Welcome to the recent new Essential Members. We have revamped the Essentials Portfolio by including Bitcoin. Stay tuned for trade alerts sent directly to your inbox, keeping you up-to-date with any adjustments to three key holdings. We are adding Bitcoin because we believe it will be advantageous for our Essentials members to receive real-time trade alerts for one of our top convictions in the upcoming year. What we emphasize is that it’s not a stock tip that generates wealth, rather how you manage the position. One of our most valuable value-adds has been our Bitcoin trades, which you can read about here. By initiating Bitcoin for Essentials Members, we will be updating you in real-time on our Bitcoin trades via email alerts.
The harsh truth is that many stocks look to be topping in their charts given the strong rally in tech this year, yet Bitcoin looks as if the chart has room – perhaps substantial room, which we will monitor and update you with real-time trade alerts as we hit key price levels.
Certainly, the asset is facing one of the best moments for institutional adoption, which is the approval of spot Bitcoin ETFs and a clearance for central banks to own up to 2% of assets in crypto. Couple this ramp in demand with the Bitcoin halving that is set to take place in 2024, which will further restrict supply, and we think this is the perfect recipe for Bitcoin to lead in 2024.
Bitcoin Backdrop:
It’s important to understand that some of the brightest minds in technology (and by far, the best investors in technology) believe bitcoin is a viable form of currency, as well as one of the recent marvels within tech innovations. Venture capital firms such as Khosla Ventures, Union Square Ventures, Lightspeed, and A16Z have been funding bitcoin projects for some time (circa 2013 and 2014).
On the other hand, one of Bitcoin’s hurdles is multigenerational adoption. To date, bitcoin is predominantly a retail dominated asset. Late Charlie Munger and Warren Buffett both criticized bitcoin as worthless. In fact, Buffett went so far as to claim Bitcoin is “probably rat poison squared.” In this article, we would like to highlight the unique benefits of Bitcoin.
Economic Uncertainty in Lower GDP Countries
The populations that rapidly adopt Bitcoin are located in lower GDP countries. Imagine not having enough confidence in your government and federal-backed insurance to put your money in the bank. Yet, this is the reality for billions of people globally who do not trust their governments – primarily in Latin America, Africa, Asia and the Middle East. There are ongoing conflicts in these countries, civil dis-rest, cartels often run the government behind the scenes, and the domestic economies can become crippled overnight.
Regardless of how you feel about your own country’s government and banking system, it’s important to acknowledge that the best technology solves issues for global populations. You do not need to personally use Facebook to acknowledge the social network is popular globally with 3 billion users. You do not need to personally use Salesforce to see it solved a real need for sales and marketing teams. Similarly, you may feel quite confident in your country’s government and banking system – but it’s important to acknowledge that the majority of the world does not have this confidence and these populations do not use a bank. We call this the “unbanked” and this is a key demographic driving Bitcoin adoption from the bottom up.
For example, Venezuela saw record Bitcoin adoption during a period of hyperinflation when the price of a cup of coffee rose to 2,800 bolivars up from 0.75 bolivars within one year, representing an increase of 373,233%, according to Bloomberg data. Essential goods such as toilet paper and medicine were also very costly, and many Venezuelans fled the country. Despite market volatility, bitcoin helped Venezuelans make money at a time when inflation threatened their livelihood and also their family’s survival. Cryptocurrency offered the lower GDP country accessible protection and the ability to escape an autocratic government.
Notably, the government in El Salvador has adopted Bitcoin as their national currency. During the transition, the government provided $30 in free Bitcoin for citizens who signed up for a digital wallet. Within weeks, the number of digital wallets in El Salvador surpassed the number of bank accounts in the country. This is clearly demonstrating the distrust many global populations have with their banking system. Although many consider countries with the most dominant GDPs as the countries who set the world’s stage for economic conditions, the emerging markets play an important role as the unrest in these regions can lead to disruption.
Apple, Google, Microsoft, and Amazon crossed market caps of $1 trillion because their products scale to global populations and are required on a daily basis. Bitcoin not only scales to the global population, but it also protects and diversifies their livelihood – a necessity rather than a convenience. In fact, we see populations who are not necessarily tech-savvy most enthusiastic about bitcoin, and this was part of the I/O Fund’s thesis in 2019 as to why Bitcoin would cross a $1 trillion market cap.
Notably, Bitcoin is also the world’s most secure financial network. The transfers eliminate processing fees and hedges against inflation. Due to these unique features, the I/O Fund believes Bitcoin should be worth as much as a search engine, enterprise software, social media network, warehouse fulfilment/data center (AMZN), or iPhone hardware company. Bitcoin is more secure than 10,000 banks combined due to its decentralization. This level of security solves a genuine need for the financial system as the financial system cannot be automated without a decentralized blockchain solution.
The United States Has Its Fair Share of Financial Issues Too
Economists have discussed the effects of going off the gold standard during Nixon’s presidency, yet this has been a futile conversation in the past as there has been no alternate method of transacting other than centralized cash. Gold and precious metals are hard to transport and cannot be used to transact daily in the modern age, despite having a store of value.
