Investing in crypto has become synonymous with investing in Bitcoin (BTC), but an investment in Bitcoin bears little resemblance to an investment in the broader digital asset class. The “original” cryptocurrency, Bitcoin may seem like a logical entry point to crypto investing: it has a $1 trillion market cap, 13-year track record, an uncompromised network and a first-mover advantage.
While investment in digital assets – the emerging world of web3 – presents an attractive opportunity, long-term investors should be cautious making an allocation to Bitcoin specifically. Here’s why:
Bitcoin Blunder #1: Broad Misunderstanding of Supply
Like any other asset, Bitcoin pricing is predicted by supply and demand. A critical misconception among investors is that there is a strictly limited supply of Bitcoin. With a theoretical maximum of 21 million coins, and 18.9 million mined already, it might seem to be a scarce asset. However, historical evidence suggests it is very easy to launch a cryptocurrency that closely resembles Bitcoin, thus attracting investors who have missed the opportunity to generate ‘crazy’ returns on early crypto investments (in fact, Dogecoin, which began as a joke, is technically stronger, i.e., faster and cheaper to do transactions in, than BTC).
Despite Bitcoin’s lack of scarcity and technical superiority, investors continue to tout the currency as “digital gold.” This comparison fails because gold cannot be replaced by silver or platinum, as they do not share similar physical properties. Bitcoin, however, is different from exact copies only by name, by slightly longer digital ledger and by distribution among existing holders. To put it plainly, Bitcoin is easily replaceable.
Bitcoin Blunder #2: Over-Inflated Ideas of Demand
While Bitcoin’s supply is underestimated, the demand for the currency is also largely over-inflated. Demand requires there be an innate, fundamental value in Bitcoin, and that value must be greater than the cost of supporting it.
The value of an asset is defined by its possible applications, but Bitcoin is an open-source system with no IP rights, meaning its value can only be determined by its utility to consumers. Although Bitcoin was initially extoled as a democratized global currency, it failed to become a new convenient payment system for several reasons, including high terawatt-hour costs, slow confirmation that makes BTC impractical for everyday transactions, and pricing volatility that prohibits time-of-sale deals.
Cryptocurrencies that are tied back to the US dollar, such as Tether, are more practical and stable, and much better suited for digital transactions. Bitcoin is also problematic from an ESG perspective due to the extremely high, continuous input of energy required to maintain its existence - it currently uses over 200 terawatt-hours of electricity annually, more than all but 22 countries with a population in the millions.
Bitcoin Blunder #3: Declining Market Share and Erratic Pricing
Bitcoin can be considered a ‘dominant’ market presence so long as its market capitalization is at least 10% of the sum of all crypto coins, but current market trends indicate that its share decline can be estimated at conservatively at 5-7 years and as soon as 2-4 years. The process has already begun, with Bitcoin down to less than 40% of digital market share. Institutional investors currently own about $70B in Bitcoin (about 8% of all coins), and while institutional adoption has helped spread acceptance and higher perceived value, Bitcoin's market capitalization has steadily declined. Bitcoin will continue to lose market share due to creation of more advanced decentralized projects and the rise of competitive clones.
The focus in crypto now is on how these decentralized products are going to impact our lives. The time for proof of concept coins is over, and Bitcoin’s pricing reflects that – at the time of writing, BTC was down more than 50% from November/December 2021 highs, with YTD 2022 losses of 35%.
With failing conditions for supply and demand, steadily decreasing market share, and changing priorities in the crypto space, Bitcoin’s erratic pricing is the new normal and its long-term equilibrium price should gravitate to zero over time.
Better than Bitcoin
Bitcoin was a pioneer in decentralized finance but is unlikely to stand the test of time. With no protectable uniqueness, no functional value, and a very expensive life support system, it’s likely to simply become a museum exhibit.
With Bitcoin on the road to obsoletism, savvy investors should look to what’s next in digital assets. Web3 has great appeal for investors' portfolios, and forward-thinking investors may consider a broad basket of crypto tokens (100+) to get exposure to explosive growth of this asset class. Alternatively, lower risk solutions such as long/short market neutral portfolios may be appropriate.
Investors should prepare for a new age of digital assets and construct their portfolios accordingly. Expect the arrival of new crypto investment products that provide active coin management, offering investors diversified, risk-managed access to growth in the digital assets space.