they are 100% in control of the money supply and can create unlimited amounts of it.
  • The central bank's policies "conveniently" made the rich richer (themselves included) via surging real estate and stock prices.
  • Meanwhile, everyone else's cash and savings get devalued due to the rapid increase of the money supply.
  • The establishment (i.e. people who got us to this point) know that this is unsustainable and is planning for a reset of the system.
  • But frustration on the ground is high and trust in the establishment is low.
  • Previously, people had no choice but to go along with it because there was no alternative. Now, there is an alternative via bitcoin.

This is the fundamental reason I'm investing in bitcoin.

All this being said, the timing for when to invest is crucial.

After all, the monetary system had been faltering for years, and the central bank can drag things out for many more years before the system finally breaks down.

So why have I decided to invest in crypto now?

The short answer: There's been a catalyst that dramatically accelerated things.

The straw that breaks the camel's back

Though the financial system was already in trouble prior to 2020, it was mostly still held together by the central banks that were doing everything they can to buy time.

The situation took a big turn for the worse, however, in 2020 when the Covid-19 pandemic struck.

With many parts of the economy shut down and the unemployment rate rising to double digit levels¹, the U.S. government and central bank went on an unprecedented debt binge and money printing spree.

pandemic debt surge
m2 money supply

Their response to the pandemic was the equivalent of a two-pack-a-day smoker suddenly going twenty packs a day; His days were numbered before... but now, he is on the fast track to the end.

If this is not a clear signal that we are in the final phase leading up to the next financial crisis, I don't know what is.

Well, maybe except if inflation starts ramping up!

Inflation starts ramping up

On 12 May 2021, the U.S. CPI (inflation) numbers came in much hotter than forecasted²:

us cpi

Given what we already know about the massive money printing programs conducted in 2020 and its prior years, this is a warning sign that surging inflation might already be here.

If we consider that the central bank cannot raise interest rates (or they'd bankrupt the nation as well as countless companies and people), it seems reasonable to estimate that the endgame is near.

All signs are now pointing to a fast-approaching climax to all the problems that have been festering for the past 50 years... and I'm betting that after the dust settles, crypto will come out of it a big winner.

Note

To be clear, I am NOT suggesting that bitcoin will replace national currencies.

In my opinion, the most likely scenario is that bitcoin will exist alongside a new global monetary system and its group of national currencies³.

The struggle between government control and individual freedom will continue, but the former's influence will be diminished because people now have an alternative monetary asset to turn to (bitcoin) if the central bank starts behaving irresponsibly again.

The anti-establishment narrative

This is another core component of my investment thesis.

Ever since the 2008 GFC, public dissatisfaction with Wall Street and the banking community has been steadily rising, spurred on by popular films such as The Big Short, Inside Job and Too Big to Fail that explained to the world how the bankers who caused the crisis were bailed out by politicans using taxpayer money.

Today, the average disgruntled Joe on the street can, for the first time ever, "stick it to the Man" AND make money doing it.

This is a crucial psychological shift that has never before occured on a global scale. By holding bitcoin, one can not only beat the "evil bankers" at their own game, but - and this is the important part - get RICH at the same time.

It's a highly emotive and contagious idea that has only just started gaining traction. We've seen glimpses of its potency in the form of the Dave Portnoy's 2.5 million (and growing) Twitter following, the 'WallStreeBets vs Hedge Funds' saga and from stories of people paying off their mortagages¹⁰¹¹ and becoming millionaires¹² by investing in crypto.

Even the millenials who normally shy away from stock investing¹³ are now dipping their toes into crypto with HODL¹⁴ and lazer eyes¹⁵ memes, the latter of which has even been adopted by members of Congress¹⁶.

The HODL culture is of particular interest, because what it effectively boils down to is a community of investors who constantly reassure each other not to sell.

hodl bitcoin

This is a remarkable characteristic for an investment asset; Holding Hodling crypto has become a cultural movement.

On social media, you'll find communities of crypto investors relating to each other as fellow soldiers (or HODLers) "holding the line", as though they are part of some globally decentralized army fighting for a common cause. Their sense of camaraderie should not be underestimated; People share painful stories of loss and thrilling accounts of gains. Upon reading these anecdotes, one gets the sense that this is more than just about money.

The point to all of this is that the idea of crypto investing is exciting, infectious, and most of all, sticky. People who get into crypto do not stop thinking or talking about it; And they're more than happy to introduce it to their friends.

If you haven't checked out the crypto scene on Reddit or Twitter, I strongly encourage you to do so. The buzz there is unlike anything I've ever seen; It's an extraordinary melting pot of people sharing lively discussions, arguments, lessons, stories and jokes, all centered around a singular topic: crypto.

