After a decade, is Bitcoin still a contrarian bet?
Cryptoassets and Bitcoin, in particular, has dominated the news since Q4 of 2020 through a massive bull run (+600%), followed by a massive crash (-55%). But is it a good investment today?
We know that the markets are mostly dominated by human psychology more than underlying fundaments. "Fear" (loss aversion) and "greed" (FOMO) is what generally fuels an emotional rollercoaster in any volatile market (and it's particularly true for Crypto markets).
But, is Bitcoin a good investment in 2021?
Usually, a contrarian investing strategy produces better results simply because you bet against the existing market trends. The masses typically follow the Fear and Greed cycles and usually doing the opposite is a great strategy to generate profits.
As I am writing this, Bitcoin is currently trading over $40,000 USD a coin and this level also happens to be the upper band of a 4-month-long consolidation in Bitcoin. Break this level upward and you will resume the uptrend to a new ATH. Fail to break it (again) and you will return back to the boring crab market of $28,000 to $42,000 range.
But I am not a chartist, nor a TA. Nor am I interested in drawing or reading lines on a chart. I am a theorist. I look at the data and create a thesis. And the goal of this article is to answer whether Bitcoin (and the broader crypto market by definition) is a contrarian bet in 2021 or not?
What would be a contrarian bet?
As of July 2021, we have over 220 million Bitcoin users worldwide. [source] If you think about it, 220 million is not a number to sneeze at. At the current world population of 7.8 billion (of which a quarter are under the age of 15), it means approximately just 4% of the adults worldwide have already invested some money in Bitcoin.
Think about that for a moment! Are you part of this 4% or someone watching it from the outside?
Irrespective of which subset you belong to, in my opinion, you are still early. And here is why:
The Money Layer of the Internet
Think of Bitcoin as a "money layer" of the Internet. Currently, the 220M Bitcoin userbase is akin to the number of Internet users in the year 1999. Also, the year 2000 was the year when the Internet went mainstream! By that logic does this mean, will we see a similar adoption of Bitcoin worldwide soon?
So, on the one hand, you are sort of early but on the other hand, you are also part of a growth trajectory that is only going to get "more exponential" in the coming years.
Today, we can not imagine a world without the Internet and Mobile phones. Both the internet and mobile technology help bitcoin on its adoption curve. And the data does paint a similar picture.
The rate of adoption of Bitcoin is faster than both the Internet and Mobile. At < 4% global adoption Bitcoin hasn't even begun its adoption s-curve. (picture below for major technologies)
Let's say Bitcoin manages to maintain this pace for another decade or so. Today there are 4.8 billion internet in the world and 5.27 billion cell phone users in the world. [1] That's ~61% and ~67% of the world's population.
This would mean, if Bitcoin has to catch up with just half these numbers in the next 10 years, there may be as many as 2.2 billion bitcoin users worldwide in 2030. Growing from 220 million users to 2.2 billion users in the next 10 years is still an impressive 10X growth.
Enter Metcalfe's Law
Metcalfe's Law says that a network's value is proportional to the square of the number of nodes in the network. So a 10X growth in users would mean ten to the power two growth in network's value.
In the case of Bitcoin, since the Bitcoin protocol network and the bitcoin as a Store of Value is the same thing, it would mean a 100X price appreciation.
If we take a 10X price appreciation then you are looking at $40,000 x 10 = $400,000 USD per bitcoin.
If you believe that Bitcoin is here to stay and it will onboard multi-billion plus users worldwide, then a 50X to 100X growth from here is very likely and resulting in $2M to $4M USD per bitcoin.
Maybe the reality will fall somewhere in between.
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Some Maths on the Network & Current Users
Since there will always be only 21 million bitcoin, and it's safe to assume that at least a couple million are either lost or locked up permanently in cold storage by its true believers, the actual float is likely much smaller.
If every user of the network today was a true believer or a long-term investor, this cohort could have easily HODLed (a bitcoin slang for holding your coin and never selling) it to a million dollars per coin.
But since that has not happened, it means the majority of this group are short-term speculators or they are just testing the water.
From a purely investment perspective, despite Bitcoin having 220 million adopters worldwide, given the total market cap of a mere 780 Billion USD, it tells us that the vast majority of these early cohort has very little skin in the game.
Growth Trajectory
The data also tells the same story. The bitcoin and crypto userbase doubled in just the past 6 months. [2] And if you go further back in time, 2017 was really the beginning of mass adoption or more accurately 'mass awareness'.
So, we have had less than 5 years of mass awareness and roughly one year of mass adoption.
Since 2017, we have seen consistent growth in the Cryptoassets-userbase. And this trend is likely to accelerate primarily driven by now Institutions entering the space, Corporate adoption, and the seismic shift such as El Salvador declaring Bitcoin a legal tender.
Moreover, out of 193 countries, as many as 80+ are exploring some form of CBDCs (Central Bank Digital Currencies) for their citizens which will only further accelerate cryptocurrencies awareness in the general public. So all in all, if anything, you are not late.
I strongly believe, the correct contrarian bet today is making a substantial investment in Bitcoin as opposed to putting in a few bucks, or passing on it now because you think you missed the boat.
Bitcoin is not only going to gain more worldwide adoption but will also ride the mobile wave. Both mobile and internet penetration is still growing across the world and having a mobile and internet connection today means having a bank account in your pocket. Bitcoin and other cryptoassets benefit from this fact.
Conclusion
If you are going to make a bet on Bitcoin or Ethereum or any Cryptoassets in general, then do so with a decent percent allocation as part of a well-diversified portfolio. There are thousands of ways you can slice your portfolio and this is up to each investor how they want to allocate their hard-earned money.
The contrarian bet on Bitcoin today is not passing on it because you think you are late (because you are not) and placing a bigger bet (because most of the existing users are just speculating for a quick profit and that too with little skin-in-the-game). The contrarian bet, therefore, is "going big" before most of the existing investors figure it out.
If you are battling with the question of whether to dip your toes or not (into Crypto), the answer is not only YES (in my opinion), but actually going beyond the "play money" and putting in a respectable sum.
Once the existing userbase turns into more matured long-term conviction-driven investors, the only way is UP.
Not only the userbase is growing exponentially but also the ecosystem around the blockchain tech, and as well as the capital investment and adoption from all corners of the world.
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PS: This should be clear and obvious but just in case, THIS IS NOT A FINANCIAL ADVICE. This essay is purely an intellectual exercise. Please do your own research before making any financial investment.