The year 2020 is coming closer to the end and we all look forward to 2021. On the subject of investing,the first question that raises my mind is ” How should we be investing right now based on how market economies and technologies are evolving?”So, to that end we will need to ask the question :
Bitcoin is many things to many people around the world and why they chose to hold Bitcoin depends on their circumstances and views about Bitcoin is today and what it could become in the future.So, to begin exploring the validity of Bitcoin as an investment in 2021,lets start talking about the difference between return and risk.
Return & Risk
A Yale Study conducted by economists examined whether the returns of digital assets like Bitcoin , Ethereum (Ether) and Ripple behave like the returns of other asset classes i.e. stocks,traditional metal commodities. Based on their analysis, the return behavior of all digital assets including Bitcoin could not be explained by the risk factors that account for the returns in stocks,currencies,precious metals,commodities or by macroeconomic factors rather economists found that Bitcoin’s performance is driven by cryptocurrency specific factors such as the momentum effect and proxies for average and negative investor attention.
What the Momentum Effect means is that an asset is likely to continue increasing in value if its already just increased in value. What that means is that Bitcoin’s Price and the sentiment surrounding Bitcoin experience a self- reinforcing effect. We can measure the Twitter post or Google searches about Bitcoin and correlate that pretty strongly against Bitcoin’s price. So, something to really consider about Bitcoin, and other digital currencies or digital assets in totality is that what drives the price – their narrative – changes and potentially matures over time.
For example- performance has not been historically connected to the change in Bitcoin’s fundamental metrics. if you have followed cryptos in any length in time, you know that the performance of the crypto assets,digital assets, it hasn’t been driven by fundamentals, instead being driven by speculative trading activity. However, over time, as the investors and market participants analyzing and participating in Bitcoin market evolves, its performance may be tied to a greater extent to fundamental adoption variables and to the lesser extent, reflexivity and sentiment.
I think in 2021, that is definitely something to pay attention to because global investor sentiments does have an impact Bitcoin’s price, but Bitcoin has a distinct underlying fundamentals that are not affected by the health and economic situation created by the pandemic and lock downs. Compare that to the traditional economies and economics, where we have demand shocks ( the decline in consumer demand for goods and services due to the lock downs and unemployment). We have supply shocks(production limitations and supply chain shutdowns) and the ensuing policy response by governments and central banks(quantitative easing or record low interest rates). On the other hand , Bitcoin’s fundamentals and utility are not directly affected by the decline in profitability or production or an increase in the money supply. Instead, the headwinds may increase the attractiveness of investing in Bitcoin and i do believe that many investors are taking note.
Bitcoin Evolving Narratives
This is where it gets really interesting….
We need to look into the history Bitcoin and the study Bitcoin’s evolving narratives. another angle in Bitcoin’s lack of movement with traditional assets is the absence of an agreed upon narrative at any given time. These narratives have ranged from Bitcoin as the peer to peer electronic cash system/payment system to reserve currency for digital assets to store of value or even a safe haven. The list goes on and on , but the lack of consensus could be an important reason why Bitcoin has not traded in line with other assets today,Something we have seen this year and is a salient narrative i.e Bitcoin is an emerging store of value asset,but most recently Bitcoin’s behavior has been inconsistent with prices moving in step with different asset classes week to week.
This is an important evolution for Bitcoin, even though the media detracts from Bitcoin, if its not maintaining this consistent narrative- if one week it looks like a store of value asset and then the next week it doesn’t ; i dont think that detracts from its value, especially as its narrative is still emerging. You see in the early days of Bitcoin’s existence, events and sentiments affecting traditional markets had little to no impact on Bitcoin’s markets.
Bitcoins trading infrastructure was completely independent of traditional market infrastructure and Bitcoins ability to react to current events affecting traditional markets in real time was limited because Bitcoin’s trading was not integrated into traditional markets.but, as the infrastructure has matured, participants in Bitcoin markets and traditional markets have started to overlap. This is why we see so much noise about institutional investors now being able to trade Bitcoin futures and options on the same platform they use to trade derivatives of other assets. At the same time, retail investors can now buy and sell Bitcoin on certain platforms that allow them to trade stocks.
I think this is one of the most important things to note because as Bitcoin matures and the profile of the market in Bitcoin expands to include more participants from traditional markets, well Bitcoin could become more correlated with other assets increasing its overall value. As Kathy Wood from ARK Invest said –
As Bitcoin’s narrative becomes more consistent as it proves to stand alone from the fiat monetary system, that where i think Bitcoin really shines as an investment. Here is another quote i would like to show from Chamath Palihapitiya –
Bitcoin is unique in that it continues to be influenced by retail investors sentiment and can capitalize on the shift in the way that retail investor interact with traditional markets and consume financial information. I think this is one of the best reasons why Bitcoin could continue to serve as a portfolio diversifier – if not become the best investment in 2021 because Bitcoin’s fundamentals are relatively shielded from the economic impact of the pandemic as its functionality is not predicated on profitability or production and Bitcoin is natively digital.
I really think that the simple explanation as to why Bitcoin is the best investment in 2021is that it simply does not fit into any defined asset categories, making it the ultimate alternative asset. As Bitcoin grows and matures, as investors study its characteristics as institutional investors and retail really start to get on board, I think that opens the doors for helping Bitcoin mature into an independent asset class.
This i believe is the most important narrative surrounding Bitcoin in 2021, Bitcoin is not just an alternative asset or investment anymore. It is an alternative Asset Class that stands alone and above many others. Bitcoin is an unique investment asset with compelling differences relative to traditional asset classes. I think in 2021with the way economics are developing, there is nothing better you can ask for.
So What do yall think? Do you think Bitcoin is the best investment in 2021? Do you think Bitcoin is maturing? What do you think is going to happen next year and how are you planning for it?
Let discuss discuss on the comments below
If you are looking for guidance to how to acquire cryptocurrencies like Bitcoin or Bitcoin Cash, or Ethereum or other cryptos ; I have prepared a Beginners Buyers Guide which is found at the Cryptocosm to help you to buy cryptocurrencies like Bitcoin easy,fast and reliable.
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