Wwith some cryptocurrencies down 40% or more from their recent highs, crypto investors may be worried about what to come next. But despite the volatility, there are at least three good reasons Bitcoin (CRYPTO: BTC) investors to believe in the future of cryptocurrency.
To say that bitcoin has been on a wild ride over the past year is an understatement. Just since May of last year, bitcoin has grown from around $ 9,400 to over $ 64,000 in April 2021. Bitcoin’s recent correction has gained momentum based on two key factors. Elon Musk seemed to move away from his bitcoin support based on the idea that bitcoin mining uses a huge amount of energy. It does not fit in You’re here (NASDAQ: TSLA) Ecological position. The second issue was China’s crackdown on the use of crypto as a form of payment.
1. Redraw the line between gambling and investing
While the price of bitcoin has been volatile, increased acceptance as an investable asset class looks good for its future. Square (NYSE: SQ) was one of the first companies to help bring bitcoin to the mainstream through its Cash app. In case there is any doubt about the popularity of bitcoin, Square’s Bitcoin activity has increased 11-fold to over $ 3.5 billion in the company’s last quarter. The financial company has consistently referenced Bitcoin’s commitment to the Cash app as one of its pillars of growth.
Image source: Getty Images.
Pay Pal (NASDAQ: PYPL) doesn’t just let Bitcoin enthusiasts corner Square. The payment company wants customers to feel comfortable with crypto as a form of payment, offering to ‘put currency back into cryptocurrency’. Many investors are still trying to learn more about what crypto is and how it might fit into their lives. Although many companies allow investors to buy crypto, there are relatively few debit or payment card options that allow people to spend crypto directly. PayPal offers to automatically convert crypto into a currency that can be used to make payments anywhere PayPal is accepted.
It is one thing for retail-oriented businesses to attract customers with Bitcoin options. However, Goldman Sachs chief digital officer Mathew McDermott said the investment firm’s institutional clients have gone beyond learning crypto and requesting access for their wallets.
Wells fargo (NYSE: WFC) also wants in the bitcoin business. The bank will soon offer a professionally managed solution for customers using cryptocurrency. John LaForge, head of the bank’s Real Assets Strategy, said: “We believe the cryptocurrency space has just kind of seen an evolution and maturation in its development that now allows it to be a viable investable asset. “
2. A graphic demonstration
There is a crazy method of Bitcoin mining. A 2018 study in Letters in Applied Economics suggests a theory behind the price of bitcoin: the value of a single bitcoin is correlated with the cost of operating that coin.
In this context, it makes sense to look at the costs associated with mining. One of the major costs that miners face is graphics card (s), or ASIC miners, which generate most of the processing power. Graphics cards and ASIC miners suffer from constant supply shortages. Theoretically, as the cost of acquiring mining equipment increases, the price of bitcoin should also increase.
The biggest provider of Bitcoin mining equipment is Bitmain, which is reportedly sold out until at least August of this year. Regarding graphics cards, Nvidia (NASDAQ: NVDA) estimates that the GPU shortage will likely continue until 2021. Due to supply shortages, scalpers regularly buy and resell mining equipment at a significant mark-up.
Investors should note that bitcoin mining is also limited to one block every 10 minutes, so miners cannot speed up production to produce more coins. With high demand, fixed production, and increased costs to acquire mining equipment, the price of bitcoin is expected to rise as long as these trends continue. The challenge of these trends is that scarcity drives up costs also means chasing less capitalized competition. According to Fitch Solutions, a data analytics company, the chip shortage affecting miners could last until at least 2023.
Investors are starting to speculate that bitcoin could follow Ethereum (CRYPTO: ETH) to switch from proof of work (mining) to proof of stake (detention). One of the main issues publicly debated is the enormous cost of electricity to run a proof-of-work system like bitcoin. However, there are several reasons to believe that Bitcoin may not need to follow Ethereum on the proof of stake route.
First, Ethereum is moving to proof of stake due to the large number of applications trying to run on the current network. A proof of stake network, which requires significantly less computing power to verify transactions, can help Ethereum’s network to grow and become more efficient.
