In the previous post we discussed why bitcoin ATMs might be useful for investing in bitcoin and also what are the characteristics of bitcoin that make it valuable. In this post we look at potential reasons why bitcoin price might increase in the future and also what kind of investing strategy can be chosen.
Why bitcoin price might increase
There are many factors why bitcoin price is undervalued today:
- Next global financial crisis. Since Bitcoin creation there was no large crisis in global economy (after 2008). And crisis will come sooner or later. Economy develops in cycles. You never know the form of new crisis and when it will hit, but the fact is that it will for sure happen. Here is a short list of economic crises happened before. Advantage Bitcoin gives is that it is uncorrelated to most modern financial instruments, which means when traditional financial assets will drop in value, Bitcoin could become a safe haven.
- Halving. Bitcoin works like this — every 10 minutes on average a block is found, which adds brand new bitcoins to the system. Initially it was 50 BTC, but with every 210’000 blocks (or roughly 4 years) this reward is reduced 2x times. There were two halvings already and now every 10 minutes only 12.5 BTC are created. In about 3 years from now there will be another halving, which means only 6.25 BTC will be created every 10 minutes. In simple terms that means with the same level of demand, new supply will be reduced twice. Price obviously will increase. Usually market puts this into expectation earlier than halving happens.
- Inflation reduction. As a consequence of the previous point, the issuance rate of new bitcoins decreases over time (halves every 4 years roughly). The first 4 years there were planned 50% of all bitcoins issues (10.5 millions). Then next four years with reward of 25 bitcoins per each block when were another 25% of all bitcoins issued. Next four years after halving 12.5% is planned etc. What does it practically means in terms of percentage? Let’s assume we are at the end of the first 4-years period. At this moment there were 10.5 million bitcoins issued and they were still issued at rate 50 per block, which results in ~2.6 million bitcoins per year (or 25% inflation rate per year). This is an average of high inflationary countries, very far from developed countries of 1-2% per year. However, with first halving at the end of first 4-years period, the inflation reduced immediately to 12.5% because now with 25 bitcoins per block, there were supposed only 1.3 million new bitcoins per year. At the end of year 8 of bitcoin existence (with still 25 bitcoin per block) inflation reduced to 8.3% (still the same 1.3 million per year of new coins, but the base of issued currency is 15.75 million bitcoins at this moment). Reduction of block reward to 12.5 bitcoins per block, brought inflation rate to 4.2% immediately. Now this rate is much closer to the inflation rate of developed countries. What will happen at the third halving (~mid 2020 year): at this moment there will be 18.4 million bitcoins issued, the issuance rate will be reduced to 6.25 new coins per block or 328500 new bitcoins per year. This will result in inflation rate of 1.7%, which will be better than most countries in the world in 2018:
- Current congestion problems. Bitcoin right now has a large conflict with community split in two fractions. One are those who don’t want to restrict Bitcoin’s capacity short term and increase block size short-term, while working in parallel on future bitcoin developments like layer 2 solutions (so called big blockers), and another fraction are the ones who want to restrict block size to 1 MB and push users to off-chain solutions (so called small blockers). A result of the restricted block size to 1 MB is that miner fees grew substantially making bitcoin impractical for many use-cases. However, this could be a temporary problem as market is looking for compromise solutions. When this problem is solved via finding a common way forward, or chain split and everyone goes their own way, price of bitcoin might increase longterm on all chains (something similar already happened with ETH and ETC). Price turbulence period might occur short-term in the latter scenario.
- Still low adoption. Bitcoin is still in its infancy phase with most user-base coming from male 25-35 y.o. people, who are technically savvy. There are supposedly only few millions that hold any amount of bitcoins. Which means that if adoption increases — more and more people will use it. Increased demand will potentially increase price of bitcoin.
- Access easing. Bitcoin ATMs are one way to purchase bitcoins out of many. However, there are still some ways for common public and especially instituions missing. Entrepreneurs try to introduce it, e.g. Winklevoss brothers tried to register ETF, but were rejected by SEC. However, in the future one could successfully do it. Other existing market players, like Forex company can provide trading opportunities in Bitcoin related pairs (e.g. Alpari already does it). All this will result in new money coming into Bitcoin, and increasing market demand. Large financial institutions already start to adopt existing instruments for Bitcoin, e.g. tracker certificate by Vontobel bank is traded on Swiss exchange.
- New generations perception shift. This happens with any technology. Old generations having particular background can’t quickly adjust to new technology and another way of handling the usual things. It happened when cars were replacing horses, when electricity was introduced, when internet appeared etc. Same happens with money. Every kid born today will never know the world where there were no cryptocurrencies. Making payments via banks that are available only during working days from 8 till 5 and will charge you extra fees, will be a history for new generations.
Bitcoin investment strategy
If you are not a professional trader, the simplest USD-cost averaging strategy works very well. It means that with regular intervals you purchase bitcoins with the same USD or other fiat currency amount (e.g. every 1st day of month buy $100 worth of bitcoins). What does it practically means? If bitcoin price increases you purchase smaller amount of bitcoins, however, your previous holdings increase in value. With price decrease your holdings decrease in value, however, with every purchase you get more bitcoins and reduce your average USD purchase price of 1 BTC. Sometimes it is recommended to enrich this strategy with buying more than standard amount in case there is significant drop in price.
If the long-term price of bitcoin increases, and according to reasons listed above it potentially might increase, this strategy will give you smooth capital increase.
Let’s look at the history of bitcoin prices (source Bitcoincharts) and calculate what would be the result of such investment (purchases done via ATMs) in case someone would have started at the highest price in 2013 (means the worst time to start your investments). For simplicity reason we use 10% as bitcoin machine fees on top of exchange rate. Also the installation of bitcoin ATMs started in October 2013, so back then there were only very few machines available, however, today they are much more accessible.
|Date||Bitstamp price||ATM price (+10%)||Investment, USD||Investment ATM, BTC||Cost average price|
As a result one would have done $4400 as investment and would hold a little more than 9 BTC. Average cost price is $487. So the whole sequence of investments is equal if you could buy $4.4K at $487. Current price is ~$2500 and your current holdings in USD equivalent would have been roughly $22.6K.
Repeating the same process and buying at pure Bitstamp exchange rate gives expected average cost price of $443 (10% better) and as a result accumulated holdings of 9.9 BTC, which is almost 1 BTC higher.
Here is a chart demonstrating the comparison of 2 scenarios (as of July 2017):
In the end of the day those two average cost lines are very close to each other in comparison to current market BTC price. Of course, if there is an opportunity to purchase at exchanges — it makes sense to do it, as it gives a price advantage (trade fees are lower). Don’t forget that when you sell bitcoins back using bitcoin ATM you will also pay fees to operator. However, even investing by using bitcoin ATM can still generate a very high return on investment if BTC grows long-term.
Here how the same chart looked half year later:
The average price of purchasing Bitcoin is $497 when purchased on the market, and $547 when purchased via ATM. In total $5’000 were invested over several years, which resulted in $122’242 portfolio evaluation result (when invested using ATM).
You can find nearest bitcoin machine and start contributing to your future capital.