7 Things To Read About Bitcoin (For Institutional Investors)
May 2020
After some quiet years, Bitcoin is top of mind again. We recently published a paper ("Bitcoin for the Open-Minded Skeptic") to help demystify Bitcoin for a new cohort of investors.
Many investors and institutions ask us: what else should we read to get smarter on Bitcoin? Here are some favorites.
1. Wences Casares (Mar 2019)
Wences is the founder of a Bitcoin wallet company (Xapo) and a board director at Paypal and Libra. Wences saw Bitcoin's potential early and is credited as "Patient Zero" for introducing many investors (especially in Silicon Valley) to Bitcoin.
In 2019, Wences finally put his Bitcoin thesis on paper in "The case for a small allocation to Bitcoin":
Bitcoin is a fascinating experiment but it is still just that: an experiment. As such it still has a chance of failing and becoming worthless. In my (subjective) opinion the chances of Bitcoin failing are at least 20%. But after 10 years of working well without interruption, with more than 60 million holders, adding more than 1 million new holders per month and moving more than $1 billion per day worldwide, it has a good chance of succeeding. In my (subjective) opinion those chances of succeeding are at least 50%. If Bitcoin does succeed, 1 Bitcoin may be worth more than $1 million in 7 to 10 years. That is 250 times what it is worth today (at the time of writing the price of Bitcoin is ~ $4,000).
Wences goes on to poignantly share his personal journey to Bitcoin, after growing up in Argentina and seeing his family lose their entire savings three times:
I grew up in Patagonia, Argentina, where my parents are sheep ranchers. Growing up I saw my family lose their entire savings three times: the first time because of an enormous devaluation, the second time because of hyperinflation and the last time because the government confiscated all bank deposits.
It seemed like every time we were recovering, a new and different economic storm would wipe us out again. My memory of these events is not economic or financial but very emotional. I remember my parents fighting about money, I remember being scared, I remember everybody around us being scared and returning to desperate, almost animal like behavior. I also remember thinking how unfair it was that these crises hit the poor the hardest.
People who had enough money to get some US dollars protected themselves that way, people who had even more money and could afford to buy a house or apartment protected themselves that way, and people who had even more money and could have a bank account abroad protected themselves that way. But the poor could not do any of those things and got hit the hardest.
When I saw the emergence of the Internet I was young and idealistic and I sincerely thought the Internet was going to democratize money and fix money forever. But it has been 30 years since the Internet was created and it has fixed many problems but increasing economic freedom is not one of them.
I was about to give up hope for the Internet to fix this problem when I ran into Bitcoin by accident. At first I was very cynical but the more I learned about it the more curious I became, after six months of studying and using Bitcoin I decided to dedicate the rest of my career, my capital and my reputation to help Bitcoin succeed.
Nothing would make me prouder than to be able to tell my grandkids that I was part one of a very large community who helped Bitcoin succeed. And that because Bitcoin succeeded now billions of people can safely send, receive and store any form of money they want as easily as they can send or store a picture. So that what I saw happen to my parents and countless others can never happen again.
2. Paul Tudor Jones (May 2020)
Paul is one of the most highly regarded macro traders of the past thirty years and the founder of hedge fund Tudor Investment Corporation. In his May 2020 letter to investors, he predicts a "Great Monetary Inflation" and reveals a Bitcoin investment:
But the [Great Monetary Inflation] caused me to revisit Bitcoin as an investable asset for the first time in two and a half years. It falls into the category of a store of value and it has the added bonus of being semi- transactional in nature. The average Bitcoin transaction takes around 60 minutes to complete which makes it “near money.” It must compete with other stores of value such as financial assets, gold and fiat currency, and less liquid ones such as art, precious stones and land. The question facing every investor is, “What will be the winner in ten years’ time?”
At the end of the day, the best profit-maximizing strategy is to own the fastest horse. Just own the best performer and not get wed to an intellectual side that might leave you weeping in the performance dust because you thought you were smarter than the market. If I am forced to forecast, my bet is it will be Bitcoin.
3. Marc Andreessen (Jan 2014)
Marc is the cofounder of venture capital firm Andreessen Horowitz (a16z) and previously the cofounder of Netscape, which was pivotal to the rise of the Internet. In 2014, Marc wrote Why Bitcoin Matters as an op-ed for The New York Times:
A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers.
Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt and scorn on it.
On the other hand, technologists – nerds – are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with it.
Eventually mainstream products, companies and industries emerge to commercialize it; its effects become profound; and later, many people wonder why its powerful promise wasn’t more obvious from the start.
What technology am I talking about? Personal computers in 1975, the Internet in 1993, and – I believe – Bitcoin in 2014.
4. Bill Miller (Sep 2015, Nov 2017)
Bill is the founder of Miller Value Partners, former portfolio manager at Legg Mason Capital Management, and famed value investor. In 2015, Bill wrote about Bitcoin from a value investor's perspective:
Stylized views of value investing often invoke low accounting multiples, but we try to take a broader definition of “value” in our pursuit of assets trading at substantial discounts to their intrinsic value. Our approach is a probabilistic one, meaning that we try to think about various potential states of the future that could affect an asset’s value. We then determine what an asset could be worth under a handful of representative scenarios, multiply each scenario’s value by the probability we think it could occur, and sum up the values to get a “central tendency of value.” Our thought process on Bitcoin is a representative example of our probabilistic value approach, even though the asset may not hit the radar screens of more traditional value investors. So, we will first briefly introduce Bitcoin and then talk about a framework for valuation.
