The Fundamental Investment Case for Bitcoin

In these bear market times it seems at least to us that much of the conversation around the bitcoin price and valuation gets lost in individual narratives rather than being properly analysed within a more comprehensive investment case framework. These narratives, instead of being read as parts to an overall story, becomes the story. From an analytical point of view, this creates risks of missing the forest for all the trees.

It is not even that the individual narratives themselves are wrong. It is just that they each tell an incomplete story, have very limited explanation power on their own, and perhaps most importantly: their ‘fulfilment’, so to speak (or lack thereof), at any given time, are very susceptible to the ebbs and flows of the market — they’re unhelpfully noisy.

So to set things more straight, and without going into each of these narratives individually (we will instead revisit some later as we deduce them from a larger framework), let’s lay the investment case out as clearly as we can and work our way from there.

In other words, the fundamental investment case of bitcoin is, that we have in front of us a set of units of digital goods that are in the process of monetising. That is, the value of these units, due to their highly beneficial monetary properties, are progressively taking on a monetary premium far in excess of their non-monetary utility (which both is and should be effectively zero). Over time, as the use of bitcoin as money continues to grow, this premium will also continue to grow, adding incremental exchange value to each unit.

Now there’s a lot to unpack in the above paragraph and without blowing this short article out of all proportions, we’ll try to explain clearly and briefly what we mean by the terms money, monetising, monetary properties and monetary premium.

On the surface, that might sound circular or tautological, but it’s actually quite a useful distinction. The point of the statement is to make clear that whether or not something is money is determined by usage not semantics. It is usage that defines a good’s moneyness, not some academic box-ticking exercise.

For a fuller explanation of how we use the term money, and how we apply a theoretical framework to connect monetary usage and unit valuation, we recommend Part 1 of our 3-Part series on bitcoin valuation.

What this means is that something that is money now, may cease to be money in the future, and something that is not money now, may become money in the future. Additionally, something that is money somewhere, might not be money somewhere else. Both history and our current world are full of examples of this and you will certainly already know of many such instances.

Whether bitcoin is or is not money now is something you can argue about until you’re blue in the face, but it’s not really important at its current stage of development. The only thing that is important now is whether bitcoin is closer to being used globally as money right now than it was one year ago, two years ago, three years ago etc. Is bitcoin monetising or not? Has development stagnated and adoption reversed, or is the trend still progressing towards increasing usage?

We are in the process of developing a comprehensive framework for measuring and tracking this progress and then relating the progression to the current price. You can read about our progress towards a comprehensive short-term valuation methodology here.

Whether people choose to use one item or another for the functions of money depends a great deal on whether the item in general is suitable for use as money. This suitability can be evaluated in terms of its monetary properties.

We also discuss bitcoin’s monetary properties in detail in Part 1 of our bitcoin valuation series.

This is incidentally also what sets bitcoin squarely apart from crypto. Bitcoin is explicitly designed to maximise its monetary properties and only that. It has no real utility outside of its use as money and makes little to no attempt at doing anything other than being as optimised as possible for security, decentralisation, predictability, trust minimisation, censorship resistance etc. — all of which help safeguard its unmatched monetary properties.

In turn, it is these monetary properties that make people across the globe find bitcoin to be useful. Its usefulness makes them choose bitcoin over some other competing money, further enhancing its usefulness to others who now observe more people accepting it in exchange, and ultimately adding to the virtuous cycle of network effects.

At this point it’s almost guaranteed that you’ve heard some of the following narratives for why you should invest in bitcoin: it is uncorrelated; it is an inflation hedge; it’s a store of value. The list is long.

It’s not necessarily that any of these narratives are wrong, it’s just that they are not by themselves in any way sufficient to explain bitcoin’s investability. It’s not because of the narratives that bitcoin is investable, rather, it is because of bitcoin’s properties that these narratives are interesting and likely to be true over long stretches of time.

Bitcoin is likely to be an uncorrelated asset because its properties are not similar to most other assets. Bitcoin is likely to be an inflation hedge because one of its monetary properties is scarcity — while the supply of other monies will inflate forever, bitcoin’s supply will not. Bitcoin is likely to be used as a store of value because it is extremely secure, imparts global state-independent bearer asset rights on its holders, cannot be confiscated, and is very easy to transport or transact anywhere in the world.

It is not the individual progression of any particular subset of bitcoin usage that should interest investors evaluating bitcoin’s progress towards global monetary usage, it is the sum of all of them combined.

Subsets of bitcoin usage are much more susceptible to the ebbs and flows of the market than their sum.

Depending on how users at the price-setting margin are using bitcoin, it may for some time take on correlations with other assets, only to shed it completely at a later time. Bitcoin being correlated with something at any given time does not mean bitcoin will remain correlated with that (or any other) thing over any appreciable period of time, it just means that it is currently correlated with something with which it may or may not share some subset of fundamental similarities. The fewer the similarities, the less staying power the correlation probably has.

Bitcoin is still a complete newcomer on the global monetary scene. Its price began at zero and it has had to organically grow from nothing to its current market cap of a mid-sized state-issued fiat money. The price of bitcoin still fluctuates significantly. This sometimes makes bitcoin a poor short-term store of value even if it is an excellent long-term one.

Similarly, due to the free market price-setting of bitcoin and its tiny size relative to the larger monies with which it competes for global usage, the volatility of its price might over shorter periods of time overshadow its ability to safeguard its users against monetary debasement.

Oftentimes zooming out from a scene makes the larger picture easier to spot. It is the combined progression of all usage subsets that determines whether bitcoin continues to take on a growing monetary premium, and it is the growth of the premium over time which makes bitcoin investible at all.

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