Deconstruct Bitcoin’s zeal into an investable thesis
It’s all Bitcoin all day in my Twitter feed these days. Tesla bears, Fed obsessives, and even golden bugs are calm. The HODLers are in full force to celebrate Bitcoin’s parabolic sevenfold resurgence from the $ 5,000 ash (as of the morning of this writing). Frankly, I am skeptical of Bitcoin. I see it as a speculative technological action, not digital money. However, I don’t avoid cryptocurrency. Instead, I’m trying to figure out an appropriate job size and strategy that is consistent with my investment framework.
I’ve been in the Bitcoin hoop for a while now. I traded a minimal amount in the early days and made no significant gain (in absolute terms). At first, I was drawn to the prospect of decentralized money and banking – the theory and practical benefits that cryptocurrencies potentially have. However, I expected more development 12 years after Bitcoin began to exist. To me, this looks even more like a tech stock in 1999 than a booming currency – all potential; no (significant) practicality (yet).
While I’m certainly not the most hip in the cryptocurrency scene, I understand that. Considering Bitcoin’s large market capitalization ($ 666 billion at the time of this writing) – eclipsing that of Walmart, Johnson & Johnson, and almost a handful of blue chip companies – I’m surprised Bitcoin still has so little. of utility over those familiar names. Indeed some people use Bitcoin, but the overwhelming majority seem to store it in the hopes of higher prices.
Value requires utility, even for money.
Value, in my opinion, requires utility. So “intrinsic value” is illogical. I don’t see how anything can be of value in itself; simply because it exists. For an asset to be valuable, it must have a value someone else , aka a uh-value.
Material objects as such have no value or devaluation; they acquire significant value only in relation to a living being – in particular, in relation to the service or obstruction of the purposes of man.
Ayn Rand, “From the Horse’s Mouth”, Philosophy: Who Needs It
Food, shelter, entertainment, art, etc., all serve the purposes for buyers of these items. Their market prices reflect this value. Remember, oil was a nuisance that devalued property before 1859. Today, however, the opposite is true. What changed? The invention of petroleum refining gave birth to previously unnecessary sludge, turning it into the black gold we know today.
Money is no different. It serves a human purpose from which it derives its value. Money is a concept of economic value. It quantifies value, makes it accessible to people and thus facilitates trade. Just as there could be no houses, cars, or smartphones without standards for length (feet, inches, meters) or time (seconds, hours, days), modern economies require monetary standards.
Bitcoin is not money (and probably never will be)
Bulls generally view Bitcoin as the future of money. I do not see it. Money is simply a unit of account, which is a specific type of measure used to calculate economic value. Money is not a synonym for medium of exchange or value of storage. Although these functions are denominated in monetary terms, they are separate concepts, in my opinion. This confusion only breeds confusion.
My bounded – if not rare – definition of money highlights the challenge of Bitcoin here. Until you get paid by your employer or buy groceries, in Bitcoin, this will not serve as a common measure of economic value. People will mentally convert all Bitcoin transactions to a local currency standard (dollars, euros, yen, etc.) no matter how splashing the title.
The Panthers’ Russell Okung made Bitcoin headlines by allegedly becoming the first player in the NFL to be paid in Bitcoin …
However, an actual read of the details reveals that the team is paying him in dollars (i.e. – say in fiat). Half of his salary will automatically be converted into Bitcoin at the spot rate. Using similar logic, Okung is also paid in food, clothing, and cars.
That said, just because Bitcoin isn’t money, doesn’t mean it’s worthless. . Its supporters make other reasonable claims that can be systematically analyzed once Bitcoin is unboxed with its many slogans. These other use cases are more plausible, in my opinion, and potentially give Bitcoin its value.
The value of Bitcoin is everything in the future
When you sum everything up, Bitcoin is basically a database. Its innovation lies in the way it is maintained. Bitcoin does not require any central authority (i.e. an owner, such as a business) to function like everyone else. Preferably, the maintenance of the database is a function of the decentralized Bitcoin network (i.e. the ecosystem of the participants).
