Before I start talking about Bitcoin (CCC:BTC-USD), let’s look at things from a slightly different perspective.
Gold is widely considered as an inflation hedge and an honest currency. Unlike Bitcoin, companies do not have gold on their balance sheets. However, central banks do hold gold. As a matter of fact, central banks have been net buyers of gold for most of the last decade. Yet, gold is not accepted as a method of payment.
On the other hand, companies are increasingly accepting Bitcoin as a method of payment. Tesla (NASDAQ:TSLA) recently announced that it bought $1.5 billion in Bitcoin and plans to accept the crypto as a method of payment in the foreseeable future.
In a recent disclosure, Square (NYSE:SQ) purchased another $150 million worth of Bitcoin. According to Square, “cryptocurrency is an instrument of economic empowerment, providing a way for individuals to participate in a global monetary system and secure their own financial future.”
Furthermore, Mastercard (NYSE:MA) and PayPal (NASDAQ:PYPL) have also made moves to accept Bitcoin as a method of payment. Mastercard believes that the company wants to “enable customers, merchants and businesses to move digital value — traditional or crypto — however they want.”
Clearly, if we look at the corporate sector, there is a growing consensus that Bitcoin needs to be among the future payment methods. The reason is wider adoption of cryptocurrency among consumers, and we are still at an early stage of crypto adoption.
Why Is Bitcoin Surging?
Let’s talk about the hyperbolic rally. The cryptocurrency trades near $50,000 and has surged by 337% in the last six months.
Some claim the rally is purely speculative, but I would differ considering the following points.
First and foremost, Bitcoin has a finite supply of 21 million coins. With the crypto witnessing wider acceptance, the demand drive surge is likely.
Furthermore, it’s important to note that Bitcoin is priced in dollars. On one hand, we have a digital currency that’s finite in supply. On the other hand, there is no limit to the amount of dollars that can be printed. The dollar is purely backed by trust in the government.
To get some perspective on the level of expansionary monetary policy, the total public debt in the U.S. has surged to $26.9 trillion. In addition, total assets in the Federal Reserve balance sheet have swelled to $7.5 trillion.
Therefore, we are talking about a digital currency with finite supply that’s priced against the dollar, which can have a potentially infinite supply. Amidst ultra-expansionary monetary policies, it’s very likely that Bitcoin will trend higher against the dollar. Even if the demand remains the same.
Of course, the same holds true for gold. At some point in time, the precious metal will surge. For now, the excessive funds in the economic system are being directed to equities and cryptocurrencies.
I strongly believe that Bitcoin is still in a phase of fair price realization. The crypto is often criticized for being too volatile. However, once the crypto is closer to its fair price, volatility is likely to decline.
Thanks to the cryptocurrency space, there seems to be a cold war between the centralized and the decentralized. I prefer to have the bulk of my assets in the centralized world. However, some exposure to the de-centralized makes sense.
I would not be surprised if Bitcoin corrects further from current levels. However, the crypto seems to be in an uptrend. The obvious risk is regulatory risk. As an example, India is “proposing to prohibit all private cryptocurrencies in the country.”
I personally feel that free markets should be allowed to work and people can decide on the extent of exposure to crypto. However, there is no doubt that we are in an early stage of significant changes. In the next few years, centralized digital currency is likely to be a reality.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored more than 1,500 stock specific articles with focus on the technology, energy and commodities sector.