During the Nixon Presidency, the United States fiat system decoupled from gold, and this is why the cost of living has gone up exponentially while wages have stagnated. This has forced many households to work two jobs with little to show for their efforts.
Currently, the United States is at debt levels of about 119 percent of gross domestic product (GDP) whereas the average since 1940 has been in the 70 percent range with the exception of World War 2 when debt-to-GDP was at 106 percent. There has been a steady rise in the level of national debt to GDP due to decreased tax revenue and increased spending, especially on health care. The debt load is being passed onto Millennials, which is a demographic rapidly adopting cryptocurrency.
Source: YCharts
The United States is unlikely to see hyperinflation to the extent of Venezuela (at least, let’s hope not). However, trust in fiat currencies is eroding as debt continues to climb.
Japan is an excellent case study for an economy that is struggling due to quantitative easing. The Japanese debt-to-GDP ratio topped 260% last year due to its quantitative easing. Government debt to GDP in Japan averaged 137.4% from 1980 to 2017. Easy money policies from Japan’s central bank harmed domestic asset returns by suppressing local interest rates. Ranking as the world’s third largest economy, Japan resorted to negative interest rates in 2016. In April 2016, it was reported that a “Japanese bank buying 5-Year U.S. Treasuries with perfectly hedged currency and duration risk would (lose) 0.9% a year.”
Consequently, Japan is a thriving bitcoin market and has seen a continuation of crypto activity despite regulations. For example, 39% of investors aged between 18 and 30 years have invested more than ¥10,000 in cryptos. Also, 49% of young crypto investors between 18 and 30 years trade cryptos multiple times weekly.
During the Ukraine-Russian war, the use of crypto once again took prominence as the Ukrainian government accepted crypto donations during this crisis. According to Alex Bornyakov, Deputy Minister of Ukraine’s Ministry of Digital Transformation, “In times like these, response time is crucial. Crypto is playing a role to give us flexibility to respond really quickly to deliver the army’s required supplies.”
The lack of financial access might also increase the use of crypto in both countries. The Ukraine central bank had suspended electronic transfers and reduced cash withdrawals with Ukrainians turning to cryptocurrency.
In the words of Alex Gladstein, Chief Strategy Officer at the Human Rights Foundation, “The fact that it can’t be frozen, the fact that it can’t be censored, and the fact that it can be used without ID is very, very important,” He further added, “And they are why bitcoin is such an important humanitarian tool.”
Institutional Adoption
Most people can imagine a world that runs on digital financial transactions as money today is exchanged digitally and cashless. The United States has digital financial apps, such as Apple Wallet, and Venmo is a popular method to exchange money between friends without fees.
One of the biggest hurdles for institutions, however, is not the idea of a world run on digital currencies, but rather the decentralization concept and the need for reliable and safe cryptocurrency custodians. Institutional investors need to know the assets are secure, insured, and under the care of a trusted third party, per SEC rules, which requires advisers to keep client funds with a qualified custodian. ETFs solve these major hurdles.
Custody solutions safeguard cryptocurrency, and go beyond private keys or wallets, which are subject to hacks or the misplacement of hard disk storage. The word “custody” refers to a third-party provider of storage and security services for cryptocurrencies. These services are aimed at institutions and hedge funds, and incorporate a combination of storage online for liquidity and storage that is disconnected from the internet.
According to Fidelity’s Institutional Investor Digital Assets 2022 Study, 58% of the surveyed Institutional Investors had an investment in digital assets, up 6 percentage points from 2021. 74% of the total surveyed investors had plans to buy digital assets in the future compared to 71% in 2021. 81% of the surveyed investors believe digital assets should be part of the portfolio. Asian Investors had about 69% invested in digital assets, though a 2-point decrease from 2021. While European Institutional Investors showed an 11% YoY jump to 67% of the investors surveyed, US Investors showed a 9-percentage point increase from 2021 to 42%.
How I/O Fund traded Bitcoin in the past – What You Can Expect
Here is an example of how the I/O Fund has traded Bitcoin in the past. The goal is to be directionally correct.
Similar to this, you will receive notifications via email when we buy and sell Bitcoin moving forward. We often cover a stock in our free newsletter, but this is a small percentage of the work involved with smart investing. Our real-time trade alerts are invaluable for knowing how much of a position we own, and when we are buying or selling.
Bitcoin Buy Plan
We use a blended approach of technical analysis to determine our portfolio entries and also to pre-determine our risk management. Risk management is a key part of owning tech stocks. In the below video our Portfolio Manager Knox Ridley outlines his bullish outlook on Bitcoin, citing on-chain and technical data to support his prediction of an upward trend.
Currently, we have an 8% allocation in Bitcoin. He anticipates the next buying opportunity to arise within the $38,000 to $40,000 range and advocates for making proactive moves in the cryptocurrency market. Additionally, he maintains that there are no plans to sell Bitcoin prematurely. The only levels to closely monitor are the breakdown below $28,000 or the range depicted in the video above $50,500, if a five-wave drop is followed by a three-wave retrace. Short of those two things happening, the I/O Fund will not be selling Bitcoin right now – rather we are looking to be heavy buyers.
You can read more here, and please whitelist us to ensure you are receiving the trade alerts when they occur, which will be sent via email.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
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