Decentralization has both advantages and disadvantages, the main virtue of Bitcoin being its immutability. However, this robust integrity comes at a cost. Bitcoin database update is very slow.
Bitcoin’s database loyalty is as innovative as it is potentially valuable. Satoshi Nakamoto’s vision – the mythical creator of Bitcoin – was to serve as a trustless system for electronic transactions, “a purely peer-to-peer version of electronic money”. In other words, Bitcoin’s initial vision was as a payment platform to transmit value efficiently and affordably, i.e. electronic currency . This differs from current systems, which are slow, expensive, cumbersome, and the result of Byzantine regulations.
While I find Bitcoin’s technology promising, it is nevertheless more potential than reality. There is little evidence that Bitcoin is used much for anything other than financial speculation. There is a big disconnect between the price of Bitcoin and its use in transactions – its usefulness. The first exploded exponentially while the second stagnated .
Transaction volumes do not seem to have d ‘impact on the price of Bitcoin.
Of course, the world is becoming digital. However, there is little evidence that Bitcoin – or any other existing cryptocurrency – is needed to realize this future. Despite (alleged) hordes of smart people working on cryptocurrency-related projects, Bitcoin is currently little used. His prospects are resolutely forward-looking and far from certain . So while I hope for the success and mass adoption of Bitcoin, I see it as another “Sardine trade ” for the time being.
There is the old story of the market craze in the sardine trade when sardines disappeared from their traditional waters in Monterey, California. Commodity traders pushed them up, and the price of a can of sardines soared. One day a shopper decided to buy an expensive meal and actually opened a can and started to eat. He immediately fell ill and told the seller that the sardines weren’t good. The salesperson said, “You don’t understand. These don’t eat sardines, they sell sardines.
Seth Klarman, margin of safety via ValueWalk
My Bitcoin framework
Calling Bitcoin a commercial sardine is no big deal. There is a lot of money to be made in his speculation. For me, until I could measure it in my frame, I was hesitant to spend large sums on it. After all, everyone needs an investing philosophy, whether we know it or not. While I see Bitcoin’s promise, I also see fanatics taking a break from me.
For me, Bitcoin fits into two distinct strategies. The first is purely dynamic trading. I want to trade its trend. This could be very important as most investors seem to be building up positions with no intention of selling. Thus, the emergence of increasingly important players, such as institutions, could have disproportionate price implications on the limited supply of Bitcoin in circulation. (The opposite is also true!)
MassMutual bought $ 100 million in Bitcoin for its general investment fund, the last mainstream company to venture into digital assets.
My second strategy is value driven. I too am in love with the potential of Bitcoin to transform financial services. If Bitcoin were to be mass adopted, its price would surely increase as the demand for use cases met the fixed supply. However, I have a shallow belief in this. First, I’m skeptical that this will happen given the sheer amount of regulation in the space. Moreover, I am not convinced that Bitcoin would necessarily emerge as the winner if my capitalist utopia were to materialize.
The above is an illustration of the way I turn my perspective on Bitcoin into a real investment.
So, I find it difficult to commit large sums to either exchange. However, I am still able to participate by managing the size of my post. I keep them small, given my skepticism. Of course, these are my opinions . Others will have different views and exposures.
Deconstructing Bitcoin into specific trades helps
Bitcoin is perhaps the most emotionally charged investment asset of my career. His supporters give a skeptical air to supporters of gold, Tesla or even home ownership. While their zeal raises a giant red flag for me, I also don’t want to write off Bitcoin by reflex. Instead, I try to dissect the theses, analyze his outlook, and devise a potential plan to trade them.
I see two potentially different ways of profiting from Bitcoin. The first is a dynamic strategy. I want to follow its trend. The second is a fundamental vision based on value. If Bitcoin can serve as the backbone for a next-generation financial services industry, then demand will surely increase.
To be sure, I have a weak belief in both strategies. However, by isolating these views within my framework, I can now systematically allocate capital to everyone with more confidence by tailoring the size of my position to my belief.
The future is still unknowable. This is what investors do best to assess financial risk. While emotions provide valuable signals, further analysis can often improve their usefulness.