Bitcoin is a currency. What makes the currency unique is that it's the most popular cryptocurrency. Research suggests that the most popular cryptocurrency will maintain its purchasing power for much longer than any other currency. In other words, the cryptocurrency will be a much better currency.
The degree of risk associated with an investment in Bitcoin is 'medium', with the shares having a beta that is 42% above the market (1.42 vs. 1).
Assuming Bitcoin's share of the money supply increases to 10% (from 2.2%) and the value of the global money supply remains unchanged (at $35.2 trillion), then that equates to a Bitcoin price of $167,619 per coin (from $41,458), and upside of 4x.
Operations
How did the idea of Bitcoin come about?
The idea of Bitcoin, as well as the broader concept of cryptocurrencies, originated from a long-standing interest in digital cash and decentralized financial systems. Bitcoin itself was first introduced in a 2008 white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" by an individual or group using the pseudonym Satoshi Nakamoto.
Several key factors and ideas contributed to the development of Bitcoin:
- Cypherpunk Movement: The Cypherpunk community, a group of activists advocating for the use of cryptography to bring about social and political change, laid much of the philosophical and technical groundwork for cryptocurrencies. They promoted the idea of using cryptographic techniques to create secure, anonymous digital currencies and transactions.
- Earlier Digital Cash Experiments: Before Bitcoin, there were several attempts at creating digital cash systems, like David Chaum's DigiCash, which used cryptographic protocols to ensure privacy. While these systems had innovative ideas, they often relied on central authorities and didn't achieve widespread adoption.
- Double Spending Problem: A significant challenge in digital cash is preventing double spending, where the same digital token is spent more than once. Traditional digital transactions require a central authority, like a bank, to validate transactions. Nakamoto's Bitcoin solved this with a decentralized ledger, the blockchain, which is maintained by a network of nodes following a consensus protocol.
- Blockchain Technology: The introduction of blockchain technology was a key innovation of the Bitcoin paper. It's a decentralized ledger that records all transactions across a network of computers. This makes Bitcoin resistant to fraud and censorship.
- Economic and Political Context: The development of Bitcoin was also influenced by the economic environment, particularly the financial crisis of 2007-2008. This period led to increased skepticism about traditional banking systems and interest in alternative forms of currency that weren't controlled by governments or central banks.
- Influence of Previous Concepts: Bitcoin combined concepts from previously proposed systems like b-money and Bit Gold, which outlined ideas for decentralized digital currencies, but never fully developed them into working systems.
In summary, Bitcoin emerged from a confluence of ideas from the Cypherpunk movement, previous digital cash experiments, cryptographic advancements, and the socio-economic context of the time. It was the first successful implementation of a decentralized digital currency, solving key issues like the double-spending problem through its novel use of blockchain technology.
What's the mission of Bitcoin?
The mission of Bitcoin, as outlined by its creator Satoshi Nakamoto, is to provide a decentralized digital currency that enables peer-to-peer transactions without the need for a central authority, such as a bank or government. This is aimed at creating a financial system where transactions are transparent, secure, and accessible to everyone, regardless of their location or status. Bitcoin's design seeks to offer an alternative to traditional financial systems, emphasising financial freedom, privacy, and reduced reliance on centralized institutions. This mission is rooted in the belief that a decentralized approach to currency can offer enhanced security, lower transaction fees, and resistance to censorship.
What's the main problem that Bitcoin is designed to solve?
The main problem that Bitcoin is designed to solve is the issue of trust in financial transactions. Traditionally, trust has been established through intermediaries like banks or financial institutions. Bitcoin, through its decentralized blockchain technology, solves this problem by allowing for peer-to-peer transactions without the need for a centralized authority. This design addresses several key issues:
- Double Spending: It prevents the same digital currency from being spent twice.
- Censorship Resistance: Transactions cannot be easily blocked or censored by governments or institutions.
- Reduced Dependency on Intermediaries: It minimizes the need for third parties, reducing potential points of failure and costs associated with transactions.
- Global Accessibility: Bitcoin offers a global, digital form of currency accessible to anyone with an internet connection, not limited by national borders or traditional banking systems.
What is Bitcoin?
Bitcoin is a currency.
What's unique about Bitcoin?
