The New Playbook for Bitcoin
„I do believe the role of crypto is digitizing gold, in many ways.“
Larry Fink
- The new playbook for Bitcoin is characterized by absolute scarcity, which Bitcoin is rapidly approaching, and a world of Bitcoin ETFs, where institutional and sovereign players are increasingly using Bitcoin as an asset class.
- The US Securities and Exchange Commission (SEC)’s approval of Bitcoin spot ETFs has farreaching, positive consequences. The possibility of a Bitcoin ban seems to be off the table in the West.
- As the number of bitcoins held by ETFs increases, so does the risk of a mega-drawdown. In the event of a liquidity crisis, ETF holdings technically can be liquidated very rapidly. Bitcoin is, therefore, likely to remain significantly more volatile than gold.
- Following the halving in mid-April, Bitcoin has become the hardest monetary asset and now has a stock-to-flow ratio around twice as high as gold. Digital gold is thus increasingly competing with analog gold, whereby the overall demand for noninflationary assets will continue to rise structurally.
- Bitcoin is now rapidly approaching absolute scarcity: almost 95% of all Bitcoin has already been mined. Within the next 10 years, 99% of all available Bitcoin will have been mined.
- According to the new playbook for Bitcoin, as absolute scarcity is approached, the influence of the halving cycles will continuously decrease as the newly created amount of Bitcoin gradually becomes less significant.
Bitcoin has been an integral part of our In Gold We Trust report for eight years. We have been dedicating a chapter to the dominant cryptocurrency every year since 2016, as we view the decentralized network protocol as a potentially revolutionary monetary invention. While the perspective we hold is not universally embraced among gold enthusiasts and often faces criticism from the broader gold community, it is evident from the present situation that our consistently communicated positive stance on Bitcoin as an asset class has been validated. Without engaging in undue self-congratulation, we assert that our optimistic outlook has proven to be accurate thus far.
Our investment strategy, consisting of a combination of gold and Bitcoin, which we first presented five years ago as part of the In Gold We Trust report,[1] has proven to be remarkably successful not only in theory but also in practice. This is evidenced, not least, by the live track records of our two funds, which have been implementing these combined strategies for over three and four years, respectively.
Incrementum Gold Bitcoin Strategy and Incrementum Gold Silver Crypto Strategy, 100 = 02/26/2020, 02/2020–04/2024
Source: Reuters Eikon, Incrementum AG
In previous years, we extensively analyzed the similarities and differences between gold and Bitcoin. We also looked at valuation methods and how the Bitcoin phenomenon fits into the monetary theory of the Austrian school of economics.
For readers who want to know more about these topics, we would recommend reading the following chapters of previous In Gold We Trust reports, which we believe are still highly relevant today.
- In Gold We Trust report 2023: “Showdown in Sound Money”
- In Gold We Trust report 2020: “The Plan B Model: The Holy Grail of Bitcoin Valuation?”
- In Gold We Trust report 2019: “Gold and Bitcoin: Stronger Together?”
This year, we are maintaining our positive stance on the young asset class. However, in addition to the changing of the playbook for gold, the playbook for Bitcoin is also changing. We consider the main changes for Bitcoin to be the following:
- ETF approval by the SEC, thus ensuring long-term legal certainty is a fundamental game changer.
- Bitcoin’s rise to become the hardest monetary asset
- The halving’s impact on supply, and especially issuance, as we approach the maximum number of coins available
In conclusion we will also introduce some thoughts this year regarding a new theoretical concept , which is based on a previously presented concept from the world of gold: Freebitcoin, corresponding to Freegold.
Bitcoin ETFs and Legal Certainty as Game Changers
Back in 2013, the Winklevoss twins submitted their first application for approval of a Bitcoin ETF to the US Securities and Exchange Commission (SEC). This and other early applications were rejected due to concerns about market manipulation, lack of market surveillance, and the volatility of cryptocurrencies. Over time, growing institutional interest, improving market infrastructure, advances in technology, and international examples of crypto ETFs led the SEC to rethink its position.
On January 10, 2024, the time had finally come: The SEC approved 11 Bitcoin spot ETFs. The approval of Bitcoin ETFs by the SEC has far-reaching implications for Bitcoin and the general perception of Bitcoin by financial market participants.
Spot Bitcoin ETF Overview, 04/30/2024
Source: hildobby, Incrementum AG
The three most important consequences of this decision are:
1. Regulatory clarity and legal certainty: The classification of Bitcoin as a commodity and the authorization of ETFs results in a changed regulatory landscape. Bitcoin falls under the supervision of the Commodity Futures Trading Commission (CFTC) and is regulated differently than all other cryptocurrencies, which remain under the supervision of the SEC as securities. Bitcoin’s status as digital gold has been confirmed by the regulator’s decision.
