All day long in my Twitter feed these days. Quiet are the Tesla bears (NASDAQ :), the Fed-obsessed, and even the gold bugs. The HODLers are out in full force celebrating a parabolic revival, seven times Bitcoin from the ashes of $ 5,000 (as of the morning of this writing). Actually, I’m skeptical of Bitcoin. I see it as a speculative technology stock, not digital currency. However, I am not avoiding the cryptocurrency. Instead, I try to determine an appropriate position size and strategy that is consistent with my investment framework.
I’ve been around the Bitcoin ring for a while now. I traded a very small amount in the early days and made no significant gains (in absolute terms). At first, I was drawn to the prospect of decentralized money and banking – the hypothetical a practical benefits that cryptocurrencies may have. However, I was expecting more 12-year development into the existence of Bitcoin. For me, technology stock in 1999 is still more like a growing currency – all potential; no functionality (meaningful) (yet).
While I am certainly not the most plugged into the cryptocurrency scene, I am informed. Given Bitcoin’s lofty market capitalization ($ 666 billion as of this writing) —to maintain one Walmart (NYSE :), Johnson & Johnson (NYSE :), and all but a handful of blue-chip companies – I’m surprised Bitcoin has that still has little usefulness compared to these household names. Surely some people use Bitcoin, but the vast majority seem to record it in hopes of higher prices.
Value Is Utility, Even for Money
Value, in my opinion, requires usefulness. Therefore, “intrinsic value” is illogical. I don’t see how something can have value in itself; just because it exists. To have value, an asset must have a value i someone; a.ka. a worth-while.
Material objects as such have no value or value; they acquire the significance of value only in terms of existence – especially in serving or obstructing man’s goals. – Ayn Rand, “From the Horse’s Mouth,” Philosophy: Who Needs It
Food, housing, entertainment, art, etc. all serve purposes for buyers of such 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? Birthed oil refining utility was invented into the previously useless sludge transforming it into black gold we know as today.
Money is no different. It fulfills a human purpose from which it derives its value. Money is a measurement concept for economic value. It quantifies value, making it transferable among people and thus facilitating trade. Just as there could be no houses, cars, or smartphones without standards of length (feet, inches, meters) or time (seconds, hours, days), modern economies require financial standards.
Bitcoin is not Money (and probably never will be)
Bulls usually consider Bitcoin to be the future of money. To be honest, I don’t see it. Simply put, money is a unit of account in my opinion; a specific type of measurement used to match economic value. Money is not constitutes the medium of exchange or store value. Although these functions are necessarily named in money terms, they are, in my view, different concepts. This correlation only exacerbates confusion.
My delineated – if not uncommon – definition of money highlights Bitcoin’s challenge here. Until you are paid by your employer or buy goods in units of Bitcoin, it will not be a common measure of economic value. People will mentally convert any Bitcoin transactions to the local financial standard (dollars, euros, yen, etc.), no matter how splashy the headline.
However, an actual reading of the details reveals that the team actually paid it in dollars (ie fiat). Half of his salary will be automatically converted to Bitcoin at the spot rate. Using similar logic, Okung is also paid in food, clothing and cars.
That said, the fact that Bitcoin is not money does not make it worthless. His supporters make other reasonable assertions that can be systematically analyzed after unpacking Bitcoin from its numerous slogans. These other use cases are more credible, in my opinion, and possibly give Bitcoin its value.
The Value of Bitcoin is Everyone in the Future
When you boil it all down, Bitcoin is basically a database. Its innovation is in the way it is conducted. Bitcoin does not require any central authority (i.e. owner, as a company) to act like everyone else. Instead, its database is maintained by the decentralized Bitcoin network (i.e. the ecosystem of participants).
Devolution brings both benefits and disadvantages. Bitcoin’s main virtue is its immobility. It is very difficult to change unilaterally. However, this firm integrity comes with a cost. Updating the Bitcoin database is very slow.
The fidelity of the Bitcoin database is as innovative as it could be valuable. Satoshi Nakamoto – the legendary creator of Bitcoin – had the vision of serving as a non-trusted system for electronic transactions; “Peer-to-peer version of electronic cash only.” That is, Bitcoin was initially envisaged as a payment platform for efficient and cheap transfer of value – ie electronic currency. This is in contrast to today’s systems which are slow, expensive, cumbersome, and the result of byzantine regulations.
While I find Bitcoin technology promising, it nonetheless has more potential than reality. There is little evidence that Bitcoin is used much for anything other than financial speculation. The price of Bitcoin is completely disconnected from its use in transactions – its usefulness. The former has soared exponentially while the latter has stagnated.
Transaction volumes do not appear to affect Bitcoin price
To be sure, the world is digitizing. However, there is little evidence that Bitcoin – nor anyone else exists cryptocurrency – required to operate this future. Despite a (alleged) mass of smart people working on cryptocurrency-related projects, currently there is little use for Bitcoin. Its prospects lie firmly in the future and are far from certain. So while I am optimistic about Bitcoin’s success and mass adoption, I see it as another “trading sardine” for the time being.
There is the old story of the market lust in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The merchants offer them and the price of a can of sardines increased. One day a buyer decided to treat himself to an expensive meal and open a can and actually start eating. He immediately became ill and told the seller that the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines. ”- Seth Klarman, Margin of Security via ValueWalk
My Bitcoin Framework
Calling Bitcoin a trading sardine is not a knock. There is clearly good money to be made from speculation. For me, until I was able to increase it in my framework, I’ve been shy of committing meaningful amounts of capital to it. After all, everyone needs an investment philosophy whether we know it or not. While I see the promise of Bitcoin, I also see a seal giving me a break.
To me, Bitcoin fits into two different strategies. The first is just momentum trading. Simply put, I want to trade its trend. This could be very significant as most investors appear to be accruing positions with no intention of selling. Thus, the emergence of more and more players, as organizations, could have overcome the price implications of the limited supply of Bitcoin that is actually circulating. (The opposite is true too!)
My second strategy focuses on value. I have also been amazed by Bitcoin’s potential to transform financial services. If Bitcoin were adopted as a mass, then surely its price would not rise as the use case demand met the stable supply. However, I have very low conviction in this. First, I’m skeptical that it will actually happen given the huge amount of regulation in space. Furthermore, I am not convinced that Bitcoin would necessarily emerge as the winner if my capitalist utopia were to occur.
The above is an example of how I am transforming my views on Bitcoin into a tangible investment
So, I have a hard time committing significant amounts of capital to either trade. However, I am still able to participate by controlling the size of my job. I keep them small given my skepticism. Of course, these are my opinion. Others will have different perspectives and different expositions.
Deconstructing Bitcoin into Specific Trades Helps
Bitcoin is perhaps the most emotional investment asset of my career. His supporters make opponents of gold, Tesla, or even home ownership look suspicious. While their seal raises a huge red flag for me, I also don’t want to retroactively delete Bitcoin. Instead, I’m trying to pull off the thesis, analyze its prospects, and come up with a possible plan for its trading.
I see two potentially different ways to benefit from Bitcoin. The first is a momentum strategy. Simply put, I want to follow his trend. The second is a basic value-based view. If Bitcoin can serve as the backbone of the next generation financial services sector, then demand is bound to increase.
To be sure, I have low conviction in both strategies. However, by isolating these views within my framework, I can now begin to systematically allocate capital towards each with greater confidence by increasing the size of my post to my conviction.
The future is always unknown. The magnitude of financial risks is what investors do best. Although emotions provide valuable signals, further analysis can often enhance their utility.