So while there are many technical benefits to blockchain technology¹⁸, I believe it is the emotionally engaging nature of the subject that gives it the mindshare potential it needs to achieve mainstream adoption.

And with institutional investors now coming onto the scene¹⁹²⁰, it looks like we won't have to wait too much longer before that happens.

Price target

To project a price target for bitcoin, let's first compare it to existing financial assets that also serve as a store of value: Gold and negative yield bonds.

Gold
Market cap: $11 trillion²¹
Supply growth: 2.7 million kg per year²² (with existing 179 million kg supply)

Negative yield bonds
Market cap: $18 trillion²³
Supply growth: Theoretically unlimited

Bitcoin
Market cap: $1 trillion²¹
Supply growth: 2.5 million more bitcoins until 2140 (out of total 21 million), after which no more will be produced²⁴

Bitcoin vs Gold

  • History: Gold has a longer history of being a store of value. (Gold wins)
  • Supply: Gold supply is expected to steadily increase. Bitcoin supply decreases over time until the 21M cap. (Bitcoin wins)
  • Fractional ownership: You can't own 0.01 of an ounce of gold, but you can own 0.00000001 of a bitcoin. (Bitcoin wins)
  • Portability: Gold is heavy and difficult to transfer over national borders. Bitcoin is 100% digital and easily transferable. (Bitcoin wins)

Bitcoin vs Negative yield bonds

  • Carrying cost: Bitcoin has no carrying cost, while negative yield bonds charge interest (Bitcoin wins)
  • Supply: Bonds have theoretically unlimited supply, whereas bitcoin has a fixed supply (Bitcoin wins)
  • Factional ownership: You can't own 0.01 of a bond, but you can own 0.00000001 of a bitcoin. (Bitcoin wins)
  • Centralized intervention: The price of bonds is directly affected by interest rates which are controlled by the central bank, while the price of bitcoin depends purely on demand and supply. (If pro-centralization, bonds win. If pro-decentralization, bitcoin wins)

Given that the 3 assets have similar "store of value" characteristics and: 

  1. Unlike gold and bonds, bitcoin can be bought in fractions (so even the poor can invest in it)
  2. The bitcoin market cap is less than 4% of the combined market cap of the three assets
  3. Very few companies currently hold bitcoin in their treasury accounts²⁵

... I find bitcoin to be largely undervalued at the current price of $50,000.

If we make the simplistic case for an equal distribution of the combined $30 trillion market cap ($30 trillion divided by 3), that would bring the price of bitcoin to approximately $476,000 per coin, an approximate 9.5x return from the current price of $50,000. This is not so much a specific price target as it is a placeholder to help newcomers understand the magnitude of the potential return.

For specific price targets, I'll defer to professional investors much smarter than myself with targets of $300,000² by end 2021, $288,000 by 2024² and over $1 million by 2026².

It goes without saying, but I'll say it anyway: none of these targets are guaranteed. Personally though, even if these targets missed by half, I'd still be a happy investor.

Concerns

In this section, I'll address the main concerns of investing in cryptocurrencies.

Cryptocurrencies have no intrinsic value

For the most part, this is true. Cryptocurrencies have no intrinsic value as they are made up of lines of code.

This misses the point however, as the same can be said for Facebook and Google; Their products and services are mostly just lines of code.

The value of cryptocurrencies does not depend on "what they're made of" per se, but the network effect and benefits they bring to people. The larger the benefit, the more valuable the cryptocurrency.

What if the government bans cryptocurrencies?

Since blockchain technology moves power away from the government towards the people, it's natural for restrictive governments to resist it.

Indeed, the governments of Turkey, Nigeria, Bolivia, Ecuador, Algeria, Nepal, Qatar, Egypt and Bangladesh have already moved against the crypto industry to varying degrees²⁹. It's no coincidence that most of these countries have relatively low GDP and have a long history of government corruption.

In contrast, the most liberal and economically advanced countries such as the U.S., Canada, the European Union and Australia have embraced the crypto industry³⁰.

The decentralized nature of most blockchains makes it impossible for governments to fully prevent their use. If one government bans cryptocurrencies, transactions can still be run over the blockchain (over the internet) that are processed in countries without the ban.

Unless the internet connection is cut off, people can't be fully stopped from participating in the crypto economy.

What if there are bugs in the blockchain? What if the blockchain gets hacked?

Software bugs and melicious hacking are legitimate concerns to crypto investors.

Thankfully, these can be avoided by only investing in cryptocurrencies with large market caps and long operating histories.

For example, bitcoin has a market cap of $1 trillion (at the time of this writing) so there is strong financial incentive for hackers to exploit any bugs or hack the system.

