There have been some significant changes regarding Bitcoin (BTC-USD) over the years, with early adopters seeing it primarily as a store of value and those later in the game treating it the same way as a high-growth stock in terms of how to trade it.
In the early years, it was mostly retail investors who took positions in Bitcoin, while in recent years it has been institutional investors and high net worth individuals who have taken large positions in the flagship cryptocurrency.
For years, Bitcoin’s price action decoupled from other asset classes as HODLers refused to sell, believing that Bitcoin’s price would explode into the high 6-figures and possibly 7-figures over time.
In this article we will look at how this worked in the early years of Bitcoin’s adoption and what has changed since then as a new breed of investor entered the market.
Bitcoin early adopters
As mentioned above, the early adopters were largely retail investors who viewed Bitcoin as a store of value that would outperform all other assets considered a store of value, including gold.
They would and are still doing HODL which, as Bitcoin’s price started spiking in response to growing interest, would create scarcity and amplify the price’s uptrend, which of course was significant when the bulls did it had say.
A question that needs to be asked and answered is this: If bitcoin has been such a solid store of value, why has the price fallen in apparent response to sellers selling their positions? The answer is, just because there were a significant number of investors who were HODLing doesn’t mean there weren’t some who weren’t happy to take their profits and run away.
Another factor was that many people were hit by FOMO and in response started buying near or at the top, when the price started to reverse direction they would panic and sell; These were people with more of a herd mentality than those who actually studied and understood Bitcoin’s potential. This is different from today as institutional investors are taking positions in Bitcoin even though Bitcoin’s price drop is the same.
As those outside of the early adopters began to realize that Bitcoin was legit, they became interested in the new asset class and invested a significant amount in it.
The only thing they brought to the table, which I think is misguided, was that they lumped Bitcoin with other tech or growth stocks, and consequently when the economy was deteriorating and the Federal Reserve announced that they that would raise interest rates To fight inflation, institutional investors began selling off.
What happened here is that institutional investors use what is called a DCF model to estimate future profits. At the base level, this means that as interest rates rise, margins and earnings begin to shrink, causing them to readjust their future outlook for high-growth stocks.
The problem I see with using the DCF model is that it lumps Bitcoin with high-growth stocks as if they were in the same asset class. In my opinion, bitcoin and cryptocurrencies are a whole new asset class and need to be traded as if they are.
Like I said, it doesn’t matter right now. Institutional investors are in control of Bitcoin’s price at this point because they are handling it, and even if you agree with my assessment, the fact is that for now, Bitcoin’s price action is being driven by the big players.
What the battle is about
When I talk about the battle between early adopters and institutional investors, what I mean is that there are two different ways of looking at bitcoin, and how it is held and/or traded in the future will be dictated by what happens after the Federal Reserve raises of interest rates as a result of inflation falling to target levels.
If Bitcoin continues to be adopted after that, will new investors taking a position in it view it as a store of value, or will they lump it in with high-growth stocks?
My thought on this is that Bitcoin will again be accepted as a store of value. The reason for this is demographics. Millennials are the main investors in Bitcoin and they are very familiar with it and positive about its potential as an alternative to the US dollar and gold. Over time, they will dominate Bitcoin’s direction. This direction will be a store of value and potentially, depending on Lightning Network implementation, a way to purchase goods and services on a daily basis.
The Lightning Network
For the purposes of this article, I won’t go deep into the Lightning Network. As most of my readers know, it was designed to significantly increase Bitcoin’s transaction speeds when used to purchase goods and services at the point of sale.
The reason I’m bringing it up here is because there are people in the bitcoin community who believe it will be a bigger catalyst than it was a store of value.
There aren’t that many investors who see this as the primary catalyst for Bitcoin, but as the Lightning Network becomes more readily embraced and some large retailers or service companies begin to increase sales in response to customer preferences, it’s easy for companies to spot themselves strive to include bitcoin as an option to fiat. If and when that happens, Bitcoin’s price could surge to levels even the most ardent bulls can’t imagine.
I mention this to show that there is a third, important element in the bitcoin narrative, but it won’t be an immediate factor in how investors value bitcoin anytime soon.
The reason why looking at Bitcoin is important is because different types of investors will hold or trade Bitcoin based on this finding.
Viewed as a separate asset class, it is viewed primarily as a store of value that will eventually decouple from other asset classes as it has in the past and start yet another bull run that I think will break highs, almost certainly by a large amount.
As for institutional investors, they will come back when economic conditions are favorable, and when they do, they will be a powerful catalyst for the bitcoin price rally.
The difference will be, Bitcoin will decouple again and fly past the high-growth stocks to which the big players will also return, so my thesis.
The bottom line is that we have to be careful not to let our positions in Bitcoin put us off and regret it for years. Bitcoin is here to stay. It’s still in the early years of its growth cycle, judging by the rate the internet was growing when it began to be embraced by the masses, and once the Federal Reserve is done with its rate hikes and inflation cuts, I believe that if we do that, we will see a bitcoin bull market that will go far beyond what we have already seen.
And even if institutional investors were to remain in control of bitcoin’s price action for years to come, the good news is that investors will still enjoy a major upside move in the price even if it fails to decouple from other high-growth assets.
I don’t think it’s going to work that way, but when heads win and tails win, all you need to know is how big the rewards are going to be.
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