Alden, who found Lyn Alden Investment Strategy, wrote:
“So, I’m neither a perma-bull on Bitcoin at any price, or someone that dismisses it outright. As an investor in many asset classes, these are the three main reasons I switched from uninterested to quite bullish on Bitcoin early this year, and remain so today.”
The three reasons Alden laid out are scarcity, halving, and the potential of Bitcoin to act as a backdrop to inflation.
Scarcity of Bitcoin
Unlike traditional financial assets, even gold, the supply of Bitcoin is fixed. No more than 21 million BTC can ever exist, which makes Bitcoin a deflationary currency.
Scarcity could give Bitcoin value, Alden explains in her paper. There are no central entities that could alter the monetary policy of BTC. If the demand for Bitcoin continues to increase and its supply remains the same, it could push the value upwards.
“Bitcoin’s protocol limits it to 21 million coins in total, which gives it scarcity, and therefore potentially gives it value… if there is demand for it.”
The scarcity of Bitcoin by itself does not give BTC value. There has to be demand from the market to support it. But there are other characteristics of Bitcoin, such as fungibility, transportability, immutability, and decentralization, that makes it a practical store of value.
Bitcoin also remains highly dominant over thousands of cryptocurrencies in the market. In terms of market capitalization, Bitcoin accounts for 62.4% of the entire cryptocurrency market cap. That figure includes coins that potentially have insufficient liquidity to justify their valuation.
The dominance of Bitcoin — and therefore its network effect — makes the top cryptocurrency even more compelling as a long-term hold, Alden said.
The Bitcoin dominance index. Source: CoinMarketCap.com
The May 11 halving
On May 11, the Bitcoin blockchain network underwent its third block reward halving. Approximately every four years, a halving gets activated, slowing down the production of BTC by half.
The purpose of a halving is to decrease the rate of BTC production gradually as Bitcoin approaches its maximum supply of 21 million. A halving cuts block rewards miners receive by half, leading to a massive decline of miner revenues for a brief period.
Following every halving, Bitcoin historically saw extended price rallies. The previous halvings occurred in 2012 and 2016. At the time, BTC was hovering at $11 and $650 in 2012 and 2016 respectively. Now, BTC remains above $9,000, after reaching a record high at $20,000 in December 2017. Alden wrote:
“Bitcoin has historically performed extremely well during the 12-18 months after launch and after the first two halvings. The reduction in new supply or flow of coins, in the face of constant or growing demand for coins, unsurprisingly tends to push the price up.”
The price of Bitcoin with halving dates. Source: Blockchain.com, Lyn Alden
The historical performance of Bitcoin subsequent to previous halvings raises the probability of another prolonged uptrend.
Backdrop of heightened levels of inflation
In May 2020, billionaire hedge fund investor Paul Tudor Jones praised Bitcoin and described it as “great speculation.”
Tudor Jones said he holds just over 1% of his net worth in Bitcoin. He explained that the potential devaluation of cash strengthens the value proposition of BTC. He said:
“Every day that goes by that bitcoin survives, the trust in it will go up.”
Similarly, Alden said that other hedge funds have been investing or experimenting with Bitcoin as of late.
“Smaller hedge funds have already been dabbling in Bitcoin, and Tudor Jones may be the largest investor to date to get into it. There are now firms that have services directed at getting institutional investors on board with Bitcoin, whether they be hedge funds, pensions, family offices, or RIA Firms.”
Crucial metrics, such as the assets under management (AUM) of the Grayscale Bitcoin Trust (Btc), indicate institutional activity in the Bitcoin market is rising. Data shows the AUM of Btc is now at $3.55 billion, around $500 million higher than during the 2017 peak.
The Grayscale Bitcoin Trust assets under management. Source: YCharts.com
A confluence of BTC reaching its fixed supply of 21 million, a bullish post-halving trend, and growing institutional activity could benefit Bitcoin’s long-term price trend.