The fact that bitcoin continues to operate without incident today is strong evidence that the bitcoin blockchain is secure.

Can't anyone just duplicate a blockchain?

Yes, technically anyone can clone the bitcoin blockchain and create their own version of it.

The problem however, is that running the network would require the participation of countless others.

You can duplicate a blockchain, but you can't duplicate the ecosystem of miners, buyers and sellers that transact on the original.

The value of a blockchain lies not in its code, but in the network of people and systems that use it.

Since there is no central authority, isn't investing in crypto unsafe?

Investing in cryptocurrencies is, in a sense, "less safe" than investing in traditional financial assets because - by default - there is no protection against fraud or human error. If you make a mistake or get scammed, the transaction cannot be reversed.

This is just a temporary issue however, as there will eventually be intermediaries that will mitigate this problem.

For now though, you are fully responsible for any mistakes you make.

Wouldn't it be difficult for crypto to achieve mass adoption since it requires some technical ability to use?

The crypto industry is still in an early phase, so it's not very user-friendly yet.

This said, centralized crypto exchanges like Binance and Coinbase provide an intuitive user interface that's similar to most modern trading/investing platforms, so beginners might prefer to use them first.

Isn't the crypto market dominated by big players (aka "whales")? Wouldn't that make it subject to manipulation?

All markets are manipulated on some level, but yes, the pseudonymous and unregulated nature of the crypto market makes it easier for market manipulators to operate.

I would say though, that market manipulation can only be carried out over the short term, so if you're investing over a longer term horizon based on solid fundamentals, you'll be fine.

And actually, if you know how the market manipulators work, you can use this knowledge to your advantage. To learn more about this, check out my personal investment strategy below.

Most concerns and criticisms about crypto are either due to a misunderstanding of how the technology works, or the relatively young age of the asset class.

As the technology matures, 99% of these "problems" will be worked out.

By then, of course, the market price would have gone up substantially as well.

The only persistent issue that's unique to crypto is the presence of big players that can manipulate the market without legal penalty; It's a decentralized and pseudonymous marketplace, after all.

Thankfully, there are ways to get around this "problem" if you know how they operate (see my investment strategy below for more).

Upon considering all factors, and given that bitcoin has survived for 12 years and rallied to a high of $64k before even going mainstream, my view is that the upside potential is well worth the downside risk.

Crypto's future role

My reasons for investing in crypto extend beyond the next 3-5 years.

As bitcoin goes mainstream over the longer term, people will have to choose to:

  1. Keep their savings in a national currency that is subject to inflation and devaluation³⁰ by the government, or
  2. Keep their savings in gold which is vulnerable to confiscation³¹, or
  3. Keep their savings in bitcoin that cannot be inflated, devalued or confiscated³²

The choice is obvious.

Bitcoin's superior 'store of value' characteristics are especially important to the wealthy, since they have the most to lose when (not if) national currencies get diluted.

Remember, in 2020 alone the U.S. central bank expanded the money supply by 37%! If you had $1,000,000, by the end of the year your theoretical purchasing power would have fallen to just $630,000!

So the use case for bitcoin is straightfoward.

Meanwhile, there are more sophisticated second- and third-generation blockchains that serve more advanced purposes. To keep things concise I won't go into the details of those but suffice to say, crypto technology will realistically disrupt multiple industries over the next 5-10 years and open up new markets that didn't exist before. If you'd like to know more about this, join my newsletter below.

The bottom line is that blockchain technology is here to stay, and it's poised to make a big impact on billions of people around the world.

Investing in a future people cannot yet see

Imagine buying Amazon stock in 2012.

Back then, online shopping was a fringe activity and most people thought the internet was just for sending emails and watching YouTube videos.

Amazon's founder, Jeff Bezos, saw a different future and went on to build an online shopping portal.

There were of course, countless naysayers along the way. "Nobody likes to shop online!" "Buying stuff on the internet is too risky." "No way I'm entering my credit card details on the internet." 

Ten years later, Amazon became one of the largest companies in the world with service offerings like AWS, Alexa and Amazon Prime that operate in a dozen different markets today.

crypto early investor

In a similar way, bitcoin is just the start of a growing range of services powered by blockchain technology. There will be technical challenges and hiccups along the way, but 99% of the problems will be fixed by the time the technology goes mainstream.

Importantly, the early days of slow user growth is over (2009-2019) and we are now on the cusp of an explosion of decentralized digital services that will start eating up the market share of existing companies.

crypto mass adoption

Twenty years ago, people laughed at the idea of powerful media conglomerates being threatened by digital content.

Today, newspaper, magazine and print ad agencies have all but been put of out business by Google and Facebook.

