Ray Dalio's personal opinion on Bitcoin

Source: Daily Planet

I wrote this article to clarify my views on Bitcoin. Please note that the content I explain in this article is not from the media, but my own opinions, so I think the content of this article is reliable. I find that most people who want to promote Bitcoin try to find one narrative, while those who oppose Bitcoin, the minority who are scared and shrinking in the corner, use another narrative. Like most things I comment on, there are actually pros and cons to Bitcoin, so I hope to express my understanding as accurately as possible.

Before I start, I want to reiterate that I am not an expert in Bitcoin and cryptocurrency, so I don’t think my opinions are of much reference value, and I even think that I shouldn’t express these ideas. I think that one must know a lot of information to make valuable comments on the relevant market, so I don’t have too high expectations for my own opinions. Despite this, people still ask me to evaluate Bitcoin, so I decided to write this article to express my "amateur" views. I think there are some benefits to expressing my opinions, because sometimes the media will distort my ideas, but I want to remind everyone not to rely too much on my opinions. My only request to you is to read the content of this article instead of paying attention to media reports.

I think Bitcoin is a remarkable invention. It is a new type of money, programmed into a computer system, and has been running for about 10 years as a form of money and savings. It is astonishing how fast it has developed. The whole process is like creating a traditional credit-based monetary system. Creating Bitcoin is as magical as creating alchemy, both of them are making money from worthless programs. In about 1350 AD, the Medici family introduced credit products, which made bankers rich. Similarly, Bitcoin has subverted the existing monetary system and made its inventors and those who entered the market early very rich, and it is very likely to make more people become symbols in the future. For now, those who created Bitcoin and made this new type of money a reality have made the system work very well, and now Bitcoin (including various other competing altcoins) has become a digital asset that can replace gold.

It is undeniable that the demand for gold has been growing for quite some time, and there are not many assets in the market that can replace gold. This is because global debt and currency minting are going on at the same time, and I think this trend will continue in the future. Given the current situation, the global market has a growing demand for currency, or limited value-preserving assets, and not only that, the market demand is also rising. Such assets are actually very similar to gold in that they can preserve value, but the number of issuance is small and the market size is relatively small. Bitcoin and other competing altcoins may be able to meet this demand. I think investors will no longer regard Bitcoin as a speculative investment and hold it for a short period of time, but from the current perspective, investors will hold it for a long time because it still has value in some aspects in the future. I think the biggest question is what practical use it has and how much demand there will be in the future. Since the supply of Bitcoin is limited, people must estimate the price by estimating the demand.

In addition, it is necessary to further explain the limited supply of Bitcoin. Although the supply of Bitcoin is limited, the supply of other digital currencies is unlimited. At present, many new types of digital currencies have emerged, which have triggered competition in the industry. The supply and competition of these digital currencies will inevitably affect the price of Bitcoin and other cryptocurrencies. To be honest, I think there will be better cryptocurrencies to replace Bitcoin in the future, because things are always evolving in iterations and updates. However, due to the fixed nature of Bitcoin, it is destined to be unable to evolve, so I think there will definitely be other cryptocurrencies to replace Bitcoin in the future, and Bitcoin will eventually be eliminated, so investing in Bitcoin is also a risk. For the above reasons, "limited supply" seems to keep Bitcoin at a high price, but this is not the case. For example, the supply of BlackBerry phones is limited, but it will not have much value because they will be replaced by more advanced competitors. However, I still can't analyze why these competitions do not pose a threat, and I hope that the above immature ideas can be corrected.