The sword of Damocles of a Bitcoin ban is off the table – at least for the US and probably also for all other Western countries. This legal certainty is a game changer for institutional investors in particular.
2. Market acceptance and investor interest: The introduction of Bitcoin ETFs increases the acceptance of Bitcoin as a legitimate asset class and reduces career risk for asset managers who have been reluctant to take Bitcoin positions for their clients. The availability of ETFs also opens the way to a much broader range of investors, particularly those who are familiar with traditional investment vehicles and can now easily integrate Bitcoin into their existing trading, custody, and reporting infrastructure.
Just a few months after the approval of Bitcoin ETFs, it is evident that the event has led to increased demand, resulting in a jump in the price of Bitcoin. Since the ETFs were approved, there have been net inflows of around USD 15bn. Including the Grayscale Bitcoin Trust, which was converted to an ETF as well, all US Bitcoin spot ETFs have a combined volume of USD 50bn.
Spot Bitcoin ETF AuMs*, in BTC (lhs), and USD bn (rhs), 01/2020–04/2024
Source: hildobby, Reuters Eikon, Incrementum AG
*GBTC Holdings for the Period prior to Spot Bitcoin ETF Trading (01/11/2024)
3. Possible impact on volatility and drawdowns: Bitcoin enthusiasts have often emphasized that spot ETFs are a powerful gateway for financial investors. Under the right conditions, such as a loosening monetary policy environment or the halving cycle, a wave of investment by financial investors via ETFs can bring about noticeable price gains. This has already been impressively demonstrated in the first few months since ETFs were approved. The total volume of Bitcoin ETFs of USD 50 billion already corresponds to around a quarter of the volume of all gold ETFs.
Gold ETF and Spot Bitcoin ETF Holdings, in USD bn, 01/2004–03/2024
Source: hildobby, Reuters Eikon, Incrementum AG
*GBTC Holdings for the Period prior to Spot Bitcoin ETF Trading (01/11/2024)
However, it should also be noted that this open gate also enables rapid outflows. The higher the Bitcoin holdings held by ETFs, the greater the potential selling pressure that can emanate from ETFs in the event of a sell-off. ETF holders generally act more tactically than typical Bitcoiners, who generally hold for the long term, often in self-custody, and without rapid access to exchanges.
Share of ETF Holdings versus Mined Supply, 01/2020–04/2024
Source: World Gold Council, hildobby, Incrementum AG
*GBTC Holdings for the Period prior to Spot Bitcoin ETF Trading (01/11/2024)
Therefore, we do not assume that ETFs will reduce Bitcoin’s volatility. The opposite may be true. Should ETFs hold substantial amounts of Bitcoin in the medium term, a sudden sell-off by financial investors, for example due to a liquidity crisis, could trigger a massive drawdown. Bitcoin is therefore likely to remain highly volatile, which, in our view, strengthens the argument in favor of the multi-asset approach we advocate in combination with precious metals.
Bitcoin Drawdowns in USD from All-Time High, 01/2011–06/2023
Source: blockchain.com, Reuters Eikon, Incrementum AG
4. Decentralization aspects: The decentralized nature of Bitcoin played a decisive role in the regulatory classification of Bitcoin as a digital commodity. It must be emphasized that the underlying Bitcoin protocol and its decentralized structure are not affected by the ETFs. At the heart of this decentralization is not only the proof-of-work (PoW) consensus mechanism but also the network of nodes.
5. Liquidity and market depth: Following the launch of Bitcoin ETFs and the associated developments on the Chicago Mercantile Exchange (CME) and in the trading volumes of the ETFs themselves, there was a clear market reaction. Total derivatives trading volumes on the CME rose by 35% to USD 94.9 billion in January, marking the highest level since October 2021.
In addition, the Bitcoin spot ETFs got off to a remarkable start with a trading volume of around USD 1.6bn just minutes after the exchange opened, underlining the high initial demand for these products. This volume rose to over USD 2bn in a short space of time, reflecting the momentum and investor interest in these new ETFs.
The liquidity of crypto exchanges reported on coinmarketcap has also increased significantly, but interestingly is still well below the peak levels of the last bull market. This is presumably due to the fact that the increase in derivative transactions and now ETF transactions – which net the inflows and outflows at the level of the ETFs – means that a smaller proportion of all transactions are actually processed on the blockchain.
