There is a lot of talk about Bitcoin’s (BTC-USD) potential crypto winter in 2022, as claimed by crypto bears. We find it interesting that such sentiments were nowhere to be found during Bitcoin’s November peak. But investors who have developed a certain level of finesse in crypto investing would then have sounded the alarm of a potential top. But, we saw a huge amount of hype during those days, also exacerbated by exuberant media.
We encourage crypto investors to consider the long-term thesis of the crypto leader. Despite the emergence and rise of new digital assets in 2021, Bitcoin remains the go-to coin for many crypto investors. It remains Coinbase’s (COIN) largest crypto asset by trading volume in the first nine months of 2021. Additionally, institutional investors continued to dominate crypto asset trading, as seen in Coinbase results of the previous quarter.
Besides, a recent report from Glassnode also showed that long-term holders are unfazed by Bitcoin’s recent major drop. Instead, they took the opportunity to hoard Bitcoin out of the hands of weak and over-leveraged short-term traders, who were “forced” to sell during the volatility. Additionally, KPMG Canada’s recent purchase of Bitcoin and Ethereum (ETH-USD) (amounts undisclosed) also lends credence to Bitcoin’s legitimacy. Although his decision drew criticism as a marketing ploy, we believe it sparked increased corporate interest in Bitcoin and Ether. Additionally, India and Russia have also opted not to ban crypto assets (at least for now), but have introduced regulatory mechanisms to live with them. Therefore, we believe that such moves have a positive impact on the long-term outlook for crypto assets, especially for Bitcoin as a leader in the crypto world.
We discuss why investors should take advantage of Bitcoin’s recent weakness and accumulate more exposure.
Bitcoin is still the most traded crypto asset in Coinbase
Coinbase is one of the top ten crypto exchanges in the world by trading volume, according to data from CoinMarketCap. In its last quarter results, Bitcoin remained its most traded crypto asset in the first nine months of FY21. It accounted for 27% of its trading volume, followed by Ether at 23%. Notably, it has fallen significantly from its 45% share the previous year as Ether and other crypto assets gained share. But, we do not think that this represents a disappearance of its legitimacy. Given the “explosion” in crypto asset trading volume in Coinbase to $1.12 billion in the first nine months of FY21 from $104 billion last year, it is easy to understand why. This means Bitcoin trading volume in Coinbase jumped to $303.5 billion in the first nine months of FY21 from just $46.8 billion the year before (up 549% over a year). What disappearance and insignificance are we talking about? We believe this represents the continued adoption and maturity of crypto assets as a whole as more and more investors join us.
Also, investors should duly note the involvement of institutional trading in Coinbase. Coinbase numbers continue to demonstrate the momentum of adoption by institutional investors/traders in crypto assets. This was a huge shift from what we observed just a year ago. For example, institutional investors accounted for $63 billion in trading volume, compared to $41 billion in retail volume in the first nine months of fiscal 2020. However, institutional volume jumped to $766 billion. compared to $358 billion in retail volume in the first nine months of FY21. Therefore, this clearly represented the huge shift in momentum from retail to institutional trading. While retail volume is still significant and has often driven past wild swings in Bitcoin, ongoing adoption by institutional investors may reduce volatility going forward. We believe institutions and companies that choose to adopt Bitcoin as an asset class on their balance sheets are taking the long view.
Tesla’s 10-K could reveal why companies are still hesitant to adopt Bitcoin
Recent stock market volatility has also boosted momentum for crypto assets, including Bitcoin. We also shared in a previous post that the correlation between Bitcoin and the US stock market has moved closer to previous years. While this may have weakened Bitcoin’s short-term catalysts, we believe long-term adoption by institutional investors is still in its infancy. Therefore, we believe investors should capitalize on Bitcoin’s current volatility and weakness before more institutional and corporate investors join the bandwagon afterward. Graticule Asset Management Asia also highlighted how recent equity market volatility has slowed adoption by institutional investors, albeit momentarily. He added (edited):
Volatility of growth stocks in a rising interest rate environment temporarily slows planned forays by institutional investors into cryptocurrencies. Although the decision to allocate to crypto has already been made by many traditional institutions, but most took time to invest. They don’t want their first foray into space to be a quick money-losing proposition. We believe institutional allocations will wait until global equity markets, particularly growth stocks, have stabilised. (Bloomberg)
We think this makes sense, especially for companies that have decided to invest in Bitcoin. But the current accounting rules are “not beneficial” in how these companies should account for their Bitcoin holdings on their balance sheets. Especially if they have a long term perspective (no regular trading). We can certainly take some wisdom from Tesla’s (TSLA) decision to adopt Bitcoin in 2021. For example, Tesla recently pointed out in its FY21 10-K (edited):
Digital assets are considered indefinite life intangible assets under applicable accounting rules. Therefore, any decline in their fair value below our carrying values for these assets at any time after their acquisition will require us recognize impairment chargeswhile we can make no upward revisions for any increase in market prices until a sale. For any digital assets held now or in the future, these charges may negatively impact our profitability during periods in which such impairments occur, even if the overall market value of such assets increases. For example, during the year ended December 31, 2021, we recorded approximately $101 million in impairment losses resulting from changes in the carrying value of our bitcoin and $128 million gains on certain bitcoin sales. by U.S. (Tesla’s FY21 10-K)
Therefore, we can understand the apprehension of companies that have decided to invest in Bitcoin but are worried about how the impairment charges might affect its quarterly results. It is a valid consideration. But we are also confident that the equity market will regain its bullish momentum in 2022, in line with what Graticule Asset Management Asia reported above. Unless you believe we are in a secular, multi-year bear market, we are confident that the US stock market will find its footing. Therefore, this should help appease and ensure more institutional investors to allocate more Bitcoin holdings. Notably, Tesla’s book value of its bitcoin holdings is approximately $1.26 billion as of December 31, 2021. It also held a cash and short-term investment balance of $17.71 billion. It therefore represents less than 10% of its cash and cash equivalents. Therefore, we believe there is huge potential for bitcoin to grow when more companies start allocating some of their cash to long-term bitcoin. And why bitcoin? We believe that the less volatile nature of Bitcoin compared to other crypto assets, in general, is more constructive for business adoption.
Block, Inc. (SQ) CEO Jack Dorsey also made the point during a recent Bitcoin conference hosted by MicroStrategy (MSTR). He added (edited): Slow things tend to last and be more predictable and safer.”
Buy Bitcoin now while businesses are still on the sidelines
We pointed out in our previous article that Bitcoin price action is constructive to go long on Bitcoin now. But we have a long-term view on the crypto leader. So, you should not consider our point of view if you regularly trade Bitcoins.
We believe the institutional adoption question has been answered in the Coinbase numbers. Therefore, it is now a matter of waiting for the equity market to stabilize before more companies can potentially join the bandwagon. So don’t wait until then.
As such, we reiterate our buy rating on bitcoin for long term crypto investors only.