At the same time, I admire Bitcoin for having stood the test of time for 10 years, and the Bitcoin network has been running well and has not been hacked so far. Nevertheless, for someone who owns digital assets, cyber attacks are now more terrifying than cyber defense, and cyber risk is already a risk that cannot be ignored. Even the Department of Defense cannot guarantee that its systems will not be hacked, so in the current situation, it is naive to completely believe that digital assets will not be hacked, which is one of the advantages of physical assets like gold, but also the risk of all financial assets. In fact, I think that most of our future financial system is likely to be composed of digital assets, and therefore more vulnerable to destruction or cyber attacks than the current system. Here I would like to remind you that cyber attacks are happening faster and faster and are likely to threaten the value of traditional financial assets. Although Bitcoin can be stored offline through a "cold wallet", it is difficult to do so, and few people actually do so, so overall, Bitcoin is an online digital currency, and its level of protection against cyber risks does not meet my requirements. I would like to say here that if my point of view is wrong, I hope someone can correct me.

Of course, there are many other aspects of Bitcoin as a digital currency that are worth discussing, such as its privacy level and whether its development will be affected by government regulation. In fact, when it comes to privacy, the level of privacy protection achieved by Bitcoin is not as high as people think. After all, it is a public ledger and a large number of Bitcoins are held in a non-private manner. Once the government or even hackers want to find out the owner of these Bitcoins, I doubt whether personal privacy can be protected in this case. Not only that, I think if the government wants to ban the use of Bitcoin, most people will not be able to use it, and the demand will drop significantly. Although some people think that the idea that the government may invade privacy or prevent the use of Bitcoin and altcoins is far-fetched, in my opinion, the more successful Bitcoin is, the greater this possibility is. Since the establishment of the first central bank, the Bank of England, in 1694, governments have wanted to control currency and have the power to have the only currency and credit in their country for various reasonable reasons. Therefore, if you stand in the position of government officials, it is easy to understand their behavior and thoughts. They will never allow Bitcoin (or gold) to surpass the currency and credit they provide and become a better choice. So, I think the biggest risk facing Bitcoin is success, because once it succeeds, governments will do everything they can to try to kill it.

Among the reasons I mentioned above, in terms of supply and demand, although the supply of Bitcoin is limited, it is difficult to predict its corresponding long-term demand because it is a long-term asset. Assuming that I regard Bitcoin as an asset that can replace gold, I can convert some of the privately held gold assets into Bitcoin for diversified investment. In this assumption, if 10% or 20%, 30%, 40% or even 50% of the value is transferred to Bitcoin for diversified investment, or Bitcoin holders want to diversify some of their investments into other assets such as gold or stocks, what will happen if the government issues a ban at this time? The result is obviously difficult to predict. Therefore, for me, Bitcoin is like a long-term option with an unpredictable future. I can invest a certain amount in it, but even if I lose 80%, it will not affect me.

This is my impression of Bitcoin as a non-professional. If there is anything wrong, please correct me. Only in this way can we understand more. At the same time, my colleagues at Bridgewater and I are still focusing on studying other value-preserving assets.

It is worth noting that Bitcoin in this article refers to the sum of Bitcoin and other competing coins.

In the current market where bond yields are close to zero, most central banks in the world are trying to devalue their currencies, so it makes sense to look for other hedging assets at this time. As of now, Bitcoin is still the leader among cryptocurrencies and has received the most attention in the United States. Since October last year, the price of Bitcoin has soared by nearly 200%, with the unit price once reaching $40,000 and finally stabilizing at around $30,000. It has to be admitted that Bitcoin does have some attractive attributes, such as limited supply, global exchangeability, and rapid development. However, at present, we do not think it can be a viable means of hedging for large institutional investors in the market. This is due to the high volatility of the currency price, regulatory uncertainty and difficulty in operation. On the contrary, we think that Bitcoin is more like an option and hope that it can become digital gold, so among the various development results in the future, one of them will become a truly accepted hedging asset by institutions.

Moreover, when we studied Bitcoin, we also believed that it had some of the qualities that we considered to be a value-preserving asset, although it is not yet a value-preserving asset. Of course, Bitcoin also has advantages similar to gold, such as limited supply, it will not depreciate due to the increase in the issuance of central banks. In addition, Bitcoin has the advantages of being easy to carry and can be traded globally, especially for individuals. Not only that, it can also be an option for diversified investment. Although so far, most of the above statements are purely theoretical and have not been verified in practice.

