Bitcoin goes parabolic

THIS column has twice spoken about cryptocurrencies and more specifically, bitcoin. The first column entitled “Can Cryptos Be an Asset Class” was published in December 2020, and the second “Has Bitcoin Become Mainstream?” was published earlier this year.

The first set of arguments ended with the conclusion that bitcoin doesn’t make sense as it has no intrinsic value, it is not a currency, and is highly volatile. It is also not backed by any asset nor legal tender and is highly speculative.

In the article early this year, there was a greater understanding of cryptos with the emergence of derivative instruments or Exchange Traded Funds (ETF) that track both the spot and future prices.

The conclusion was then that ownership among the larger market players can only increase with the likelihood that smaller retail owners would embrace these ETFs to give them greater security and flexibility in terms of ownership via shares of the ETF rather than direct ownership of the tokens.

Another summary point then was that bitcoin was increasingly being recognised as a medium of exchange and has certainly become mainstream.

Although bitcoin’s ownership structure remains largely concentrated, the introduction of spot bitcoin ETFs has provided an added avenue for the leading cryptocurrency to be recognised as an asset class and inch closer to becoming a mainstream asset.

US$100,000

In terms of price, since the last article on bitcoin was written early this year, its price has moved up strongly on the confluence of factors, more than doubling to surge past the US$100,000 mark.

It was last seen at US$100,500. Circulation-wise, bitcoin saw total tokens outstanding increase from 19.6mil coins at the end of last year to 19.8mil, an increase of just 5.7% and leaving the balance of 1.2mil coins to be minted.

Hence, bitcoin today has a market capitalisation of just under the US$2 trillion mark, with a daily trading volume over the past 30 days of approximately half a million coins worth more than US$50bil.

Bitcoin mania

The introduction of spot bitcoin ETFs was clearly a game changer for not only bitcoin but other cryptocurrencies as well.

Today, spot bitcoin ETFs have total assets under management of approximately US$112.9bil.

Based on the current bitcoin price, spot bitcoin ETFs hold approximately 1.12mil Bitcoins, translating to approximately 5.6% of total bitcoin outstanding

The largest bitcoin ETF today is iShares Bitcoin Trust with a total market capitalisation of US$53.9bil.

Bitcoin mania has also hit other institutions, the most prominent being MicroStrategy. The company issues new shares and bonds to purchase bitcoins and as the price rises, it is able to issue more shares based on higher share price as well due to the correlation between its share price and the price of bitcoin. Recently, MicroStrategy raised its bitcoin holdings to 423,650 bitcoins, making it the second largest holder of bitcoin via the issuance of shares and bonds under its three-year plan to raise as much as US$42bil (US$21bil in stocks and US$21bil in bonds) to buy bitcoins.

MicroStrategy intends to raise, on an evenly split basis in the form of stocks and bonds, about US$10bil in 2025, US$14bil in 2026, and US$18bil in 2027. However, post-US election, as the price of bitcoin rose on Trump’s victory, MicroStrategy turned aggressive, buying 171,430 bitcoins for US$15.6bil via the issuance of new bonds and stocks.

MicroStrategy’s average cost has now increased to US$60,324 per bitcoin.

The company’s market capitalisation today is almost US$100bil, which is more than double the value of its bitcoin holdings.

The Trump factor

With Donald Trump winning the US Presidency, crypto mania has taken a life of its own. Trump, who once labelled cryptocurrencies as a scam, embraced digital assets during his campaign, promising to make the United States the “crypto capital of the planet” as well as to accumulate a national stockpile of bitcoin. He even called himself the ”crypto president” during campaigning. Last week, Trump named pro-crypto Paul Atkins to run the US Securities Commission and Exchange, and that propelled bitcoin price to above the US$100,000 mark.

The United States does hold some bitcoins in the form of seized assets and it is said to be worth some US$20bil based on today’s prices. The idea of a bitcoin reserve is backed by certain fundamental reasoning too.

One is to hold a substantial amount of what is seen as “digital gold” - a term that the US Treasury used to describe bitcoin recently - in a decentralised finance world. The other argument is that bitcoin can be a tool to manage the US’ ballooning national debt, which has surpassed US$36 trillion.

Assuming the Unites States goes for up to 5% of all bitcoins, the Unites States could lift demand for bitcoins by another 800,000 tokens worth some US$80bil. A bill to promote US bitcoin strategic reserve too has been presented by Senator Cynthia Lummis, which calls for a build-up of bitcoin reserve of approximately 200,000 bitcoins a year over five years.

One of the recommendations under the Bill is the setting up of a network of secure storage facilities where government-owned bitcoin would be held.

Talking about reserves, even shareholders of Amazon are calling for the company to conduct an assessment to determine if adding bitcoin to the company’s treasury is in the best interest of shareholders. In contrast, Microsoft shareholders rejected the idea outright, mainly due to the high volatility of bitcoin. Ironically, the proposal to adopt bitcoin itself came from Michael Saylor, the chief executive officer of MicroStrategy.

Highly concentrated

Slowly but surely bitcoin is emerging as a financial asset and close to being a legal tender. For now, though, bitcoin remains a highly concentrated asset in the hands of a few with 1.8% of bitcoin addresses owning almost 93% of the total coins outstanding, while 91.8% of all addresses own just 0.24% of all coins outstanding. In dollar terms, there are 152,168 bitcoin millionaires out there, other than those held via the spot bitcoin ETFs or those indirectly held via shareholding in companies like MicroStrategy.

Of course, some of these statistics may be skewed by bitcoin holders with multiple accounts.

In summary, as far as bitcoin is concerned, there have always been two schools of thought as to how it fits into the world of finance. For now, the proponents of cryptocurrency have won the battle against the naysayers and the doomsayers as its price has surpassed a new psychological barrier.

It has also invited fresh debates as to where bitcoin price will be after Trump assumes office next month as well as its outlook in the next 12 months and the years ahead as fewer bitcoins remain to be mined.