[What Do You Think] Bitcoin with Changed Environment, Scale, and Base Should Now Be Viewed as an Investment Asset

[濁流淸論(Takryu Cheongron)] "Emerging as the Real 'Digital Gold'... Macroeconomic Environment Also Favorable for Investment"

Takryu Cheongron is a column featuring in-depth analysis and diagnosis by experts in the relevant fields on socially controversial topics. This week's topic is virtual currencies (cryptocurrencies) such as Bitcoin, which have recently reignited investment enthusiasm.

Lee Junhaeng, CEO of Streamy (operator of the virtual currency exchange ‘Gopax’)

Last February saw a series of major news related to Bitcoin. Tesla purchased Bitcoin worth approximately $1.5 billion. BlackRock is preparing for Bitcoin-related investments, and BNY Mellon Bank announced the launch of Bitcoin-related services. On the 28th of last month, Citigroup released a report stating that Bitcoin has reached an ‘inflection point’ and could be used as a means of trade settlement.

Despite these significant developments, the domestic atmosphere remains surprisingly calm. The ‘Kimchi premium’ (the phenomenon where domestic Bitcoin prices are higher than overseas) that surged over 50% in 2017 is hardly seen anymore. Is this due to the heavy blow from the Bitcoin bubble burst back then? The perception that Bitcoin is still speculative and fraudulent remains widespread. However, Bitcoin in 2017 and Bitcoin in 2021 are very different. The investment points, environment, scale, and base are different. The composition of capital is also different.

In 2017, Bitcoin was mainly a ticket to participate in ‘blind investment.’ Participants in Initial Coin Offerings (ICO) bought Bitcoin from the perspective of subscription to realize tens of times profit. Four years later, the U.S. Securities and Exchange Commission (SEC) has started to strengthen regulations on illegal ICOs, and the investment narrative has returned to Bitcoin’s first generation as ‘digital gold,’ aiming to overcome the limitations of the current financial system after the 2008 financial crisis. It is now recognized as an investment asset with completely different attributes from 2017.

Changes in the macroeconomic environment follow a similar trajectory. In 2017?2018, the U.S. Federal Reserve pursued tapering (reduction of quantitative easing). At that time, the benchmark interest rate rose from 0.5?0.75% to 2.25?2.5% over two years. But now, it is a zero interest rate era. The Fed is expected to maintain the benchmark interest rate at 0.0?0.25% throughout this year. Fed Chair Jerome Powell has indicated a willingness to tolerate inflation to boost employment. In this environment, the expected outcomes are either reflation (expansion of money supply to prevent deflation) or inflation. In reflation scenarios, prices of Bitcoin and other risk assets rise. In inflation, inflation hedges like gold are favored. For Bitcoin, which carries the narrative of ‘digital gold,’ it is a worthwhile bet for investors seeking asymmetric returns compared to gold.

The scale and base of Bitcoin have also changed significantly. An asset size of $1 trillion versus $100 billion is qualitatively different. The fundamental of assets aimed at value preservation is the public’s belief. Gold, government bonds, and Bitcoin all embody a kind of faith similar to religion. A religion once considered a cult is no longer a cult when it has the top 10 global followers and scale. Now, icons of innovation and investment such as Elon Musk, CEO of Tesla, and hedge fund manager Paul Tudor Jones are its followers. Institutional capital demand is also substantial.

Ultimately, compared to 2017, the investment narrative is different. A much more favorable macroeconomic environment has been created. Bitcoin’s base has broadened and volatility has decreased. Of course, this does not mean there will be no more crashes. All assets inevitably develop bubbles and eventually undergo corrections. However, at a time when investment importance is higher than ever, perhaps it is necessary to coolly evaluate Bitcoin as a new asset.