At the same time, Bitcoin still faces many challenges, and it will take some time to gain recognition from more institutional investors. Here are three of the most prominent challenges:

1. The price of Bitcoin is still extremely unstable, which means that its future purchasing power is still speculative. Compared with existing value-preserving assets such as gold, real estate or legal safe-haven currencies, the value of Bitcoin will fluctuate more in the future.

Second, Bitcoin still faces significant regulatory risks because it has no potential government endorsement and no long historical background, so it cannot provide a baseline for future demand. Although stricter regulation may lead to more institutions accepting Bitcoin, it may also cause some whales to sell Bitcoin because government regulation is their biggest concern.

3. Although Bitcoin's liquidity has now accelerated, the current level still poses structural challenges, hindering large traditional institutions like Bridgewater and their clients from holding Bitcoin.

As for future development, we predict that the infrastructure of Bitcoin and other cryptocurrencies will continue to mature. Not only that, but the environment we live in will also change. Many government-issued bonds will have lower returns and will no longer be an option for investors to diversify their investments. Currencies will face greater risks of depreciation, all of which will promote the development of other value-preserving assets faster. For now, although we want to predict the future more comprehensively, it is undeniable that there will be many factors that will affect Bitcoin in the future, so we cannot say that we are full of confidence in the future of Bitcoin.

This report will analyze Bitcoin from the following three aspects:

1. The first is its place among cryptocurrencies and what has fueled the recent bull run.

2. The second is the various qualities that make Bitcoin a store of value.

3. Finally, there are the various problems and challenges that Bitcoin will face in the future.

This article will analyze the above three points in detail.

As prices surge, the market is reignited

Hot debate on whether Bitcoin can become a store of value

Bitcoin’s 400% surge in 2020 has rekindled market interest, largely driven by its perceived potential to become “digital gold” and a store of value and potential inflation hedge in portfolios. While there are now a number of cryptocurrencies on the market, Bitcoin still dominates the market, so we’ll focus on Bitcoin and discuss its potential as “digital gold”.

Looking back at the 2017 bull run, investors were interested in Bitcoin mainly because of its speculative nature, which resulted in a sharp decline in investment returns and Bitcoin's cryptocurrency market share. The reason behind this is probably because the ICO wave attracted a large part of the speculative enthusiasm at the time, and speculators bought new tokens issued by cryptocurrency start-ups that promised to provide revolutionary decentralized technology and business models. In contrast, in the cryptocurrency bull run that lasted from 2019 to the end of 2020, Bitcoin outperformed other cryptocurrencies, and its market share is now back to its highest level since early 2017. Bridgewater Fund has communicated with large cryptocurrency market participants and service providers and found that people are increasingly interested in the idea of ​​Bitcoin as "digital gold", which seems to be the key driver of this new round of cryptocurrency bull market.

Central banks around the world are issuing a large amount of legal tender.

Bitcoin's limited supply makes it more attractive

Bitcoin is somewhat similar to gold, but if they are used directly as a medium of exchange for goods and services, their uses are actually very limited. However, Bitcoin has the same advantages as gold, such as limited supply and a more stable issuance cycle, so it may not depreciate due to central bank issuance like fiat currencies. According to Bitcoin's code, its total supply is 21 million, and the issuance rate is automatically halved every four years. It is this feature of Bitcoin that has led people to call it "digital gold." As shown in the figure below, although the issuance of Bitcoin was high in the first few years, the current supply growth rate is much lower than that of gold.

Bitcoin may be particularly attractive to some investors at this stage, and this phenomenon may be due to the same reasons that gold has been popular in the past few years. It is important to note that neither gold nor Bitcoin can generate returns immediately, but this seems to be irrelevant when the returns of other assets have fallen sharply. Gold is one of the few assets that can perform well during inflation, and investors are likely to consider gold and make investment plans in inflationary market environments. In addition, in the context of high internal and external risks and rising risks, gold has some other benefits, such as it is not affected by the political situation of any country. If people really accept the view that Bitcoin is "digital gold", it is conceivable that a similar situation will occur in concept with Bitcoin.