In 2017, Bitcoin reached new all time highs and elicited vocal skepticism from many. Bill captured this skepticism well and offered his response:
Recently, there’s been an unusual confluence of opinion by some of the world’s best and most sophisticated investors, financial executives and academics about an investment we hold in some client accounts: Bitcoin. Jamie Dimon, Ray Dalio, Howard Marks, Larry Fink, Bob Shiller and Paul Krugman all are on the record with comments on the cryptocurrency. Dimon called it a “fraud” and people who owned it “stupid;” Dalio said it was a “bubble;” Marks referred to it as “an unfounded fad;” Fink said its price was an “index of money laundering;” Shiller said it was the “best example” of a bubble right now; and Krugman had previously proclaimed it “evil.” In a CNBC interview in 2014, Warren Buffett advised investors to stay away from it and called it a “mirage.” He said the idea that it had some “huge intrinsic value” was “just a joke in my view.”
In general, I think the strongly held negative views on Bitcoin fall under the rubric “new things, old thinking.” Whenever we are confronted by something we haven’t seen before we try to understand it by assimilating it to something we have seen before or that we think we understand. We reason by analogy, or we employ metaphors that seem to fit. Sometimes this is effective, other times not. As we gain greater understanding and experience, our thinking becomes (hopefully) better and more accurate.
5. Murray Stahl (Oct 2017)
Murray is the founder of Horizon Kinetics, a value-oriented investment adviser. In 2017, Murray wrote about cryptocurrency's potential to protect against long-term erosion of purchasing power:
A major reason that academics and the mainstream investment business do not accept cryptocurrency as legitimate is because modern portfolio theory defines risk as price volatility. Cryptocurrency has been far more volatile than even the most volatile equity class. Yet, in a historical, rather than day to day or year to year context, the great investment issue has never been control of volatility. It has been the retention of purchasing power or, stated differently, defense against the erosion of purchasing power—the contest of unending government efforts to debase the value of money versus the struggles of the citizenry to resist debasement.
To put this in relatable terms, here are just two examples of the mind-numbingly long history of government monetary policy, domestic and foreign, recent and ancient, to debase their currencies. Over any saver’s lifetime, this can be devastating.
- The Roman Empire debased its coinage for 2,000 years. As one example, during the 73 years between Marcus Aurelius’s reign ended in 180 CE and the beginning of the reign of Emperor Gallienus, the denarius silver coin was debased from 75% silver to only 5%, by which time the silver was just a surface coating that would wear off. That is 93% depreciation, which works out to about 3.6% per year.
- Staying with the 73 year timeframe, from 1943 to 2016, the U.S. dollar likewise lost 93% of its purchasing power, based on an annualized inflation rate of just over 3.6%. For most of that period, though, U.S. citizens could earn a comparable yield on their bank deposits or treasury bills, so that purchasing power could be maintained. That’s not been the case over the past ten years, though, since short-term interest rates have been kept near zero; today, money really does earn a negative return.
6. John Pfeffer (Dec 2017)
John is a entrepreneur and investor and previously a partner at KKR for over 10 years. In 2017, John wrote An (Institutional) Investor's Take on Cryptoassets:
Blockchain technology has the potential to disrupt a number of industries and to create significant economic surplus. The open-source nature of public blockchain protocols, combined with intrinsic mechanisms to break down monopoly effects, mean that the vast majority of this economic surplus will accrue to users. While tens or perhaps hundreds of billions of dollars of value will also likely accrue to the cryptoassets underlying these protocols and therefore to investors in them, this potential value will be fragmented across many different protocols and is generally insufficient in relation to current valuations to offer a long-term investor attractive returns relative to the inherent risks.
The one key exception is the potential for a cryptoasset to emerge as a dominant, non-sovereign monetary store of value, which could be worth many trillions of dollars. While also risky, this potential value and the probability that it might develop for the current leading candidate for this use case (Bitcoin) would appear to be sufficiently high to make it rational for many investors to allocate a small portion of their assets to Bitcoin with a long-term investment horizon.
>> An (Institutional) Investor's Take on Cryptoassets, Dec 2017
John also presented his Bitcoin investment thesis at the 2018 Sohn Investment Conference (Youtube).
7. Vijay Boyapati (Mar 2018)
Vijay Boyapati was an early Google engineer who wrote "The Bullish Case for Bitcoin" in March 2018. As a self-described adherent to Austrian Economics, Vijay infuses his thesis with ideology not uncommon throughout the Bitcoin community. Although such ideology may or may not appeal to every investor, Vijay nevertheless provides a sharp and thorough overview of Bitcoin and its potential as a new monetary asset.
Here's one excerpt on the evolution of money in stages:
There is an obsession in modern monetary economics with the medium of exchange role of money. In the 20th century, states have monopolized the issuance of money and continually undermined its use as a store of value, creating a false belief that money is primarily defined as a medium of exchange. Many have criticized Bitcoin as being an unsuitable money because its price has been too volatile to be suitable as a medium of exchange. This puts the cart before the horse, however. Money has always evolved in stages, with the store of value role preceding the medium of exchange role.
One of the fathers of marginalist economics, William Stanley Jevons, explained that:
Historically speaking … gold seems to have served, firstly, as a commodity valuable for ornamental purposes; secondly, as stored wealth; thirdly, as a medium of exchange; and, lastly, as a measure of value.
Using modern terminology, money always evolves in the following four stages: collectible, store of value, medium of exchange, and unit of account.
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