Blockchain And Cryptocurrency Provider

Irish Bitcoin Investment Report Q4 2019

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Table of Contents

Introduction

Boinnex has Ireland’s largest network of Bitcoin ATMs, currently serving 1000’s of Irish customers. We have seen strong growth in demand for Bitcoin during the first 3 quarters of the year and expect this trend to continue into next year. 

Over the last few months, we have had an increasing number of enquiries from institutional investors about buying Bitcoin. We have compiled this report to help address some of the concerns, trends and opportunities in the space as well as to provide actionable information for those looking to diversify into Bitcoin as an investment. For an introduction to the basics of what Bitcoin is, we recommend this resource. We have included further reading material in the FAQ at the end of the report.

Disclaimer: Boinnex is not a registered financial institution or advisor and this report should not be construed as investment advice. We facilitate OTC trades for clients and work as consultants. All investments are made at the clients own risk.

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Current State of Bitcoin Economy

Bitcoin has now been in operation for over 10 years and has thus far enabled the transfer of over $9 Trillion in value. The protocol itself has never been hacked and has the support of some of the leading tech investors in the world such as Peter Thiel, Marc Andreesen and Jack Dorsey. It currently stands in the top 30 out of 190 national currencies in terms of M1 money supply (total cash and current account deposits).

In the last 12 months we have seen leaders of the finance industry such as Raoul Pal formerly of Goldman Sachs, The Harvard Endowment fund and Mark Yusko of Morgan Creek declare their investments in this new asset. The recent CFTC approval and launch of Bakkt Bitcoin Futures from ICE , one of the largest exchange operators in the world along with the growing demand for CME has brought further legitimacy to the space.

It is still early days for institutions. There are 51 funds in the US with crypto exposure & 201 private funds with crypto exposure. About 1.3% of the total private fund population. The best estimate is about $3-5 Billion has been invested.

Uncorrelated Asset

A widely shared report from Adamant Capital suggests that the Bitcoin market may be beginning to recover. More importantly though, as we can see from the chart below, there is no meaningful correlation between bitcoin and other asset classes (equities, commodities, property and fixed income).  

Cryptoasset correlations with traditional assets are very low
Cryptoasset correlations with traditional assets are very low

For anyone who has held Bitcoin for more than 4 years, during any time in Bitcoins history, the Risk adjusted returns are unparalleled. The sharpe ratio of between 2-4, over a 4 year period has meant that a portfolio of 99% cash and 1% Bitcoin would have outperformed the S&P over the last 10 years. Bitcoin is notoriously volatile but this volatility has been in steady decline.

Macro Context

Ray Dalio of Bridgewater Asset Management, the world’s largest hedge fund, has highlighted the recent instability in the global macro economy and the potential for a major paradigm shift. It is in this context that the likes of Raoul Pal, author of Global Macro Investor believes that Bitcoin is becoming a hedge against further instability, trade wars and underfunded pensions. James O’Beirne, a well known Bitcoin developer further highlights the negative effects of corporate buybacks, quantitative easing and unsustainable debt levels, on the global economy.

The current $17 Trillion in negative interest rate bonds reflects unprecedented attempts by Central Banks to generate inflation. This has led many investors to seek alternatives . Furthermore, The IMF now openly speculates about how to impose ever-deeper negative rates, including the forced depreciation of “physical cash”. Furthermore, the IMF has now flagged the potential for ‘digital currencies, backed by central banks to become a reality’. Finally, we see are starting to see rapidly increasing Bitcoin exchange volumes in countries where the local currency is being poorly managed. Venzuela, Iran and Argentina to name but a few.

Valuation Metrics

At the moment, there is no broadly accepted valuation standard for Bitcoin. This is the primary reason traditional investors have been reluctant to allocate capital. Much like the early internet, there is no exact comparison we can make to other asset classes. Without dividends or cash flows, p/e multiples or central issuance, many dismiss it as neither a commodity, asset or currency. Analogous to how the internet disrupted media and many other sectors, we believe Bitcoin is gradually replacing a number of traditional, long term, store of value assets.