Bitcoin is easy to carry, circulates globally, and can become a value-preserving asset

Of course, scarcity alone is not enough to drive demand for an asset; people need to see Bitcoin as a viable, store-of-value asset. In fact, there are other cryptocurrencies that may have similar characteristics to Bitcoin, compete with it in concept, and have the potential to become "digital gold." However, Bitcoin has a relatively long history, is larger in scale, and has wider recognition and acceptance, which are very obvious advantages that Bitcoin has, at least so far. For example, while other cryptocurrencies also have similar technical features to Bitcoin, such as a fixed total supply and an emphasis on the concept of "stable price," Bitcoin's market performance is significantly better than other mainstream cryptocurrencies such as Bitcoin Cash (BCH), Litecoin (LTC), and Monero. Stablecoins, which are collateralized cryptocurrencies that are primarily pegged to the U.S. dollar, have also seen strong growth. However, in essence, stablecoins are not a true store of value, but a new form of digital dollar.

Finally, in addition to being able to maintain purchasing power over the long term, for a good store of value to be a good store of value, both now and in the future, Bitcoin needs to be very easy to trade and purchase. Compared to other traditional stores of value, such as gold, art, and real estate, Bitcoin is much easier to exchange and trade, especially for individual holders. In fact, given the digital nature of Bitcoin, it may be the most portable store of value, more convenient than physical cash. And, in terms of geographic scope, as Bitcoin trading services are increasingly available around the world, people can cash out Bitcoin relatively easily in most parts of the world, even easier than exchanging US dollars for local currency (except in some places with capital controls).

Whether Bitcoin can be a diversified investment option remains uncertain

Bitcoin is less than 11 years old, and there is not enough evidence to prove that Bitcoin can be considered a reliable diversified investment option in the future like gold. Nevertheless, we still studied the existing data in the market to understand the role and function of Bitcoin in hedging inflation and portfolio shrinkage. As shown in the figure below, in 2021, as inflation expectations rise, Bitcoin generally appreciates, but compared with gold, which has long played an inflation role, Bitcoin seems relatively weak.

Additionally, the chart below shows that during periods of drawdown for the 60/40 portfolio, gold remains a more reliable investment with decent returns. Bridgewater has been watching Bitcoin’s performance during deflationary periods since its introduction in 2009. However, given the short history of the cryptocurrency industry, we cannot draw any firm conclusions based on such a small sample size. So far, Bitcoin does offer some benefits as a portfolio diversification option, but this is more of a theoretical analysis than a reflection of actual conditions.

Volatility, regulatory uncertainty and immature infrastructure

Slowing down the adoption of Bitcoin by institutional investors

If the fundamental purpose of wealth is to preserve or increase people's purchasing power over time, we think Bitcoin feels more like an option, but it is still a highly volatile and speculative asset. Compared with existing store-of-value equivalents in the market, Bitcoin has not yet been widely used as a savings tool or reserve asset, and there is no "real" participation in Bitcoin asset allocation by governments or large global institutional investors. Even if there has been an increase in the participation of private institutional investors who are interested in Bitcoin recently, a large part of investors still seem to be using Bitcoin for short-term speculative transactions rather than using it as an actual long-term savings tool.

While it’s difficult to determine directly, the charts below show the share of Bitcoin held as savings in two ways. Specifically, one is the share of Bitcoin held in accumulation accounts, and the other is the share of Bitcoin held in “Last Active” accounts that are over 5 years old. Accumulation accounts are accounts that have only purchased Bitcoin and have not sold any, while “Last Active” coins are a mix of long-term investors and coins that are likely to be lost. We see that while the number of long-term Bitcoin holders has increased since 2018, their total share remains small (around 15%). And, while a significant portion of Bitcoin has not moved in over 5 years (over 20%), the majority of the Bitcoin supply is still in active or semi-active circulation (suggesting more speculative trading).

