Phoenix (Changxiao) Li

Trade Recommendation - Long Bitcoin with Buy and Hold Strategy

December 5th, 2020

Bitcoin is probably the most controversial asset in recent years with hyper volatility and
abundant retail speculations. It is the 11th year since Bitcoin was born by the pseudonymous
creator Satoshi Nakamoto. With the maturing of the cryptocurrency marketplace and
increasing public awareness and understanding, I believe that under the current macro
environment, Bitcoin could see significant upside in the long term.

Firstly, USD’s world currency status is weakening with massive quantitative easing and de-
globalization. Since the COVID outbreak, the federal reserve has printed $3 trillion USD (Exhibit
1, 2) to finance various fiscal stimulus packages (Exhibit 3) and open market operations to curb
the yield (Exhibit 4) on bonds with the hope that lower financing costs would help more
businesses to survive through this pandemic and stimulus the overall economy. Everything
comes with a cost. The simple supply-demand curve tells us that with the Feds pouring money
into the system, the value of each dollar tends to decrease.

As the world currency, the blurring barrier between the Feds and the U.S. government is
detrimental to the credibility of the Feds and USD (Ben Holland, 2020). The recent de-
globalization trend also leads China and Europe to promote its RMB and Euro to have a bigger
say on the international stage. With the possible weaker dominance of USD, investors need to
find alternatives to store value, such as Bitcoin. Also, given Bitcoin is priced by USD, a weaker
USD means a higher price of Bitcoin.

The increasing demand for Bitcoin as the alternative store of value does not necessarily come
after the USD further weakening. Psychologically, as long as the concerns and the possibility of
USD continue to lose the dominant status exists, there will be increasing demand from
institutional investors to buy store-of-value assets, such as gold or Bitcoin, as part of their long-
term asset allocation.

Secondly, the opportunity cost of holding Bitcoin, which is a non-yielding asset, is low given the
prevailing interest rates are low. I would not recommend this trade if there is an attractive risk-
adjusted yield elsewhere. The fact is that the interest rates are around historical lows. The US
10-year treasury yield is currently priced at 0.97% and European bonds are priced in the
negative territory. Looking at the equity market, the S&P 500 currently traded at 37x TTM P/E
and 22.2x forward P/E with aggressive recovery assumptions (Yardeni, 2020) (Exhibit 5). The
ratio of total market cap to US GDP is at a historical high of 182% (Exhibit 6). All of those show a
very high valuation of the assets in both the fixed income and equity markets. Thus, it is very
difficult for investors to find yield and the opportunity cost of holding non-yielding assets, such
as gold and Bitcoin, is very low.

Also due to the high valuation in both fixed income and equity markets, investors are looking
for alternative assets with low correlations with those assets to hedge their risks. This positively
contributes to the overall demand of Bitcoin thanks to its low correlation with most of the asset
classes (Exhibit 7).

Thirdly, Bitcoin is the “new gold”. Given the above thesis, I am also bullish on gold, but I believe
Bitcoin is a better asset to own with more upside potential. To become the “new gold”, here
are the key characteristics of Bitcoin versus gold.
1. Scarcity (similar to gold) – limited the total supply to 21 million tokens and 18.5 million
of them have been mined (88%). The final token will not be issued until the year 2140.
(Investopedia, 2020)
2. Indestructible (similar to gold) – Bitcoin is protected by blockchain technology with a
complex algorithm, central ledger, and consensus. It can last forever. (Binance Academy,
2020)
3. Liquidity (similar to gold) – Bitcoin has very liquid markets where fiat money can be
exchanged for them. Now, it is getting more secured and convenient for people to
trade.
4. Transaction and application – unlike gold, Bitcoin has its own advantage of full
digitalization, which means there is no heavy physical metal to move around. All the
transactions can be done easily through the internet. This unique property implies huge
application potential for people who want to store and transfer value in areas with a
insufficient banking system.

Bitcoin shares many similarities with gold as a store of value. With its advantage of digitalization
and blockchain technology, I believe that Bitcoin may not replace gold, but will have its own
role in the investment world as an alternative store of value. To have a sense of the fair value of
Bitcoin, gold has a market capitalization about $9 trillion and Bitcoin has a market capitalization
about $350 billion. It is hard to come up with a fair value for Bitcoin, but on a relative basis,
Bitcoin’s total value is only 3.8% of the total value of gold. I expect this number to go higher
from here over time.

Gold has been building its trust for thousands of years. It will certainly take some time for
Bitcoin to build trust to a comparable level as gold. The key drivers for Bitcoins are its
accumulation of trust, which naturally comes with time and improving public awareness, and
the development of new applications, such as a more efficient marketplace and sound
regulatory guidance. Those all support the fundamental value of Bitcoin and will drive the
Bitcoin price to go higher over time.