Non-sovereign Store of value

Spencer Bogart of Blockchain Capital estimates that 5% of $200trn worldwide property market is used exclusively to store value. Empty, or under occupied properties in expensive markets such as New York, London, LA and Vancouver, with strong property rights, are one of the ways that High Net Worth individuals store value securely over the long term.

Ari Paul, formerly of Susquehanna and now the CIO of Blocktower Capital estimates the  Offshore banking market as being in the region of  $25trn and sees this as one of the primary use cases for Bitcoin. Scarce and highly valued art such as faberge eggs make up a further portion of the store of value market, that Bitcoin could replace.

John Pfeffer, formerly of McKinsey, who wrote the Institutional investors guide to Bitcoin , examines Bitcoin through the lens of a potential global reserve asset.  “Fewer than perhaps 1 million BTC effectively circulate at all, and any new money will be forced to compete mostly for those, so the propensity for price to gap up as new institutional money flows in is high.”

Gold vs Bitcoin

Traditionally investors have looked to gold as a hedge against global uncertainty. Bitcoin is however, cheaper to verify, transport and divide. It is more scarce with a hard cap of 21 million units, and much harder to confiscate, if properly secured. Most importantly though, there is a demographic shift in attitudes to Gold vs Bitcoin. The millennial generation see the shift as almost a forgone conclusion. A more detailed case for this transition is made in the book, the Bitcoin Standard by Saifedean Ammous (disclosure: we contributed early feedback on this resource).

Traits of Money
Traits of Money

Stock to Flow

 A widely regarded attempt to model its future growth potential was written in early 2019 and is based on the Stock to Flow ratio. 

A statistically significant relationship between Stock to Flow and the market value of Bitcoin (95% R2, significance of F 2.3E-17, p-Value of slope 2.3E-17) was found to exist. After it’s release, a number of third parties have confirmed cointegration. This suggests that the dominant factor affecting price is scarcity. The article is worth reading in full in order to fully understand the inputs. The model itself is available to test and recreate here.  It is worth remembering that the Black Scholes pricing model for options was publicly available for 10 years without being widely recognised as being useful.

The previously mentioned Adamant Capital report attempts to document where we are in Bitcoin’s current life cycle. The report highlights the importance of Bitcoins supply schedule, with the issuance ‘halving’ in May 2020 from 12.5 to 6.25 Bitcoins per block. In previous cycles this has been a possibly catalyst for growth.

Stock to Flow

Irish Context

While the Irish economy has outperformed the rest of Europe in the last few years, we remain more indebted per person than any other country in the Union, currently standing at around €43,000 owed per person. KBC’s Austin Hughes has stated that if interest rates were to rise substantially it would increase the cost of servicing this debt; while if the level of GDP growth is diminished this could sharply increase the aforementioned debt-to-GDP ratio.”

Any disruption in the global economy puts the country in a very vulnerable position in terms of repayment. In terms of equity valuation, Ireland’s CAPE ratio currently sits at a staggering 53. As the IMF sounds a warning on Irish property, many investors have begun to look further afield.

Irish Debt

Regulation

In the US, Chairman of the SEC, Jay Clayton has said that ‘progress is being made’ to allow a Bitcoin ETF to be launched. Since 2015, the US has ruled that Bicoin should be treated as a commodity.  

The recent launch of Bitcoin Futures from ICE , one of the largest traditional exchange operators in the world is a further significant move. Unlike previous offerings such as the CBOE’s Bitcoin futures product, these contracts are Bitcoin settled.

Ireland

In May 2018 the Irish Revenue issued guidance on how cryptocurrencies should be treated from a tax persepective. Deloitte have summarised the findings here with some further thoughts from Mazars here. They are primarily subject to the standard rates of Capital Gains tax with some exceptions for traders(although this is not clearly defined).

EU Fifth Anti-Money Laundering Directive (MLD5)

Boinnex have engaged Arthur Cox to advise us in terms of compliance with the new directive relating to virtual currencies. We currently require similar levels of Know Your Customer (KYC) and Anti Money Laundering (AML) checks as any major institution and will continue to work with the Central Bank and the Revenue commissioners to ensure strict compliance.

Why Use an OTC broker(and not an exchange)?

Find out more about our Bitcoin OTC service.

Which Bitcoin Exchange?