Another way we try to determine why Bitcoin is held (either as a store of wealth or for more speculative purposes) is to look at transaction volume. Bitcoin's high transaction volume compared to gold may reflect its relative speculative nature. Gold's transaction volume as a percentage of total assets outstanding is almost negligible compared to Bitcoin. This phenomenon occurs in part because central banks around the world hold a large amount of the total supply of gold and hold it as a long-term store of value. On the other hand, Bitcoin transaction volume has surged in recent years due to the emergence of high-frequency traders, a thriving derivatives market, and a surge in the number of other tokens that trade with Bitcoin. This, coupled with the questionable reporting of transaction volume data by unregulated cryptocurrency exchanges, has also given the market the illusion of increased liquidity. In fact, this liquidity is more representative of the high churn and speculative nature of Bitcoin trading, in addition to long-term liquidity risks.

Indeed, the growing speculative interest in Bitcoin in recent months has shown some classic dynamics of asset bubbles. For example, Bitcoin options are currently pricing in future returns that appear to be highly optimistic. As we have analyzed in previous research, very fast future discounting price appreciation is classic bubble behavior and further illustrates that Bitcoin markets remain highly speculative. In addition, although the current cryptocurrency market rally has not yet formed a bubble, there is undoubtedly a degree of over-leverage. Take the 2017 cryptocurrency bull market bubble as an example. At that time, the market was driven by retail speculators, and now retail investors' investment interest in Bitcoin has begun to surge again. Margin lending rates have begun to rise on some well-known Bitcoin trading platforms in the market, which also indicates that the phenomenon of using leverage to buy cryptocurrencies is becoming more and more common. The rapid appreciation of Bitcoin prices in the future is likely, and the widespread bullish sentiment in the market and the upward trend in leveraged trading volume all indicate that the market is indeed at risk of a bubble, although as we have written before, such a bubble trend can last for a long time.

All of the above factors result in Bitcoin’s price volatility being much higher than other traditional financial assets such as stocks and commodities, not to mention stores of value such as gold. In Bitcoin’s short history, there have been many times when there have been large fluctuations, and many people who hold Bitcoin have basically experienced losses. While there are times when most Bitcoins are profitable (this is the case now), and there are times when significant gains can be made, for wealth holders, reducing downside risk is more important than ownership. Similarly, the current Bitcoin options market also has similar speculative characteristics.

Compared to the price volatility of existing wealth storage assets in the market, Bitcoin has indeed been slightly more volatile since its inception, but we know that this situation may change significantly over time. As we have seen in other market evolutions, as the number of investors with different investment targets and time horizons increases, market volatility may decrease.

The regulatory outlook for Bitcoin is highly uncertain; creating two-way risks

Perhaps most importantly, large institutional investors believe that Bitcoin’s widespread adoption will depend on regulation. Do policymakers create a sensible regulatory environment that helps build trust in certain assets, or will investors become less attracted to other assets like Bitcoin? Will regulators ban Bitcoin outright? While we don’t know how regulatory trends will change, we do know:

(a) Bitcoin will become an increasing focus of regulatory policymakers, and

(b) Regulators may take different approaches to enforcing regulation.

On that note, just earlier this month, European Central Bank President Christine Lagarde said of Bitcoin:

“Bitcoin is a highly speculative asset, but it has also given rise to some interesting businesses, but it has also given rise to some absolutely reprehensible illegal money laundering activities…Therefore, there must be regulations governing Bitcoin…This is an issue that needs to be agreed upon globally, because if someone escapes regulation, they must be severely punished.”

Similarly, Janet Yellen noted during her confirmation hearing for U.S. Treasury Secretary in mid-January 2021 that “cryptocurrencies are of particular concern” with regard to financing terrorism, explaining:

“We really need to look at ways to reduce the use and creation of cryptocurrencies. Make sure that money is not being laundered through these channels.”

We see two main regulatory pathways that are likely to play out over the next year and years:

1. Regulators restrict the use of Bitcoin and cryptocurrencies due to concerns that their use will undermine traditional fiat currencies, thereby cutting off the asset from further development in the current market environment; or

2. Create a regulatory environment that will give people more long-term trust in crypto assets, but at the same time it may also lead to increased market volatility.