The same will happen in the near future with crypto technology taking over companies in the financial, legal, real estate, retail, music, healthcare, education, art industries and more³³.

The future next-generation "companies" (i.e. blockchains) are being built today. And you can either sit on the sidelines and watch, or get in early and benefit from their inevitable rise.

[May'21 update] A window of opportunity

As of May 2021, the price of bitcoin (and many other cryptocurrencies) has corrected by 50%:

bicoin bubble

This represents an exceptional opportunity to invest in the crypto space at a discount.

Just like how the weak hands were shaken out during the 2017/18 "bubble" before prices rallied 16x, I believe we are now seeing the same phenonmenon occur on a larger scale.

Over the next few years my expectation is for the price of bitcoin to dwarf its current high of $64k.

My crypto investment strategy

The crypto market is young, volatile and unregulated. So while the potential gains are substantal, it won't be a smooth one-way ride.

If you'd like to follow my investing journey, join my free newsletter and get:

  • Details of my crypto investment strategy
  • Which cryptocurrencies I'm investing in (and why)
  • How to buy and store cryptocurrencies
  • Updates on my portfolio returns and my reactions to them
  • Thoughts on current crypto price levels
  • Important industry updates

To subscribe to my Digital Slowmad newsletter, enter your email below (it's free):


¹ https://fas.org/sgp/crs/misc/R46554.pdf
² https://www.bloomberg.com/news/articles/2021-05-12/consumer-prices-in-u-s-increase-by-most-since-2009
³ https://www.forbes.com/sites/seansteinsmith/2021/05/18/crypto-integration-is-key-to-the-dollar-remaining-the-global-reserve-currency/
https://en.wikipedia.org/wiki/The_Big_Short_(film)
https://en.wikipedia.org/wiki/Inside_Job_(2010_film)
https://en.wikipedia.org/wiki/Too_Big_to_Fail_(film)
https://en.wikipedia.org/wiki/The_Man
https://twitter.com/stoolpresidente/status/1270805981778325505
https://www.kiplinger.com/investing/stocks/602158/gamestop-how-wallstreetbets-wsb-beat-hedge-funds
¹⁰ https://www.cnbc.com/2021/04/15/jim-cramer-says-he-sold-some-of-his-bitcoin-and-paid-off-a-mortgage.html
¹¹ https://www.reddit.com/r/CryptoCurrency/comments/7musy4/just_paid_off_the_mortgage/
¹² https://www.cbsnews.com/news/bitcoin-millionaires-100k
¹³ https://www.cnbc.com/2018/08/01/why-millennials-are-scared-of-the-stock-market.html
¹⁴ https://www.investopedia.com/terms/h/hodl.asp
¹⁵ https://knowyourmeme.com/memes/glowing-eyes-laser-eyes
¹⁶ https://www.forbes.com/sites/joewalsh/2021/02/19/heres-why-2-members-of-congress-have-laser-beam-eyes-on-twitter/
¹⁷ https://www.cnbc.com/2021/01/23/why-people-invest-in-bitcoin.html
¹⁸ https://www.europeanbusinessreview.com/advantages-of-cryptocurrency-all-you-need-to-know/
¹⁹ https://www.forbes.com/sites/rogerhuang/2021/02/24/institutional-support-is-coming-to-bitcoin/
²⁰ https://www.forbes.com/sites/michaeldelcastillo/2020/08/06/valuable-sec-data-on-20-institutional-bitcoin-investors-could-soon-disappear/
²¹ https://8marketcap.com
²² https://www.gold.org/about-gold/gold-supply/gold-mining/how-much-gold
²³ https://www.bloomberg.com/news/articles/2020-12-11/world-s-negative-yield-debt-pile-at-18-trillion-for-first-time
²⁴ https://www.investopedia.com/bitcoin-halving-4843769
²⁵ https://bitcointreasuries.org/
²⁶ https://www.newsbtc.com/analysis/btc/gmi-model-estimates-bitcoin-fair-value-at-300k-by-october-2021
²⁷ https://medium.com/@100trillionUSD/bitcoin-stock-to-flow-cross-asset-model-50d260feed12
²⁸ https://www.youtube.com/watch?v=qwHI6OC3rc8
²⁹ https://finance.yahoo.com/news/countries-banned-cryptocurrencies-why-210500613.html
³⁰ https://www.investopedia.com/articles/forex/041515/countries-where-bitcoin-legal-illegal.asp
³¹ https://en.wikipedia.org/wiki/Executive_Order_6102
³² https://theconversation.com/venezuelas-desperate-currency-devaluation-wont-save-its-economy-from-collapse-101939

³³ https://www.cbinsights.com/research/industries-disrupted-blockchain/