bitcoin – the perennial phoenix

In the last week or so, the global media headlines have been so dominated by stories of crypto implosions, including FTX and Alameda, that one has had to scroll down the page to read coverage of seemingly less important events such as the US midterm elections.

For those desperate for the inside track on Sam Bankman-Fried’s (SBF) collapsed crypto empire, you may have to wait for Michael Lewis’s – author of “Liar’s Poker” – next book. Lewis has apparently been staying with SBF in the Bahamas for the last six months.

It will take many months for the FTX daisy chain of contagion to unravel, as regulators and bankruptcy lawyers try to understand how this Millennial ‘Bernie Madoff’ allegedly defrauded billions from retail and institutional investors. John Jay Ray III, who handled the bankruptcy proceedings for Enron, has been appointed to clean up the mess.

This year has seen some exceptional volatility in the digital asset space with the death spiral of UST / Luna; Chapter 11’s for both Celsius, the centralised-yield institution, and Voyager, a crypto lending firm; and 3 Arrows Capital (3AC) – one of the largest hedge fund collapses of all time.

‘Is this the death knell of crypto or bitcoin?’… we hear you ask. In order to address this all-important question, it’s fundamentally important to note that bitcoin is not crypto. Many conflate the two from a benign lack of understanding to sometimes more Machiavellian motivations.

Bitcoin was the first crypto or digital asset and today it is by far the largest still, with a current market capitalisation of $315 bn. The innovations that allowed bitcoin to emerge as the dominant digital asset today are the basis for thousands of imitations, from stablecoins to basic cryptocurrencies to more complex variations, like Ethereum.

The pseudonymous Satoshi Nakamoto created bitcoin, in a whitepaper* released on 31st October 2008. The first block, known as the Genesis block, was mined on 3rd January 2009 by Satoshi himself and the first blockchain was born. Satoshi mined over one million bitcoins before disappearing in 2011 and there is no central authority (or figure) in bitcoin.

Many technologies, included in Satoshi’s creation, were already in existence, such as cryptography, hashing algorithms, proof of work, and Merkle trees. Satoshi forged these existing technologies with some entirely new creations of his own, such as the ‘difficulty adjustment’. The intention was to create a decentralised, permissionless, censorship resistant cash system that had no need to rely on trusted third parties such as banks. The real invention was digital scarcity and inviolable property rights for digital assets.

For a more thorough investigation into the history of money and the origin of bitcoin I recommend a good introductory piece by Vijay Boyapati – The Bullish Case for Bitcoin. Indeed, many in the bitcoin space say you shouldn’t form an opinion on bitcoin’s merits until you have spent, ideally, 100 hours researching bitcoin with articles, books, and podcasts. More recommendations for these will follow later.

*Bitcoin, A Peer-to-Peer Electronic Cash System

As of today, 18th November 2022, Bitcoin has allegedly died 465 times** . However, the constant lampooning of bitcoin in the press is repeatedly countered when bitcoin makes new all-time highs. This has been achieved on many occasions after market drawdowns of the scale and speed that one might never see in traditional finance (tradfi). Some of the most important bear markets have been:

• In 2011, after the Mount Gox hack, the price of bitcoin (BTC) fell 99% from $32.00 to $0.01 over the course of a few days

• In 2013, after China banned bitcoin, the market fell 50% from $1,000 and then hit a low at $170 a couple of years later. China has banned bitcoin in total eighteen times, and still has up to 20% of the global hashrate today

• Bitcoin plunged below $3,200 after hitting $20,000 in December 2017

• Bitcoin slumped from $63,000 to $29,000 in the spring of 2021

• Most recently, the price of bitcoin has fallen from its November 2021 high of approximately $69,000 to nearly $15,000 this month.

Notwithstanding these drawdowns, bitcoin is recognised globally as a store of value, especially so in less developed countries that have high inflation. It has a Compound Annual Growth Rate (CAGR) in USD terms of 107% for the last 10 years to date. Fidelity Digital Assets have written many papers assessing bitcoin as an asset. In particular, one report, Getting Off Zero where analyst, Jack Neureuter, demonstrates that even small allocations of between 1% – 5% to bitcoin can dampen volatility and increase both total returns and risk adjusted returns in a portfolio.

As the Financial Conduct Authority regards bitcoin as an unregulated asset, we will not provide advice on the suitability of owning bitcoin, but are able to assist anyone who is interested in acquiring it and holding it securely (via self-custody). Please contact William Buckley, Client Director, for further information.

This is a post by William Buckley. Opinions expressed are entirely his own and do not necessarily reflect those of Strabens Hall.

**Data provided by 99bitcoins.com