We believe that both regulatory paths suggest that the roller coaster ride on Bitcoin prices may continue for some time.

We can see an example of tighter restrictions in China. In September 2017, Chinese authorities banned initial coin offerings (ICOs), a cryptocurrency-based fundraising process, which immediately caused the price of Bitcoin to fall 8%. In the United States, the possibility of a similar ban is relatively small, but technically possible. Given that most Bitcoin buyers rely on wire transfers and bank debit accounts to transfer funds to and from Bitcoin exchanges, the United States may for all practical purposes make it impossible for American investors to purchase Bitcoin. Here, our main concern is that if there is a central bank digital currency in the future, and the issuance of central bank digital currencies proliferates and becomes an officially recognized digital store of wealth, then governments may prefer to restrict Bitcoin as a non-government legal tender alternative, as Bitcoin is likely to compete with central bank digital currencies.

Of course, even if there is no large-scale, comprehensive ban, there are still many potential regulatory constraints that could seriously damage the adoption and market value of Bitcoin. In the past few years, the United States has basically had an overall regulatory direction for cryptocurrencies, with Bitcoin being seen as non-threatening and regulatory measures being mild, so people's recognition of blockchain technology and cryptocurrencies has continued to increase, but there are also some regulators who view cryptocurrencies as a threat to supporting illegal activities and/or subverting the existing financial system.

Let's take two examples. The Office of the Comptroller of the Currency (OCC) of the United States issued an explanatory letter on the evening of January 4th, local time. It clarified that domestic banks and federal savings associations in the United States can use public blockchains and stablecoins for settlement, which means that domestic banks and federal savings associations in the United States can run crypto nodes and use associated stablecoins for permitted payment activities. As long as they comply with existing laws and regulations, banks can use public blockchains to verify, store, record and settle payment transactions. But a month ago, the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) proposed rules to restrict the use of non-custodial cryptocurrency wallets, requiring crypto companies to verify the names and addresses of non-custodial wallet users for transactions greater than $3,000. In addition, exchanges are also required to submit and store records involving cryptocurrency transactions, aiming to effectively prohibit the use of "privacy coins" such as Monero and Zcash.

While Bitcoin and cryptocurrencies have grown rapidly given the unregulated “Wild West” landscape that the market currently presents, there are other areas that may be at risk of disruptive regulatory action, one of which is Tether (USDT), the largest stablecoin by market capitalization. Tether is currently under investigation by the U.S. Commodity Futures Trading Commission, the U.S. Department of Justice, and New York State Attorneys for issuing billions of dollars worth of USDT tokens that may not be fully backed by actual U.S. dollars. If Tether were to be shut down or suffer other significant regulatory penalties, this could undermine the value of all cryptocurrencies, including Bitcoin, given the interconnected liquidity of the entire cryptocurrency market.

In addition, regulators may allow more safe-haven institutional adoption of Bitcoin, which could still lead to huge market volatility for Bitcoin holders, many of whom are early adopters who strongly believe in the anonymity, encryption and anarchist principles created by Bitcoin founder Satoshi Nakamoto. For example, the Bitcoin market saw a sell-off after the U.S. Treasury Department's Financial Crimes Enforcement Network proposed rules to restrict the use of non-custodial cryptocurrency wallets, which temporarily caused prices to fall.

However, in some cases, regulatory clarity could add value to the cryptocurrency market in the long term. Compared to the 2017 bull run, trading infrastructure and custody solutions are now more efficient, market liquidity and complex, which "stimulates" higher institutional participation. We believe that this is partly due to regulatory changes, and traditional exchanges are beginning to accept Bitcoin derivatives.

Therefore, the recent institutional liquidity entering the Bitcoin market has led to a surge in Bitcoin prices driven by larger transaction volumes compared to 2017, when the bull run was dominated by small and medium retail investors. However, it is worth noting that institutional participation is still low and small in number, mainly limited to hedge funds and family offices rather than larger traditional institutional investors, who still have a small market share in cryptocurrency investment vehicles.

