Bitcoin: the Gold of 1977

The world is moving towards standardizing digitization of currency around the world, or at least that’s what the legendary macro investor Paul Tudor Jones (PTJ) wants us to believe. The billionaire hedge fund manager recently revealed that he would be making the biggest cryptocurrency a part of his flagship hedge fund — Tudor BVI. This comes days after reports emerged that China has launched pilot runs to slowly replace the physical tender of yuan with a digital version, named digital currency electronic payment (DCEP), bearing the same iconic design carrying a photo of Mao Zedong, former Chairman of the People’s Republic of China. The digital version is expected to carry the same value as the physical tender.

85% of internet users in China have used some form of online payment services to make a transaction. As of March 2020, China has 765 active users of mobile payment applications, a staggering 50% rise up from 357 million users in 2015. This number stands to increase owing to the pandemic and its effects in the consequent years. This digitization follows Facebook’s stable coin, Libra, which aims to provide a financial infrastructure based on a cryptocurrency pegged to a consortium of bank deposits, government securities, and low-volatility assets. This trend of the wide acceptance of cryptocurrency (and the baseline blockchain technology) has got a lot of people around the world excited in the future of banking and the eventual lead up to Decentralized Finance (DeFi).

Expansion and Contraction

Paul Tudor Jones explores the idea of a Great Monetary Inflation (GMI) — ‘an unprecedented expansion of every form of money unlike anything the developed world has even ever seen’. This inflation-heavy monetary growth around the world has led to national governments magically creating money out of thin air. To hedge against this super-inflation, PTJ banks on the high school macroeconomic principles of supply and demand. The total quantity of Bitcoins is capped at 21 million, and every 4 years (on average), the mining rewards get ‘halved’ slowing down the rate of supply, increasing the marginal value and utility derived from each Bitcoin left to be mined. The scarcity premium derived from the supply/demand of the cryptocurrency makes PTJ place a lot of confidence in the incremental value of Bitcoin.

While Bitcoin is only 11 years old, it is used in over 200 countries with over 60 million users — being traded 24/7 around the world. It is reasonable to believe that this is a number set to increase exponentially owing to a technological shift in how money is handled and distributed around the world. With the consciousness of touch brought about by the pandemic and projects and initiatives launched by Facebook and the Chinese government, the concept of virtual money is set to be more commonplace. PTJ predicts that the increasing frequency of use of virtual digital wallets would lead to a sizable expansion in the ever-expanding universe of buyers of Bitcoin as the technology would be more trusted with it becoming a vital part of our daily life. This goes in tandem with movements around the world (both pre and post-COVID-19) as seen in a large population developing nations like India where the digital wallet mobile application ‘Paytm’ has become a moniker for seamless, effortless transaction of money.

From an investor’s perspective, PTJ finds Bitcoin analogous to Gold and is bullish on its future projections. While he has initially set the exposure of Bitcoin futures in his portfolio to low single digits, he believes that Bitcoin is ready for a price spike as soon as finance professionals around the world realize its intrinsic value. Much like how Gold lost almost 50% in value between 1975 and 1977 after a very positive period of growth, PTJ believes that Bitcoin went through an 80% correction in preparation for a swell in the prices. Investors back in 1977 realized that Gold was a brilliant buying opportunity, and they would eventually realize the same underlying stands for Bitcoin in 2020. Gold would go on to achieve a value of $615 per ounce in 1980 — almost 4x value of the previous high of $160 per ounce in 1975.

The growth trajectory for cryptocurrency has been very strong ever since its creation 11 years ago, however, there are still a lot of questions to be answered about the attributes. Institutional investors have compared cryptocurrency to the infamous Dutch Tulip bubble burst from the early 17th century, questioning the form and categorization cryptocurrency can possibly acquire. At the other end of the spectrum are other investment firms that have been buying BTC worth millions of dollars in a hope to ride the bull post-pandemic. Somewhere in the middle of that wide spectrum are the believers who are confident in the ability of cryptocurrency to change the world, and impact money as we know it, think of it, handle it, and distribute it. Who is right? In a time of ever-growing importance of cryptocurrency, it is imperative for all to become versed in the underlying principles of blockchain and cryptocurrency, and pick a side in this war.

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This is a repost of the Article written by Aly Madhavji and Xavier Yew featured June 2020 in Block Journal, Issue 17: https://blockjournal.io

#blockchain, #bitcoin, #crypto