Bitcoin (lhs), in USD, and 30D Average Volume (rhs), in USD bn, 01/2020–04/2024
Source: coinmarketcap, Incrementum AG
We want to point out the relevance of the approval of Bitcoin ETFs and the associated increase in liquidity in the context of Carl Menger’s theory regarding the marketability of a good. Menger, the founder of the Austrian School of Economics, argued that the most marketable goods become money. In this sense, the introduction of ETFs is certainly helpful in Bitcoin’s journey to becoming a widely used money. We do not assume that Bitcoin will become universal money in the near future; but in Hayek’s sense, the higher marketability certainly helps to increase the moneyness of Bitcoin. At this point, we would like to refer you to the more detailed explanations in the chapter “Showdown in Sound Money” of the In Gold We Trust report 2023.[2]
In summary, the most important factor in connection with the ETF approvals from our point of view is that there has been a significant reduction in legal risks. For a long time, many investors have seen legal uncertainty as a key risk factor. The dread of a ban on Bitcoin has considerably decreased, especially in the Western hemisphere.
The Rise of Bitcoin as the Hardest Monetary Asset
The halving is a fundamental mechanism of Bitcoin that occurs every 210,000 blocks, and therefore, approximately every four years. The reward that miners receive approximately every 10 minutes for mining a new block is halved. Initially, this was set at 50 bitcoins per block. With each halving, the growth in the supply of newly available Bitcoin decreases. The last halving, which occurred in April, was the fourth time this had happened. The block reward was reduced to 3.125 bitcoins per block.
Halving Effects
Source: Glassnode, Incrementum AG
The halving is not only a technical process but also an economic event that has a profound impact on the Bitcoin economy, the mining industry, and the market as a whole.
Halving has a direct impact on the stock-to-flow ratio (S2F) of Bitcoin, as the flow – i.e. the rate at which new Bitcoin is generated – halves and the stock grows more slowly. The S2F ratio of Bitcoin has doubled again with the halving. This increased scarcity can theoretically increase the price of Bitcoin, provided that demand remains constant or increases.
Gold has a relatively stable S2F ratio in the long term, as its annual production remains relatively constant in relation to the amount available. Bitcoin’s S2F ratio, on the other hand, is now higher than that of gold (after the 2024 halving), making Bitcoin the hardest monetary asset, at least by this specific metric.
Stock-to-Flow Ratio for Gold and Bitcoin, 1900-2030e
Source: blockchain.com, USGS, World Gold Council, Incrementum AG
*Gold Production (2024-2030) = average growth rate (2004-2023)
In contrast to Bitcoin, the stock-to-flow ratio of gold will remain relatively stable, as the annual production and available supply of gold worldwide are subject to only minor fluctuations.
Halving and Absolute Scarcity
Currently, almost 95% of all 21 million bitcoins that will ever be available have already been mined. We are moving towards a figure of 99% in 2033. In around 8 years’ time, we will be entering a new era for Bitcoin – an era of almost absolute scarcity.
Mined Bitcoin Supply, 01/2009–12/2140
Source: Incrementum AG
Bitcoin is often referred to as digital gold, a description that may be a helpful analogy, from our perspective. Approaching the maximum circulating supply of 21 million coins reinforces Bitcoin’s position as the ultimate scarce resource in the digital age. This scarcity could further solidify the perception of Bitcoin as a store of value and potentially lead to a reassessment of its value. The absolute scarcity of Bitcoin relative to the relative scarcity of gold is particularly striking when viewed over the long term.
Gold Stock (lhs), in Tonnes, and Bitcoin Stock (rhs), in Coins, 1900-2030e
Source: blockchain.com, USGS, World Gold Council, Incrementum AG
*Gold Production (2024-2030) = average growth rate (2004-2023)
For investors, the marginal growth of the newly mined Bitcoin potentially means a change in investment dynamics. As we approach the age of absolute scarcity for Bitcoin, this could have a noticeable impact on the future development of the Bitcoin market, particularly with regard to the influence of halving cycles. So far, the Bitcoin price has followed a recognizable pattern that has been strongly influenced by the halvings, experiencing strong increases in each of the following 350 to 500 trading days after a halving.
Bitcoin Performance after Halvings (Halving = 100, log), 11/2012–04/2024
Source: blockchain.com, Reuters Eikon, Incrementum AG
The continuous approach to the maximum quantity of 21 million Bitcoin will change this playbook. With the majority of all Bitcoin already mined, the relative influence of halvings on the total supply should become less and less. In the early stages of Bitcoin, halvings had a huge impact because they affected a significant portion of the volume yet to be mined. As we approach the limit, each additional cut in the reward will represent a smaller and smaller percentage of the remaining total supply. This could result in the price effects of halvings being less intense than in previous cycles.