In the best case, mature cryptocurrency regulations will bring security to the market and provide more means of accessing assets, such as Bitcoin exchange-traded funds (BTC ETFs), which may encourage large institutional investors to increase their exposure to Bitcoin. We want to understand what the future of institutional investors' attitudes toward Bitcoin investment may look like, for example, if investors move some of their gold holdings into cryptocurrencies, how the market will react.

The following table is for illustrative purposes only, so it is a bit simplistic. If a certain amount of private gold savings (i.e. excluding gold held by central banks) are transferred to Bitcoin, it may drive the price of Bitcoin up. More specifically, at the bottom of the next shift, we assume that half of the total market value of privately held gold savings is allocated to Bitcoin, which means that there will be about $1.6 trillion allocated to all Bitcoins that have ever been mined. By shifting from gold to Bitcoin, investors are beginning to try to diversify their investments, which can theoretically increase the price of Bitcoin by at least 160%.

Of course, we make this calculation assuming there are no issues with liquidity or market rebound. In fact, the above estimate may be considered conservative, as such a large amount of liquidity may lead to supply tightness, which will push the actual price of Bitcoin higher. Obviously, there are many factors that may affect the future price trend of Bitcoin that we have not yet seen. For example, we don’t know when central banks may consider shifting their gold exposure to Bitcoin, or regulators may increase their "crackdown" on Bitcoin, but of course these are all assumptions.

Large institutions that want to hold Bitcoin

Still facing structural and operational challenges

In addition to these potential future developments, large institutions that want to hold Bitcoin still face structural and operational challenges that make widespread adoption of Bitcoin challenging. In terms of the former, while we won’t go into all the details here, as just one example, institutions’ requirements for regulation are often different than what we imagine, and institutional investors are likely to demand stronger regulation; Bitcoin is a bearer asset (i.e., ownership is determined only by the person who holds the private key), which increases the protection and insurance considerations for institutional asset managers. At this point, digital asset custody is still generally more expensive than traditional stocks, regulators are developing qualified custodian rules, and there are currently a limited number of underwriters in the market for custody digital asset insurance. That said, more and more institutional-grade custody solutions are slowly being rolled out, and services and pricing are likely to grow as demand grows.

For large institutions to hold Bitcoin in their portfolios, they also need to have enough liquidity to trade at a larger scale without destabilizing the market. At this point, while Bitcoin is becoming comparable to Bridgewater Fund trading in certain markets, its liquidity has reached an all-time high, so you can see that the market size is still small at the moment. We will summarize some investment vehicle comparisons below, based on our assessment of liquidity:

• For investors who can directly trade cryptocurrency hotly, the total market capacity of cryptocurrencies is currently close to 10% of the size of the tradable gold market.

• The market size is even smaller for large asset managers who can/will only access bitcoin through traditional places (i.e. derivatives, stock markets).

The following graph shows the bitcoin transaction volume we believe is from real liquidity. We see that from these perspectives, although the Bitcoin reported transaction volume is very impressive, the real transaction volume may still be relatively stable. Considering this trend, and the Bitcoin supply is fixed, Bitcoin liquidity is still related to its price. Despite the recent growth in Bitcoin prices, at the current scale, it may also have a significant impact on the market for investors who allocate relatively small amounts of assets to Bitcoin. Although the size of the gold market is far greater than that of Bitcoin, it is still smaller than that of the US stock market.

Overall, it is clear that Bitcoin has a store of value and has attracted the attention of many investors. Of course, the price of Bitcoin is still volatile. However, we must admit that this financial instrument is only a decade old. Absolutely, how such digital assets will develop relative to existing wealth reserves in the market (such as gold). A big challenge for Bitcoin in the future may still come from quantum computing, regulatory rebounds, or other issues that we have not yet identified, and even if these problems have not yet appeared, they still need to be paid attention to. For now, Bitcoin is more like a potential wealth reserve option for us.