Bitcoin is steadily evolving into a store of value for investors despite concerns about its viability re-emerging in the wake of the recent crypto market crash, according to new research.
In a new report, analysts at digital asset manager CoinShares said the evolution of the digital currency made it “increasingly apparent that it…has potential utility as a store of value” as a result of it becoming “increasingly financialised as an asset”.
“The proliferation of financial infrastructure and corresponding financial products referencing Bitcoin as well as on-chain Bitcoin usage data supports this thesis”, the report said, highlighting that since 2012 the number of Bitcoin addresses that have remained dormant for more than a year has more than doubled while financialisation has also been bolstered by the emergence of prime brokerages, order management systems and insured custody solutions which in turn have led to the rise of products such as options, futures and exchange-traded products.
Bitcoin evolving from tech stock to value store
CoinShares’ analysts said that in its initial growth phase following its release in 2009, Bitcoin has behaved “much like a tech stock” given its profile as a “potentially disruptive technology”.
“If it reaches its potential, the value could be immense, but at the same time, there is a non-zero chance that it fails entirely, leaving the value of Bitcoins close to zero. These characteristics influence which type of investors are willing to speculate on Bitcoin. This, in turn, influences how the aggregate investor pool interacts with the asset. If Bitcoin is perceived as a more liquid version of a tech start-up stock, this is likely to cause its investors to treat it as a potentially high-reward, yet liquid, risk-on asset – moving in and out of it on an opportunistic basis”, the report said.
“The markets have treated it more and more like this in the two years”, analysts added.
However, the report said that as Bitcoin matured as an asset, its risk of tech start-up-like failure “moves further and further away” and investors “will start treating it differently, leading its macroeconomic behaviour to follow suit”.
The asset manager said evidence for this shift is “beginning to gather pace” and the more the digital currency was financialised, the “more it could become a store of value”.
The report highlighted that the thesis is supported by behavioural analysis on the Bitcoin blockchain, with data showing the proportion of investors holding Bitcoin for a year or longer has increased to 55% from 30% in 2012, indicating more buyers are seeing the crypto as a long-term hold than a quick trade.
CoinShares also said that as more and more value is transferred into Bitcoin, for example from institutional investors and funds, its volatility will “likely reduce” and in turn “cause Bitcoin to act more and more like a stable safe haven and store of value”.
Look to gold for comparison
The report said investors looking to chart Bitcoin’s potential trajectory should look at the performance of gold, an established haven asset.
“Gold purchased as an investment really only took off after the 1970s when the United States once again made it legal to own and trade physical gold…Gold slowly became financialised in the mid-1970s through to the early 1980s. As this happened, its annualised volatility declines from its peak of 90%. This was not a straight line down due to high inflation in the late 1970s, however, its downwards trend remains intact”, analysts said.
With this in mind, CoinShares during periods of economic uncertainty and if the US dollar weakens, Bitcoin is “likely to benefit in the same way as gold”.
Bitcoin’s bottom supporting theory?
The report’s thesis that Bitcoin’s volatility could eventually die down will come as a relief to some crypto investors following the recent crash, which saw the cryptocurrency fall sharply to its lowest level since early February.
However, despite pronouncements of the death of Bitcoin, the crypto failed to drop below US$30,000 in value, leading some analysts to speculate that Bitcoin’s price may have found a harder floor than in previous years, potentially lending credence to the theory that is volatility is easing slightly.
“Bitcoin may have found a bottom here, at least for now as investors weigh the prospects of increased regulations and environmental concerns against the many advantages Bitcoin and other cryptos have over fiat currencies”, said Fawad Razaqzada, market analyst at ThinkMarkets.
“Bitcoin is now 50% cheaper than in April when it hit a record high at just shy of US$65,000. This makes it appealing for many who missed out on that big move up. With prices stabilising around the US$35,000 area, Bitcoin is possibly creating a low here”, Razaqzada added.
However, the analyst said while it may have avoided falling below US$30,000, Bitcoin and other cryptos “will likely stay volatile for a while” as investors weighed the ongoing developments in the market, particularly a regulatory crackdown on crypto in China and Tesla’s decision to suspend Bitcoin payments amid worries about the environmental impact of mining.
“Tesla’s decision to suspend Bitcoin payments on environmental concerns is a hammer blow for the digital currency and there is a risk that other big companies who have adopted Bitcoin may follow suit. Thus, investors may proceed a bit cautiously this time. China is obviously trying to dampen risky speculative trading and at the same time maintain capital controls by forcing people to use its own currency and its digital yuan. But the fact that it is China – the world’s second-largest economy – makes a big difference”, Razaqzada concluded.