Bitcoin is a digital store of value and a disinflationary digital currency designed to facilitate financial transactions without a centralized intermediary and government control. Bitcoin network is globally distributed and decentralized unlike traditional financial institutions. Bitcoin transactions are recorded on a public blockchain, which is a distributed ledger of timestamped transactions. Each Bitcoin network participant has its own unique address.
Bitcoin transfers are irreversible unlike transactions in traditional financial system and it usually takes a few minutes to settle a Bitcoin transaction with a relatively small transaction fee. Bitcoin’s current disinflationary model will become a deflationary model when the last Bitcoin is mined, which leads to a value appreciation. Bitcoin’s disinflationary model makes it an attractive investment alternative to gold and may provide a useful hedge for inflation.
Total Bitcoin supply is fixed at 21 million given that its inflation schedule is predefined and governed by a mathematical algorithm. As of May 2020, around 18.4 million bitcoins have been mined, which is roughly 87% of the total supply. The Bitcoin supply decreases by half every four years, and the next halving event is expected in May 2020. By 2024, Bitcoin’s annual inflation will drop below 1% as it gradually trends towards 0 by 2140 when the last Bitcoin is mined. The lack of new supply will most likely cause the future increased demand for Bitcoin.
New asset classes such as Bitcoin are rare and powerful because they may offer an asymmetric return stream while providing a diversification benefit. Small allocations to Bitcoin can enhance risk-adjusted returns as it has largely maintained a low correlation with most traditional asset classes. Based on the assumed risk and return of the traditional global 60/40 portfolio and Bitcoin, the traditional global 60/40 (95%) + Bitcoin (5%) hypothetical simulated portfolio would generate roughly 500 bps of additional return on an annualized basis when compared to the traditional global 60/40 portfolio, at the same level of risk.
Bitcoin is becoming an essential part of the global financial infrastructure. It challenges modern monetary theory and provides exciting investment opportunities, helping investors build more efficient and diversified portfolios with higher returns. The investor demand for Bitcoin is increasing as the market infrastructure matures and new financial products are becoming available. Fidelity Investments, one of the largest asset managers in the world, is building Bitcoin custody and trading platform for institutional clients. Multi-billion-dollar hedge funds, the largest endowments, and a few U.S. pension funds have already invested in the blockchain space. This will likely trigger a chain reaction among other institutions.
The crypto market is highly volatile and inefficient. However, institutional investors, family offices, and high net worth individuals, who are typically categorized as “accredited investors”, have relatively high-risk tolerance and don’t mind allocating a part of their investment portfolio to a new asset class. The reason behind this is that digital assets such as Bitcoin are historically not correlated with traditional asset classes and can provide excellent portfolio diversification benefits while generating high risk-adjusted return. Bitcoin alone has been generating an annual average return of over 300% for the past several years.
Investors who are seeking to invest in digital assets face challenges such as complexity of the blockchain technology, regulatory uncertainty, and undeveloped market infrastructure. They are typically not able to define a proper investment strategy and need professional assistance in making informed investment decisions. Traditional financial advisors are still hesitant to enter this increasingly growing market and advise their clients to buy Bitcoin, because of the lack of required expertise. However, we believe that in the next couple of years investment advisors will be forced to understand Bitcoin as new financial instruments become available.
The majority of institutional investors typically do not directly invest in the digital assets space because of the regulatory uncertainty, lack of reliable valuation models, and high market risks. Institutions do not have sufficient in-house expertise in the emerging asset class and used to get indirect exposure to digital assets via available financial instruments, such as Grayscale Bitcoin Trust, CoinShares’ ETN product, CME derivatives, and crypto hedge funds. However, these financial instruments are not designed to and cannot provide sustainable return stream, mostly because of the highly volatile crypto market environment.
Grayscale Bitcoin Trust, CoinShares’ ETN, and crypto hedge funds that use passive investment approach, such as Bitwise Bitcoin Fund, link their performance to the performance of the underlying digital asset and hence are more suitable for investors with the long-term investment horizon. Short-term investors can suffer substantial losses by investing in these financial products during bear market conditions. Crypto hedge funds that use active investment approach typically overperform passive investment vehicles, though they need to use smart hedging techniques to earn revenues during bear market conditions.
Based on PWC’s Crypto Hedge Fund Report, there were around 150 active crypto hedge funds in Q1 2019, most of them based in the US and Cayman Islands. These funds collectively managed ~$1 billion, while only 10% of them had over $50 million in AUM. The median fund returned -46% in 2018 vs a Bitcoin benchmark of -72%. This means the majority of crypto fund investors were losing money in 2018, paying a fixed ~2% annual management fee and not receiving return on their investment. Passive and index funds underperformed the median, discretionary, fund, while quant funds slightly overperformed and earned ~8% return in 2018. Fast forward in 2019, Bitcoin generated 92% return, however almost 70 crypto funds had been closed (source: Bloomberg), most likely because of the poor risk management and the consequences of the 2018 bear market, as LPs were redeeming their investments after the expiration of lockup periods.
The easiest way to buy Bitcoin is to purchase it using a credit or debit card. It usually takes only a few minutes to make the payment and receive Bitcoin. You can easily buy Bitcoin with credit card, buy Bitcoin with debit card, buy Bitcoin with prepaid card, buy Bitcoin with gift card, and even buy Bitcoin with virtual card on our website.
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