Bitcoin’s current four-year cycle so far has had the effect in terms of performance that three calendar years with positive returns were followed by one year with negative returns. This pattern is obviously closely linked to the expectations and speculation surrounding halving events. However, if halvings have a diminishing effect on Bitcoin’s growth rate, the associated cycles could also become less important, and we will see increasing deviations from this pattern.
Bitcoin Performance in Major Currencies, 2011–2024 YTD
Source: Glassnode, Reuters Eikon (as of 04/30/2024), Incrementum AG
It is therefore to be expected that the Bitcoin market eventually will evolve towards other, less predictable patterns that are more strongly influenced by global macroeconomic factors, regulatory developments and technological advances.
Bitcoin’s Potential Path to Global Adoption
While many critics argue that Bitcoin has “failed” due to its slow adoption as a currency, it’s important to highlight Bitcoin’s significant achievements. We must consider that the global implementation of network goods systems such as of automobiles and roads, telephone networks, electrical grids, railways, and the internet often spans decades, especially when they aim to replaceexisting systems.
Money, arguably the ultimate economic network good, presents a formidable challenge when there is a competition against an established monetary system. Bitcoin started in 2009 with just two enthusiasts running a new kind of code on their computers. Today, it stands as a trillion-US dollar asset. The Bitcoin ecosystem has navigated numerous hurdles, including security breaches, regulatory hurdles, divisions within its community, and various scams and fraudulent schemes that exploit the public’s lack of familiarity with this innovative technology.
The next chart shows the different stages of adoption. The next frontier is large companies and pension funds investing in Bitcoin, followed by (more) nation-state adoption. It is worth noting that already one large company and one nation-state have embraced Bitcoin.
- Microstrategy adopted its Bitcoin strategy on August 10, 2020. Since then, its share price has skyrocketed by more than 1,000%.
- El Salvador declared Bitcoin a legal tender and also opted to use Bitcoin as a reserve asset in 2021, and was met with widescale ridicule from the media and financial institutions such as the IMF and World Bank. But since then, El Salvador has been doing remarkably well economically, enjoying GDP growth far above average and paying off a USD 800mln loan in January.
Source: Finoa, Incrementum AG
The adoption curve of Bitcoin
Other companies and nation-states are watching this process unfold, waiting on the sidelines as Bitcoin becomes more mainstream. Let’s examine some prospects in that regard.
The majority of news regarding this topic centers around Bitcoin mining. Countries and also companies are able to monetize stranded energy by mining Bitcoin. An example of this is Bhutan, which partnered with Bitdeer Technologies Group in 2023 to mine Bitcoin using stranded hydroelectricity. Another example is the Ethiopian government’s deal with 21 Bitcoin miners, mostly from China, to mine Bitcoin with energy from the Grand Ethiopian Renaissance Dam.
Various oil and gas companies are also partnering with Bitcoin miners to mine using stranded flared gas. This is a remarkably beneficial endeavor for all parties involved, as stranded gas and flared gas are considered waste products in the oil and gas industry and are often burned off or disposed of at a cost, mainly for safety and environmental reasons. Recently, Argentina has announced to engage in this technology.
This also extends to governments. Marathon Digital announced in 2023 that they have entered into an agreement with Zero Two, a company backed by Abu Dhabi’s sovereign wealth fund, ADQ, to “[d]evelop and operate two digital asset mining sites with a combined capacity of 250 megawatts.”
Other Gulf nations are following suit, with Oman announcing that they will support Bitcoin mining. Interestingly, this came after Oman found Bitcoin to be in line with Islamic law – following rigorous discussion – and accepted its intended use. Speculation is rife about Qatar also climbing onto the Bitcoin bandwagon, with the Emir of Qatar visiting El Salvador’s President Bukele last year, and a private jet, donning Qatari insignia, being spotted at the Madeira airport at the time of the Bitcoin Atlantis Conference.
Iraq’s Deputy Prime Minister, Muhammad Ali Tamim, also has the rumor mills spinning after mentioning that the Iraqi government is widening partnerships and conducting agreements to be able to “use technologies to capture flaring gas” in a recent interview. And Argentina, under its new president Javier Milei, recently announced that it will also be introducing this technology.
Meanwhile, Switzerland is experiencing a significant push from Bitcoin advocates to include Bitcoin in the Swiss National Bank’s reserves. A group of Bitcoin enthusiasts is leading a campaign to change the country’s constitution and demand Bitcoin alongside gold as a mandatory reserve asset.This movement is spearheaded by 2B4CH, a nonprofit organization established in 2017 with the aim of promoting Bitcoin and blockchain technology. The initiative is gathering momentum, with plans to collect over 100,000 signatures from Swiss citizens, which would initiate a referendum on the matter.
