What I Learned About Bitcoin

After four years of being a Bitcoin investor, it is time for a bit of stock-taking and reassessment.

Almost four years ago, I expressed my opinion about Bitcoin on my German blog. At that time, I had less than 1% of my assets invested in Bitcoin and formulated my expectations for early 2021 as follows:

"My hope is that Bitcoin, like gold, has no correlation with the stock market. In the ideal case, Bitcoin can help to diversify my portfolio and protect it from a future stock market crash."

Then, in 2022, tech stocks crashed and unfortunately I had to realize that Bitcoin was not a good diversifier at that point. Along with my tech stocks, Bitcoin also came under heavy pressure and suffered a 70% drawdown.

Bitcoin Price Development

Fortunately, I had some pretty good timing when I bought more back then, and to date - after the run to new highs - Bitcoin (and Ether) has grown to about 3% of my overall portfolio, with significant triple-digit book profits.

For me, this means that I now have to seriously consider whether to take some of the profits or hold on to them. I am not a crypto expert and do not intend to position myself as such with this post. But I would like to share my thoughts, also because I am frequently asked what I think about cryptocurrencies in general and Bitcoin in particular.

In fact, I am much more confident about the future performance of Bitcoin than I was four years ago when I wrote my first post. The reasons for my optimism about Bitcoin are actually quite simple:

1. The Bitcoin Supply Is Stable

As a reminder, the number of Bitcoins is limited to 21 million. So there is only a finite number of Bitcoins that will ever exist. To date, approximately 19.5 million Bitcoins have been mined. This means that about 93% of all Bitcoins are already in circulation.

In order to slow down the creation of new Bitcoins, the reward for miners is halved after every 210.000 blocks. This takes about four years. In April 2024, another "halving" took place. This means that the reward miners receive for adding new blocks to the blockchain was halved to 3.125 bitcoins.

The actual number of Bitcoins in circulation is probably much lower than the nearly 20 million that have been mined to date. Over the years, many Bitcoins have been lost or become inaccessible due to forgotten passwords, destroyed hard drives, or other circumstances.

The supply side is therefore more or less stable, with hardly any new Bitcoins being added to circulation.

More important, of course, is what happens on the demand side, and a lot has changed in the last four years.

2. Bitcoin Has Established Itself As An Alternative Asset Class

The last Bitcoin bull market in 2020/2021 was driven exclusively by private investors mobilized by Elon Musk, among others. He had invested in Bitcoin for Tesla to great media fanfare and even announced that he would accept Bitcoin as a payment method for his vehicles.

At the time, acquiring and securely storing Bitcoin was a challenge for retail and especially institutional investors. With the approval of Bitcoin ETFs in the U.S. in early 2024, this has changed dramatically.

The SEC's approval of Bitcoin ETFs opened up access to Bitcoin for regulated investors in the financial industry. These investors now have easy access and are generating additional demand alongside retail investors who are also benefiting from easy access to Bitcoin through ETFs.

According to recent reports, U.S. spot Bitcoin ETFs are already holding more than 950,000 Bitcoins (BTC) in their portfolios, ten months after their launch. BlackRock's leading iShares Bitcoin ETF is already larger than their Gold ETF within the iShares ETF family.

Source: Bloomberg

Globally, exchange-traded Bitcoin products hold more than 1.2 million Bitcoins. (As of October 2024). This means that only 10 months after the ETFs were approved, 6% of all available Bitcoins have already been transferred into ETF holdings.

One can now speculate about whether and how fast the demand for Bitcoin ETFs will continue to grow and accordingly derive more or less adventurous price targets for Bitcoin. I will not take part in this speculation.

3. Bitcoin Enters Politics

The future development of the exchange rate is likely to be influenced by the new U.S. government's position on Bitcoin. Trump showed himself to be very crypto-friendly during his election campaign. Meanwhile, there is even a serious political discussion in the U.S. about whether a strategic reserve of Bitcoins, similar to gold reserves, should be established.

To be honest, I can't see that happening yet. How would you build such a reserve without driving the price up even higher? On the other hand, I wouldn't rule anything out under the Trump administration.

And what’s going on in my home country? Actually, in the summer of 2024, the German authorities sold a large Bitcoin portfolio that had been seized by the Federal Criminal Police Office (BKA) for almost 3 billion Euros. From today's perspective, of course, this was far too cheap. But who knows - maybe Joana Cotar, a member of the German parliament will finally be heard when she calls for a corresponding Bitcoin reserve for Germany.

I guess Europe will once again be left behind if the US does indeed take such a step towards a Bitcoin reserve. Buy high - sell low?

Despite all the optimism, there are also Bitcoin risks that I do not want to hide:

Bitcoin is Trendy Again

If you take a look at "Bitcoin" on Google Trends, you will see that the interest of private investors has increased significantly, especially in the last few weeks. With record prices, Bitcoin is trendy again.

Interest In Bitcoin Over Time

It will be interesting to see how the Bitcoin price reacts when this short-term trend comes to an end. As a long-term Bitcoin investor, one can hope that the price will not be driven as much by speculators as it has been in the past.

For example, the new Bitcoin ETFs could have a stabilizing effect in a downturn, as it can be assumed that many ETF investors, unlike crypto speculators, view Bitcoin as a long-term store of value in their portfolios.

High Volatility Will Remain

I fully expect Bitcoin to continue to be highly volatile, with drawdowns in excess of 50%. Those who can't take it should stay away from Bitcoin.

It is not psychologically easy to survive crypto winters like we have seen in recent years and to buy more when no one wants to talk about Bitcoin anymore. Value investors in particular find this extremely difficult, precisely because Bitcoin, unlike a stock, has no real value behind it and it is simply not possible to calculate a fair value.

And What About Other Cryptos?

As I said, I'm not a crypto expert or even a crypto fan. But for diversification reasons, I am a firm believer in Bitcoin and also have a significant position in Ether, which has performed even better in recent years. By the way, ETFs and ETPs are also available for the second largest cryptocurrency, Ether, since mid-2024. But the exciting topic surrounding the Ethereum blockchain platform is a story for another blog post.

I stay away from all other alternative coins. And I would strongly advise most of you to do the same because the crypto scene is full of charlatans and scammers.

That's why Bitcoin and Ether are having such a hard time getting out of that shady corner and into the regulated financial world. But the development in that direction is clearly visible.

Conclusion

I am more optimistic about Bitcoin today than I was four years ago. At that time I also considered the possibility of a total loss, but today I see it differently. I believe that the point of no return has been passed, and no democratic state in the Western world can afford to ban bitcoin completely.

In my opinion, Bitcoin actually belongs in a growth-oriented portfolio for investors who are willing to take risks, can withstand extreme fluctuations in their portfolio and see them as an opportunity. In my own portfolio, Bitcoin now has a weighting similar to an average stock holding, and I feel very comfortable with it. Therefore, I will continue to hold it.

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*Disclaimer:

The author and/or associated persons or companies own shares of Bitcoin and Ether. This post is an expression of opinion and not investment advice.