What makes Bitcoin unique is that it operates on a decentralised network (i.e. without the need of a central entity, such as the Bank of England), and the supply of the currency is limited (at 21 million coins).
The main benefit of operating on a decentralised network (rather than a centralised network) is that within the network, there is no single point of failure. In a centralised network, if the central entity that operates the network fails, then the whole network - and the currency that operates on the network - fails (i.e. there is a single point of failure in the network), whereas in a decentralised network, becasue there is no central entity, there is no single point of failure, and therefore the network - and currency - is likely to last for much longer, possibly forever.
For example, the world's first ever known currency is the Mesopotamian shekel, and it was operated by a central entity (The Kingdom of Lydia). When the central entity failed, so did the currency.
Another key benefit of transacting on a decentralised network is that transaction costs are likely to be lower.
Competition
| Item | Bitcoin | US Dollar |
|---|---|---|
| Does the currency operate on a decentralised network? | Yes | No |
| Is the supply of the currency limited? | Yes | No |
| How likely is the currency to act as a store of value? | High | Low |
| Item | Bitcoin | US Dollar |
|---|---|---|
| Medium of exchange | Yes | Yes |
| Measure of value | Yes | Yes |
| Standard of deferred payment | Yes | Yes |
| Store of value | Yes | No |
| Item | Bitcoin | Ether | XRP |
|---|---|---|---|
| Does the currency operate on a decentralised network? | Yes | Yes | Yes |
| Is the supply of the currency limited? | Yes | No | No |
| Is the cryptocurrency the most popular one? | Yes | No | No |
| How likely is the currency to act as a store of value? | High | Low | Low |
Market
Total Addressable Market (TAM)
The TAM for Bitcoin is indeed the global currency market. This includes all forms of money circulation worldwide — from fiat currencies held in banks and cash reserves to investments and digital transactions. This encompasses every potential user or entity that could theoretically adopt Bitcoin, either as a means of transaction, a store of value, or for investment purposes. It represents the maximum possible market opportunity for Bitcoin, assuming universal adoption and acceptance.
The global currency market, including fiat money and investments, is vast. As of 2023, the total value of all the money in the world, including broad money (M3), which covers cash, bank deposits, and money market securities, was estimated to be in the range of approximately $100 trillion USD. Bitcoin's TAM, when considering the potential to replace or complement global currency usage, would thus be a fraction of this amount.
As of July 2023, the total value of narrow money globally, which includes all physical money (notes and coins) and money deposited in savings and checking accounts worldwide, was approximately $40 trillion. This figure represents the M1 money supply, a classification of money that covers the most liquid forms of currency in circulation.[1]
Serviceable Available Market (SAM)
The SAM narrows down to the global cryptocurrency market. This is the market segment that Bitcoin is actually equipped to serve and includes all individuals and entities currently engaged in or open to engaging with cryptocurrencies. This market is more specific to Bitcoin's capabilities and reflects the growing interest and acceptance of digital currencies for various uses, including remittances, investment, online transactions, and as a hedge against traditional currency fluctuations.
The global cryptocurrency market is a subset of the broader currency market. As of 2023, the total market capitalization of all cryptocurrencies was fluctuating around $1 trillion to $2 trillion USD. Bitcoin, being the largest cryptocurrency by market cap, dominates this space, but the SAM for Bitcoin would include the total market cap of all cryptocurrencies, considering that these users are potentially open to using Bitcoin.
Serviceable Obtainable Market (SOM)
The SOM further narrows down to the U.S. cryptocurrency market. This represents the segment of the SAM that Bitcoin can realistically expect to capture in the near to medium term. It takes into account factors such as Bitcoin's current market penetration in the U.S., regulatory environment, competition from other cryptocurrencies, technological advancements, and market trends within the United States. The U.S. market is particularly significant due to its substantial economic size, high level of technology adoption, and its influential role in global financial systems.
Estimating the U.S. cryptocurrency market is more complex, as it would involve considering the proportion of the U.S. population or financial sector engaged in cryptocurrency usage. As a rough estimate, if we consider the U.S. as accounting for about 20-30% of the global cryptocurrency market (a broad assumption based on its economic size and level of investment in cryptocurrencies), the SOM for Bitcoin in the U.S. could be a proportion of the global market cap, roughly in the range of $200 billion to $600 billion USD.
