According to Raoul Pal, former hedge fund manager at Goldman Sachs, Bitcoin could hit $1 million in five years. Is that realistic? With a 40% increase this year, and a market capitalization of $460 billion, the potential for significant uptrend is definitely there.
According to Pal, there’s an “enormous wall” of institutional money poised to be invested in the cryptocurrency space. Bitcoin, which is already in high demand, will be the primary beneficiary of that. Pal expects it to happen sooner rather than later.
One of the driving factors in this is the slow economic recovery from Covid-19. Central banks are in a position where they need to release new cash to prevent business insolvency, which could devalue local currency. Bitcoin will be unaffected. They’re outside that system.
Bitcoin Mining and Blockchain Technology
Understanding how Bitcoin is released will give you a better comprehension of why this particular cryptocurrency is a good bet on a five-year investment plan. The coins are not minted like a standard currency. They are released based on the actions of Bitcoin miners.
What does that mean exactly? Bitcoin is an electronic medium of exchange. The transactions conducted with it are tracked in a system called a blockchain. When a transaction is made, “miners” need to verify that transaction’s legitimacy with security and mathematical checks.
Larger transactions require more confirmations to ensure security. The process is called mining because the work involved is very similar to digging for gold or some other precious resource. When verification is completed, miners add the transaction to a “block.”
Halving and Limiting Bitcoin Supply
This is where it gets interesting. The blockchain is made up of over 10,000 computers around the world that all contain the entire blockchain and its history of transactions. When miners verify and post new transactions, all of these systems are updated.
Miners are paid in Bitcoin. In 2009, the reward was 50 coins for each block, but that number halves every 210,000 blocks mined, roughly every four years. This has happened four times so far, with the latest halving event on May 11th, 2020. Mining rewards now are 6.25 coins.
Unlike traditional currency, where new cash can be printed by a Central Bank to control inflation, Bitcoin is available in only a limited supply. Eighteen million coins are already out there. That’s 85% of the maximum twenty-one million available.
Halving was implemented as Bitcoins internal inflation control. As mining rewards decrease, the release of new Bitcoins into the market is slowed. Limiting the supply increases the value, especially since the market has already established a demand.
Decentralized Finance is a Major Disruptor
Blockchain technology has sparked a major disruption in the financial world. It’s led to a new concept called decentralized finance, otherwise known as DeFi, which eliminates financial intermediaries that slow down transactions. In other words, it eliminates the middleman.
Legacy digital payment methods, like Visa and Paypal, have human gatekeepers that limit the speed and sophistication of transactions. DeFi mimics blockchain, allowing several entities to hold a copy of transactions, meaning they are not controlled by one central overseer.
The technology is not in its infancy, but it still has some growing up to do. For investors and currency traders, Bitcoin is decentralized, but it’s not generally classified as DeFi. That term is used for applications built on top of Ethereum, the second most popular cryptocurrency.
For comparison sake, Bitcoin stock is up 87.7% over the past twelve months, while Ethereum is showing a 151% gain over that same period. Both are showing indicators of an uptrend to close out the fourth quarter, with Bitcoin expected to be the better long-term play.
The Rising Demand for Blockchain and DeFi
Let’s step back a moment here and examine this from a sociological and economic perspective. I know that sounds strange coming from us, but there is definitive anecdotal evidence that the 2020 pandemic has sparked renewed interest in decentralized finance.
The election of Joe Biden as president of the United States seems to signal the demise of nationalism and return to a global market approach. Unfortunately, the seeds of institutional distrust were planted during the election and confidence in the dollar is waning.
Meanwhile, Covid-19 is surging around the world, causing economic distress in many of America’s trading partners. Governmental bailouts will be needed to save failing businesses. Central banks may have to print new currency. Inflation will cause prices to go up.
Bitcoin and DeFi are not part of this global machine. As central bank currencies lose value, cryptocurrencies are likely to increase. Sixteen million Americans have already invested in Bitcoin, roughly 5% of the overall population. That’s not a trend. It’s a movement.
Stobox (STO), AAVE ($LEND), and Compound ($COMP)
The struggle with implementing any new technology is mass adoption. Bitcoin’s success with blockchain inspired the creators of DeFi and Etherium. The success of both platforms has spawned new systems designed to bring crypto technology to the masses.
Stobox (STO) is designed for common investors who have a desire to put their money into venture funds previously available only to institutional investors. STO has a “security token offering” that brings investment thresholds down, allowing broader participation.
Aave ($LEND) takes the DeFi concept one step further, offering flash loans and the ability to switch between fixed and floating interest rates. The platform was built using ERC-20 standards established by Ethereum, so multiple tokens are accepted.
The Aave project is not unique. Their nearest competitor Compound ($COMP) issues a USDT (crypto coin that mirrors the US dollar) as a usable asset, but Aave has a wider range of tokens. There’s promise to both of these, but they are still brand new, so I’d wait before investing.
Paypal will Begin Buying and Selling Crypto in 2021
With the success of Bitcoin and the rise of new DeFi platforms, it was only a matter of time before the major players got involved. Though not the first to throw their hat in the ring, Paypal might be the largest adopter to date. They announced their intentions just recently.
“The shift to digital forms of currencies is inevitable,” said Dan Schulman, president and CEO of Paypal. “The speed and resilience of the payments system brings clear advantages in terms of financial inclusion and access.” Paypal has 361 million users globally.
Beginning some time in 2021, you’ll be able to buy and sell with cryptocurrencies on Paypal. They’re beginning the program with Bitcoin (of course), Ether (ETH), Litecoin (LTC), and Bitcoin Cash (BCH). Some believe this could be that crucial step needed for true mass adoption.
Of course, there are naysayers in this situation. Paypal is essentially a third-party payment processor. Purists believe that goes against the grain for the DeFi movement. The incorporation of a processor adds human gatekeepers to the equation. How will that work?
JPMorgan Chase and Fidelity are Already In
In February 2020, J.P. Morgan became the first major investment bank to offer their own cryptocurrency. It’s called JPM Coin and it has a 1:1 redeemable value with the US dollar, making it a stablecoin, which is crypto with a value pinned to an outside asset.
Stablecoins use blockchain technology, but they are still subject to artificial inflation because they are tethered to currencies issued by central banks. The benefit is the increase in processing speed for transactions, which JPM is pitching as a selling point.
Fidelity has not created a new cryptocurrency, but they did establish the Fidelity Digital Assets custody unit in 2020. It’s been four years in the making, so their analysts have definitely earned their pay. They recognized the trend early and adapted for their customers.
Fidelity manages $7.2 trillion in assets, so they are a clear leader in financial services. They established the DA custody unit to develop transition protocols for crypto assets and implement those protocols into succession plans for their clients.
Owning Bitcoin versus Investing in Bitcoin
You can buy and sell Bitcoin (BTC) on any standard investment platform, including Robinhood. Based on its performance this year, you’re likely to make some serious cash if you buy and hold for the long-term. Traders can also benefit from the volatility.
Of course, trading stock is very different from actually owning negotiable Bitcoin. That process involves a few extra steps. You need to set up a digital wallet, provide proof of your identity, link to a standard bank account, and then connect to a Bitcoin exchange.
There are, of course, fees involved with using Bitcoin. For instance, you can transfer 1B dollars with around 0.16$ of a mining fee. It’s unlikely you’re playing in that ballpark, but that should give you a general idea. You can see other transfer options at ERC20 or TRX.
Since we’re a trading and investment platform, I’m going to stay on that side of this issue and recommend Bitcoin as a good investment with a huge potential upside. I can’t comfortably say it will hit $1 million in five years, but you can definitely make some money with this.