Paraguay recently introduced a bill in their congress, proposing the adoption of Bitcoin as an experimental legal tender, following the precedent set by El Salvador.
As expected, governments have been slow in their adoption, with smaller states being able to move more quickly because of direct governmental control. However, what would happen if central banks widely adopt Bitcoin as a reserve asset? We thought it would be interesting to run a thought experiment, based on the Freegold concept.
A Thought Experiment, Freegold and Freebitcoin
Antal Fekete’s quote, “Gold is the ultimate extinguisher of debt”, and the Freegold thesis, according to which the gold reserves of central banks enable a recapitalization of the fiat system through price increases, provide an interesting basis for designing a hypothetical Freebitcoin system. Such a system would put Bitcoin in a similar role to gold in the Freegold thesis, but with some adjustments to the digital nature and specific properties of Bitcoin.
Bitcoin as the ultimate debt extinguisher: Echoing Fekete’s statement about gold, in a Freebitcoin system, Bitcoin would act as the ultimate means of debt settlement. This would mean that Bitcoin was increasingly seen as a global store of value, whose value existed independently of national fiat currencies, so that it could be used to pay off debts on an international scale.
Systemic integration into fiat currency systems: As with the Freegold thesis, a Freebitcoin system would allow central banks to hold Bitcoin as currency reserves in addition to conventional government bonds. These reserves could be used for recapitalization in times of heavy balance sheet losses. By accumulating Bitcoin, central banks could benefit from its price increases, which would help them to strengthen their balance sheets and stabilize the fiat system, especially in times of severe overindebtedness and inflation.
Price flexibility: A key aspect of the Freegold concept is the idea that the price of gold should be flexible and free to fulfill its role as a recapitalization tool. Applied to a Freebitcoin system, this would mean that the Bitcoin price is freely determined in the market, without fixed pegs or price limits, so that its valuation serves as a true market indicator of supply and demand.
This thought experiment can be further extended to a combined Freegold/Freebitcoin system. This potentially represents an innovative synthesis of traditional and digital stores of value that leverages the strengths of both assets to create a robust, resilient, and dynamic financial system. In this model, gold and Bitcoin complement each other to achieve the goals of debt reduction, store of value, and recapitalization of global financial systems. Here are the key elements and mechanisms of such a system:
Double sound money reserves: Central banks and financial institutions hold both gold and Bitcoin as part of their official reserves. This diversification makes it possible to get the best of both worlds: the stable, physical, and timeless store of value of gold and the digital, limitless, and efficient store of value of Bitcoin. In times of high overindebtedness and negative equity, „a smoother recapitalization“ via the portion of reserves held in Bitcoin is possible, relative to a scenario with a sharp appreciation of the gold price.
Debt extinguishment and recapitalization: Both assets, gold and Bitcoin, serve as „ultimate debt extinguishers“ in such a system due to their nature as pure assets without counterparties, in that they can be used to repay and hedge against global debt. Their acceptance and value provide a solid basis for the recapitalization of banks and governments in times of crisis. A rapidly appreciating reserve currency such as Bitcoin can contribute to a faster recapitalization of the overindebted system.
Store of value: By combining gold and Bitcoin, the system can marry the traditional security of gold with the modern efficiency and potential of Bitcoin, resulting in a diversified and robust store of value strategy. A combination portfolio of Bitcoin and gold reserves may also appear attractive from a central bank risk/return perspective.
Challenges and final considerations: One of the biggest challenges would be to create a regulatory framework that encompasses both digital and physical stores of value at an international level. This would require cooperation among governments, central banks, and international financial institutions.
At present, it seems inconceivable that the relevant institutions, such as the BIS or the IMF, would promote such a system. Nevertheless, we should not completely ignore the possibility that Bitcoin could be integrated into the architecture of the current monetary system via the back door, as this could be beneficial for the existing system, which is partly plagued by negative equity.
It remains to be seen whether the ongoing developments and increasing acceptance of gold and Bitcoin can lead to sustainable integration into the global financial system, especially in an environment dominated by traditional institutions. The integration of Bitcoin could serve as an evolutionary step towards a more diversified and resilient monetary future.
The vision of such a synthesis of gold and Bitcoin may still be distant for some, but such a combination could revolutionize the way we think about stores of value and monetary security. The potential for integrating Bitcoin into the existing monetary system should not be hastily dismissed but seriously considered as a way to strengthen the global monetary and financial architecture.
[1] See “Gold and Bitcoin: Stronger Together?,” In Gold We Trust report 2019
[2] See “Showdown in Sound Money,” In Gold We Trust report 2023