Risks
As with any investment, investing in Bitcoin carries a level of risk. Overall, based on the Bitcoin's adjusted beta (i.e. 1.42), the degree of risk associated with an investment in Tesla is 'medium'.
Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of 1.5 or more. Further information about the beta ratings can be found in the appendix section of this report.
The key risks can be found below. For us, currently, the biggest risk to the valuation of the currency relates to the strong competition from other cryptocurrencies and traditional financial systems (i.e. competition risk).
- Volatility: Bitcoin is known for its high price volatility. Its value can fluctuate dramatically over short periods, influenced by factors like regulatory news, technological developments, market sentiment, and macroeconomic trends.
- Regulatory Risks: The regulatory environment for cryptocurrencies is still evolving. Changes in regulations, both in the U.S. and internationally, can impact Bitcoin's adoption, usage, and value.
- Security Risks: While the blockchain technology underlying Bitcoin is secure, exchanges and wallets can be vulnerable to hacking and other security breaches.
- Market Adoption and Competition: Bitcoin's long-term success depends on its widespread adoption. This is uncertain and can be affected by several factors, including competition from other cryptocurrencies and traditional financial systems.
- Technological Risks: Issues like scalability, transaction speed, and energy consumption are technological challenges that Bitcoin faces. How these challenges are addressed can affect its future utility and value.
- Limited Historical Data: Compared to traditional assets, Bitcoin has a limited track record, which can make it difficult to predict future performance based on past trends.
- No Intrinsic Value: Unlike stocks or bonds, Bitcoin does not represent a share in a company or a claim on assets, and it does not generate income. Its value is largely driven by supply and demand, making it more speculative.
- Legal and Tax Implications: Depending on the jurisdiction, there can be legal and tax implications associated with trading and investing in Bitcoin, which can affect returns and complicate compliance.
Valuation
The total value of narrow money globally is estimated at $35.2 trillion as at May 2020, according to The Money Project.
The total value of Bitcoin as of today (20th March 2022) is $787 billion[2].
Accordingly, Bitcoin's share of the global money supply is 2.2%.
Bitcoin currently trades at $41,458[2] and the maximum number of coins is 21 million.
Assuming Bitcoin's share of the money supply increases to 10% (from 2.2%) and the value of the global money supply remains unchanged (at $35.2 trillion), then that equates to a Bitcoin price of $167,619 per coin (from $41,458), and upside of 4x.
Actions
To invest in Bitcoin, click here.
Appendix
Beta risk profile
| Beta value | Risk rating |
|---|---|
| 0 to 0.50 | Low |
| 0.50 to 1.50 | Medium |
| 1.50 to 3.00 | High |
| 3.00 and above | Extremely high |
Bitcoin adjusted beta calculation
| Date | iShares MSCI World ETF unit price (USD) | Bitcoin share price (GBP) | iShares MSCI World ETF unit price change (%) | Bitcoin share price change (%) |
|---|---|---|---|---|