Finally, institutional investors are “on the move”. According to Coinbase.com (Zimwara, 2020),
the “greater visibility of reputable investors warming up to digital assets” is also helping to fuel
growing “confidence among this community. In August, nearly 20 institutions already filed
paperwork with the U.S. Securities and Exchange Commission showing they invested in the
Grayscale Bitcoin Trust (Castillo, 2020). In September, “MicroStrategy CEO, Michael Saylor,
followed the footsteps of veteran investor, Paul Tudor Jones by purchasing 21,454 BTC. Earlier
in the year, Jones revealed his stake in Bitcoin, describing the assets as the “fastest horse” with
the best odds performance wise (Madeira, 2020). In November, Grayscale Investments, the
largest crypto investment firm, AUM topped $10 billion in assets in the Q3 (Roberts, 2020).

The institutional buying activities confirmed the trend that Bitcoin has been adding to portfolio
asset allocation for more and more institutional investors. This is just the beginning. With more
institutional investors follow suit, the increasing demand from institutional investors is another
important driver to send the Bitcoin price higher.

In conclusion, trade thesis in a snapshot:

1. Money printing is detrimental to the faith of USD and boosts demand for alternative
“store of value” assets.
2. The opportunity cost for holding Bitcoin is low given the low interest rates environment.
Bitcoin is a good hedge with little correlation against other richly valued asset classes.
3. Bitcoin is the “new gold”. The trust-building will naturally come with time. Bitcoin will
gradually be added to more and more investors’ long-term asset allocation.
 4. Institutional buying trend has started, and it is just the beginning. The trend will
continue, and the new demand will send the Bitcoin higher.

In terms of specific trade implementation, given Bitcoin has rallied 155% over the past year
(Exhibit 8), I would be reluctant to open my entire position in one shot. I will start to build my
position at every pullback. There are still heavy speculative forces in the Bitcoin market, so I
would not trade in and out of my position frequently. The Grayscale Bitcoin Trust (GBTC) is an
SEC-registered trust fund that solely and passively invested in Bitcoin (Grayscale, 2020). This is
an easy way to get exposure to Bitcoin if you already have a stock brokerage account, but it is
currently traded at a 20% premium to its NAV. Alternatives, Cash App by Square and Robinhood
can trade Bitcoin directly, which could be good alternatives in the short-term awaiting better
crypto ETF products coming online.
Exhibit 1

Source: Federal Reserve (The Federal Reserve Board, 2020)

Exhibit 2
Exhibit 3

Exhibit 4

Exhibit 5

Source: Yardeni Research

Exhibit 6

Source: Gurufocus

Exhibit 7

Exhibit 8
Bibliography
Ben Holland, L. M. (2020, May 15). Pandemic Bills Are So Big That Only Money-Printing Can Pay
Them. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2020-05-
15/pandemic-bills-are-so-big-that-only-money-printing-can-pay-them?sref=CxqDXO1R
Binance Academy. (2020). Store of Value. Retrieved from Binance Academy:
https://academy.binance.com/en/glossary/store-of-value
Castillo, M. d. (2020, August 6). 20 Institutional Bitcoin Investors Revealed, But Soon The List
May Vanish. Retrieved from Forbes:
https://www.forbes.com/sites/michaeldelcastillo/2020/08/06/valuable-sec-data-on-20-
institutional-bitcoin-investors-could-soon-disappear/?sh=28b7db451de2
Grayscale. (2020). Grayscale Bitcoin Trust. Retrieved from Grayscale:
https://grayscale.co/bitcoin-trust/
Investopedia. (2020, June 22). Should You Buy Gold Or Bitcoin? Retrieved from Investopedia:
https://www.investopedia.com/news/should-you-buy-gold-or-bitcoin/
Madeira, A. (2020, September 22). Institutional investors plan to buy every Bitcoin price dip,
data suggests. Retrieved from Cointelegraph:
https://cointelegraph.com/news/institutional-investors-plan-to-buy-every-bitcoin-price-
dip-data-suggests
Roberts, D. (2020, November 30). Bitcoin hits new all time high, driven by institutional buying.
Retrieved from Yahoo Finance: https://finance.yahoo.com/news/bitcoin-hits-new-all-
time-high-driven-by-institutional-buying-153215272.html
The Federal Reserve Board. (2020). Credit and Liquidity Programs and the Balance Sheet .
Retrieved from https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
Yardeni, D. E. (2020, December 4). Stock Market Briefing: Selected P/E Ratios. Retrieved from
Yardeni Research: https://www.yardeni.com/pub/stockmktperatio.pdf
Zimwara, T. (2020, July 28). Coinbase Sees More Institutional Investors Buying Bitcoin in H1.
Retrieved from Coinbase.com: https://news.bitcoin.com/coinbase-sees-more-
institutional-investors-buying-bitcoin-in-h1/