Second, the Bitcoin network has been developing a Lightning network since 2015. Think of it as an access road that connects to the Bitcoin highway, but also runs in parallel. In the traditional Bitcoin network, each new transaction is linked and reaffirmed with all other data on the network. Using the Lightning Network, two parties can essentially send and receive to each other multiple times without including the mainnet in every transaction. This way, Bitcoin transactions can branch off onto the main route and create lots of small side transactions that don’t have to clog the mainnet. As new lightning-supported crypto wallets become more prevalent, the Bitcoin network is expected to be faster and theoretically cheaper to use.
Finally, Bitcoin’s limited supply argues that investors should favor holding the coin as a scarce asset. Unlike bitcoin, Ethereum does not have a hard limit on its overall supply, which means that it can pay stakeholder interest much more easily by giving them more ETH. Bitcoin’s hard cap of 21 million coins in total means that at some point stakeholders would no longer be able to generate additional interest in bitcoins, as the cap would have been reached.
3. Definition of the gold standard
Bitcoin investors can also be encouraged by the similarities between Bitcoin and gold. Gold is valuable not only because of its relative scarcity, but also because it requires labor and time to mine the metal. There are approximately 190,000 tonnes of gold above ground. Each year, approximately 2,500 to 3,000 tonnes of new gold are mined. Considering the costs and limitations of profitable mining, statistical research suggests that large-scale gold mining will not continue well beyond 2075.
Bitcoin’s future supply looks like its true metal counterpart. The crypto equivalent of gold has a circulating supply of around 18.7 million coins. By design, Bitcoin sets its maximum supply at around 21 million coins. Bitcoin mining generates a block every 10 minutes worth 6.25 bitcoins. Blocks are automatically reduced by 50% every 210,000 blocks, or roughly every 4 years, which reduces the inflation rate of bitcoin. With these calculations, investors know that final bitcoin is expected to be mined around 2140.
Even Sylvia Carrasco, CEO of Goldex Gold Exchange, finds similarities between gold and bitcoin. In a questionnaire by Insider markets in February 2021, Carrasco was asked if she would rather hold gold or bitcoin over the next ten years. She noted, “Bitcoin and gold both have significant advantages over fiat currencies, as neither can be diluted or degraded.”
While bitcoin is certainly more volatile than gold or many stocks, its returns have far outstripped these other assets. in the past two years in particular.
Data source: Yahoo Finance.
Investors cannot afford to ignore an asset that has outperformed others by this margin. Bitcoin seems to get a new stamp of approval from different companies on a regular basis. Squeezing supplies of efficient mining equipment increases the cost of producing the part. As bitcoin moves towards mainstream adoption, gold and crypto seem more and more similar.
After the recent cryptographic correction, Bitcoin is trading almost 40% off its 52-week high. Investors looking for confidence in the future of Bitcoin can watch out for future Bitcoin expansions into more traditional financial transactions. At the end of May 2021, PayPal announced that it will now allow users to transfer bitcoin outside of PayPal’s internal crypto wallet for the first time. This will allow users to freely move their bitcoin to other sites for trading, or make payments to their friends directly with crypto instead of having to convert their crypto to cash first.
When it comes to following the mining side of the equation, investors can follow Nvidia to keep track of supply trends. As long as Nvidia’s supply is limited, there’s a good chance mining costs will rise, which seems to support the price of bitcoin. But investors should remember that bitcoin is closer to the gold version of the crypto world, not the dollar. While it is important that bitcoin be usable, the fact that institutions and individuals want to keep bitcoin in their wallets is another factor to watch out for. Those worried about missing the big bitcoin move may have another chance with the recent correction.
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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Chad henage owns shares of Bitcoin. The Motley Fool owns stocks and recommends Bitcoin, NVIDIA, PayPal Holdings, and Square. The Motley Fool recommends the following options: Long January 2022 $ 75 calls to PayPal Holdings. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.