| 01/11/2018 | 86.21 | 4,017.27 | ||
| 01/12/2018 | 78.87 | 3742.70 | -8.51% | -6.83% |
| 01/01/2019 | 84.96 | 3457.79 | 7.72% | -7.61% |
| 01/02/2019 | 87.49 | 3854.79 | 2.98% | 11.48% |
| 01/03/2019 | 88.79 | 4105.40 | 1.49% | 6.50% |
| 01/04/2019 | 92.09 | 5350.73 | 3.72% | 30.33% |
| 01/05/2019 | 86.76 | 8574.50 | -5.79% | 60.25% |
| 01/06/2019 | 91.02 | 10817.16 | 4.91% | 26.15% |
| 01/07/2019 | 91.86 | 10085.63 | 0.92% | -6.76% |
| 01/08/2019 | 89.84 | 9630.66 | -2.20% | -4.51% |
| 01/09/2019 | 91.78 | 8293.87 | 2.16% | -13.88% |
| 01/10/2019 | 94.12 | 9199.58 | 2.55% | 10.92% |
| 01/11/2019 | 96.76 | 7569.63 | 2.80% | -17.72% |
| 01/12/2019 | 98.78 | 7193.60 | 2.09% | -4.97% |
| 01/01/2020 | 97.73 | 9350.53 | -1.06% | 29.98% |
| 01/02/2020 | 89.67 | 8599.51 | -8.25% | -8.03% |
| 01/03/2020 | 77.93 | 6438.64 | -13.09% | -25.13% |
| 01/04/2020 | 86.36 | 8658.55 | 10.82% | 34.48% |
| 01/05/2020 | 90.7 | 9461.06 | 5.03% | 9.27% |
| 01/06/2020 | 92.14 | 9137.99 | 1.59% | -3.41% |
| 01/07/2020 | 96.65 | 11323.47 | 4.89% | 23.92% |
| 01/08/2020 | 102.96 | 11680.82 | 6.53% | 3.16% |
| 01/09/2020 | 99.52 | 10784.49 | -3.34% | -7.67% |
| 01/10/2020 | 96.53 | 13781.00 | -3.00% | 27.79% |
| 01/11/2020 | 108.94 | 19625.84 | 12.86% | 42.41% |
| 01/12/2020 | 112.41 | 29001.72 | 3.19% | 47.77% |
| 01/01/2021 | 111.49 | 33114.36 | -0.82% | 14.18% |
| 01/02/2021 | 114.27 | 45137.77 | 2.49% | 36.31% |
| 01/03/2021 | 118.49 | 58918.83 | 3.69% | 30.53% |
| 01/04/2021 | 123.61 | 57750.18 | 4.32% | -1.98% |
| 01/05/2021 | 125.6 | 37332.86 | 1.61% | -35.35% |
| 01/06/2021 | 126.57 | 35040.84 | 0.77% | -6.14% |
| 01/07/2021 | 128.83 | 41626.20 | 1.79% | 18.79% |
| 01/08/2021 | 132.02 | 47166.69 | 2.48% | 13.31% |
| 01/09/2021 | 126.46 | 43790.89 | -4.21% | -7.16% |
| 01/10/2021 | 133.84 | 61318.96 | 5.84% | 40.03% |
| 01/11/2021 | 131.1 | 57005.43 | -2.05% | -7.03% |
| 01/12/2021 | 135.32 | 46306.45 | 3.22% | -18.77% |
| 01/01/2022 | 128.32 | 38483.13 | -5.17% | -16.89% |
| 01/02/2022 | 124.58 | 43193.23 | -2.91% | 12.24% |
| 01/03/2022 | 128.16 | 45538.68 | 2.87% | 5.43% |
| 01/04/2022 | 117.42 | 37714.88 | -8.38% | -17.18% |
| 01/05/2022 | 117.94 | 31792.31 | 0.44% | -15.70% |
| 01/06/2022 | 106.88 | 19784.73 | -9.38% | -37.77% |
| 01/07/2022 | 115.57 | 23336.90 | 8.13% | 17.95% |
| 01/08/2022 | 110.28 | 20049.76 | -4.58% | -14.09% |
| 01/09/2022 | 99.95 | 19431.79 | -9.37% | -3.08% |
| 01/10/2022 | 107.42 | 20495.77 | 7.47% | 5.48% |
| 01/11/2022 | 115.44 | 17168.57 | 7.47% | -16.23% |
| 01/12/2022 | 109.25 | 16547.50 | -5.36% | -3.62% |
| 01/01/2023 | 117.01 | 23139.28 | 7.10% | 39.84% |
| 01/02/2023 | 113.98 | 23147.35 | -2.59% | 0.03% |
| 01/03/2023 | 117.67 | 28478.48 | 3.24% | 23.03% |
| 01/04/2023 | 119.79 | 29268.81 | 1.80% | 2.78% |
| 01/05/2023 | 118.6 | 27219.66 | -0.99% | -7.00% |
| 01/06/2023 | 124.52 | 30477.25 | 4.99% | 11.97% |
| 01/07/2023 | 128.54 | 29230.11 | 3.23% | -4.09% |
| 01/08/2023 | 125.7 | 25931.47 | -2.21% | -11.29% |
| 01/09/2023 | 120.17 | 26967.92 | -4.40% | 4.00% |
| 01/10/2023 | 117.11 | 34667.78 | -2.55% | 28.55% |
| 01/11/2023 | 122.84 | 37313.97 | 4.89% | 7.63% |
| Beta | Adjusted beta | Comment(s) | |
|---|---|---|---|
| Consistent (monthly) intervals between data points | 1.64 | 1.42 |
References