The critics are cheering from the sidelines. Bitcoin (BTC 0.82%) isn't holding up to its perception as a store of value and hedge against macro and geopolitical uncertainty. As of March 5, it trades 44% off its peak from last October.
Financial markets are complex, so it's not always easy to find a clear explanation for any asset's price action. While I believe the superior cryptocurrency has immense long-term upside, it's facing three big trillion-dollar competitive risks right now.
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Bitcoin is fighting for capital
In the past decade, Bitcoin has skyrocketed almost 18,000%. It now commands a meaningful $1.4 trillion market cap. And given its neutral, digital, and decentralized nature, it competes for capital on a global level. This pits it against large pools of capital that can draw attention away from Bitcoin.
For starters, nothing has captured the imagination of investors more recently than the artificial intelligence (AI) boom. Some of the most dominant businesses we've ever seen are going all in, sparing no expense to build computing capacity to develop this technology. The ultimate payoff is highly uncertain. But the market is bullish, exhibited by the "Magnificent Seven" group's total market cap of $20 trillion, representing about one-third of the S&P 500 index, according to the latest research by The Motley Fool.
Domestically, the U.S. housing market is a massive capital magnet estimated to be worth $55 trillion as of last June. The 30-year fixed mortgage rate is 6% for the first time since 2022. If rates continue dropping, home values could get a lift. For middle-class Americans, homes are a leading store of wealth.
Another trillion-dollar competitive risk is in U.S. Treasuries, which carry a nominal value right now of $29 trillion. This is an extremely liquid market. And they're backed by the full faith and credit of the U.S. government, making them an essential reserve asset for central banks around the world.
Bitcoin's scarcity is what matters in the long run
Because Bitcoin is liquid and has a constantly updated market price, coupled with the fact that the vast majority of investors still view it as a risk-on asset, it's going to remain volatile. It's hard to imagine that the buyers that entered the market in the past couple of years, whether individuals, institutions, or governments, have as much conviction as earlier investors. This just means they might be quicker to sell when there's turmoil.
The backdrop is nothing new. Bitcoin has always competed with other capital, whether it comes from stocks, real estate, Treasuries, or anywhere else. Patience will always be tested.
But what matters is that nothing has changed from a long-term fundamental perspective. Bitcoin is the scarcest asset out there. And a decade from now, its price should be significantly higher.
