Four Fundamental Reasons Currently Speaking For Bitcoin

#1: Inflation and energy prices

Since the end of 2021, inflation in many countries had already risen towards 5%, at least according to official figures. Now, inflation is even higher, often clocking in at 7 to 8%. Figure 1 shows the latest estimates from the European Union’s (EU) statistical office, Eurostat. In April 2022, they estimate inflation in Germany at 7.8%. They also give significantly higher estimates for other EU member states.

Figure 1: Inflation in the EU Member States (source: Eurostat)

#2: Sanctions and confiscability

With Russian EUR and USD holdings frozen in the wake of far-reaching sanctions, it is evident that central bank assets are not absolutely safe. There is a risk of confiscation / seizure of said assets. It will be part of central bank risk management to analyze the vulnerability of their reserve assets to sanctions or seizure in the months and years ahead. One attempt at a solution could be to buy gold or other commodities. However, this does not solve the confiscability issue.

#3: Lawmakers send various positive signals

The European crypto community recently breathed a collective sigh of relief. After prolonged tension and discussion around a potential Proof-of-Work (PoW) ban in the EU via the Markets in Crypto Assets Regulation (MiCA), the EU Parliament voted against this ban. They hence deleted the corresponding paragraph from the MiCA draft. The consequences of such a ban on Proof-of-Work technology would be equivalent to a Bitcoin (and Ethereum in its current form) ban in Europe. PoW is a vital component of the Bitcoin blockchain and ensures the decentralization and immutability of the blockchain.

Figure 2: White House Regulatory Agenda on Digital Assets (Source: The White House)

#4: Decreasing supply pressure from China

It’s been a few months now since the final act and culmination of China’s crypto ban. Quick refresher: the Chinese government banned crypto assets in three phases in 2021. Phase 3, the complete ban of all crypto assets in the Chinese space, was introduced in September 2021. Chinese exchanges (the largest in the world) responded by offering their domestic customers a transition period to sell all crypto assets. Thus, since the end of November 2021, we saw a surplus of supply from China, which exerted a strong downward pressure on the price (for a more in-depth analysis, see here: A Fundamental Analysis Of Crypto Markets In Early 2022). Price is roughly a result of supply and demand, and currently, most of the supply still comes from China, while high demand exists in the West. If the excess supply from China decreases or even dries up, while the EU and US continue to buy (which is expected), then this logic would have a positive effect on the price.

Figure 3: Estimated hash rate of the Bitcoin network. (Source: Blockchain.com)

It‘s only a matter of time

In short, one can see that the signals and sentiment for crypto assets are positive across the board. Consumers begin to notice the effects of rising inflation first hand: everything is getting more expensive. People begin looking for a safe asset that, unlike cash with its 7% loss p.a., generates positive returns. Recent events show that assets traditionally considered safe may very well be seized or otherwise lost. Assets belonging to the Russian Central Bank and oligarchs have been frozen, but many Ukrainians have also lost access to their bank accounts and credit cards as a result of the war. For these people, crypto assets are lifesavers. Lawmakers in the world’s major economies are working on inclusive regulation, and absolute bans are no longer on the table. We find that these factors will make an important contribution to the further appreciation of crypto assets and especially Bitcoin in the medium and long term.

Remarks

This article is an informational document and does not constitute an investment recommendation, investment advice, legal, tax or accounting advice or an offer to sell or a solicitation to purchase any securities and therefore may not be relied upon in connection with any offer or sale of securities. The views expressed in this letter are the subjective views of 21e6 Capital personnel, based on information which is believed to be reliable. Any expression of opinion (which may be subject to change without notice) is personal to the author and the author makes no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied.

About 21e6

21e6 Capital is a Swiss investment advisor, connecting professional investors with optimal crypto investment products. 21e6 Capital has analyzed over 1,000 crypto funds across the world and condensed them into a selection that can yield crypto-exposure with minimized downside risk. Backed by a highly experienced team of crypto and finance experts with in-depth knowledge in digital assets and DLT, 21e6 Capital created a unique quantamental strategy that is aimed at achieving crypto-like returns while minimizing risk and volatility to global equity levels. The 21e6 Capital team builds upon strong academic roots with a track record of leading crypto asset and decentralized finance publications and research, ensuring state-of-the-art crypto investment solutions for financial industry professionals.

Authors

Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was ranked among the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. He has been a member of the FinTech Council and the Digital Finance Forum of the Federal Ministry of Finance in Germany. He is also on the Board of Directors of FiveT Fintech Fund, 21e6 Capital and Blockchain Founders Group — companies active in venture capital financing for blockchain startups and crypto asset investment management.

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Our aim is to give professional investors access to the new asset class of “crypto assets”. www.21e6.io