Kraken is the most popular exchange in Europe and with good reason. We believe it has a security-first culture which is the primary concern in a sector that has been widely subject to hacks. Boinnex has worked with Kraken for a number of years and continues to find them to be a reliable partner. Boinnex have the highest level of authentication with a number of other reliable exchanges in order to ensure we achieve the best rates for clients. We reviewed the pros and cons of some of the most popular exchanges

Storing Bitcoin

We have a number of solutions for clients depending on their level of exposure and personal requirements. Whether it’s cold storage, Multisig, Password Sharding or two factor authentication, this is a central part of our value add, and is something we are happy to discuss in person. We do not act as custodians on behalf of clients. Our role is to help you navigate the buying process in this new and complex ecosystem and explain the options and trade-offs in relation to storage.


Dan Morehead, who previously held executive roles at Deutsche Bank in London and Goldman Sachs, recently released a blockchain letter that touches on the importance of the Bakkt launch for custody; ‘ Many institutional investors have been waiting for institutional-grade custodians and exchange infrastructure to enter the space. The combination of ICE’s time-tested infrastructure and the security of Bakkt Warehouse’s custody product gives institutional investors the green light that they’ve been waiting for.’

Conclusion

Over the last 10 years Bitcoin has gone from being a small software project to the largest non-sovereign currency in the world. As Central Banks increasingly compete to devalue their own currencies, we believe a fixed supply currency may act as a counterweight to this trend. Bitcoin is yet to be tested by a major recession and like any investment, carries many risks. That is why most of the resources in this report recommend a very small allocation to begin with. If this is something you would like to explore, we would be glad to meet with you. 

 

FAQ

  • Environmental Concerns

Many raise the enormous energy consumption as a concern for Bitcoin investors. In truth, the vast majority comes from the excess supply of renewable sources such as hydroelectric dams. For example, as Robert Sharratt explains80% of all Chinese miners are located in Sichuan province with “the vast majority of power produced in Sichuan is from hydro power.” Additionally, because bitcoin is transparent, these energy costs are known whereas the energy costs for other assets are less visible. 

  • Scaling Concerns

Significant progress has been made in terms of scaling with the layer 2, lightning network. For further information on this solution, we recommend this introduction.

  • Libra & Other Cryptocurrencies

Libra is a very separate project to Bitcoin and is yet to launch. There have been a number of attempts to prevent its development by national governments. This is not possible with Bitcoin as there is no central party, like Facebook in control of the protocol. Other cryptocurrencies suffer from the same centralisation. As a result, to quote Peter Thiel, we are ‘long Bitcoin and neutral to skeptical on anything else.’

  • Government Bans

The US, being the leading financial regulator in the world, has taken a positive view of Bitcoin and some of the largest exchanges and custodians have reaped the rewards as a result. There were numerous Chinese bans during 2017 which did little to affect the 2015-2017 100x run up in price. Many officials have realised that attempts to ban Bitcoin would be very difficult to impose as the system is run on a peer to peer basis, much like torrent software.

  • What about Blockchain?

From 2015-2018, a narrative emerged that ‘Blockchain’ was going to solve all the database problems that businesses face. In truth, the term Blockchain was co-opted as a catch all phrase by business leaders. Many of these efforts have now been abandoned, much like the early Intranet projects claiming they would replace the internet. Despite the hype there are some interesting developments in the space and and some projects that are beginning to show value in areas like supply chain, voting and self sovereign identity. Boinnex consulting can help analyze the potential of blockchain technology for your organization or use case. If blockchain doesn’t fit the bill then we’ll point you towards a more suitable solution.

 

  • Where can I learn more?

We recommend the Bitcoin Whitepaper as a good place to start. There is a lot of misinformation due to the nascent nature of the asset class, so following those with a long term, reliable track record is another important part of the learning process. https://hive.one/bitcoin/ is a reasonable resource. There are many good podcasts such as: “What Bitcoin Did” podcast, Stephan Liveras podcast and Trace Mayers “Bitcoin Knowledge Podcast”.

The satoshi Nakamoto institute and lopp.net both have a deep catalog of written resources.

As always, we are happy to discuss any questions or concerns in person.

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