This time I’m going to adress a very sizzling and controversial topic: Bitcoin and the so called emerging cryptoassets class, perhaps I should discuss the whole crypstoassets in general but being $BTC the most relevant and representative of them all I’m going to personify my thoughts on it, as I write this lines Bitcoin accounts for 61% of all cryptocurrencies aggregated market cap and trades for 7.177$ per Bitcoin.

A special mention should be granted to Ethereum for its relevance, second currency by cryptocurrency market capitalization, and for its unique properties.

Nonetheless I believe the same logic and arguments I’m about to expose apply to them both and by extension to any other smaller cryptocurrencies out there.

A lot has been written in the recent times regarding crytocurrencies, I’m going to treat the topic from an investor’s point of view, which by definition differs from technological, speculative or trading approaches. 

The biggest missconceptions regarding Bitcoin

Market actors are assuming the success of the technology implies the success of the asset class.

And one doesn’t necessarily imply the other. E.g. the Internet emergence and revolution has changed our lives and the economic paradigm, however, it hasn’t been until relatively recently that Internet related companies have become profitable widespread quality assets. The Dot-com bubble is the greatest example of how the success of the technology ≠ the success of the assets related to it, at least not initially.

Bitcoin = Asset/Currency

Blockchain = Technology
Market actors are wrongly assuming the adoption of the Blockchain technology by large corporations and other traditional market actors implies the success of the underlying cryptoasset related to them. 

Again the same missconception, some traditional players are implementing private blockchains within their business ecosystems, nonetheless given the opensource nature of the blockchain protocols, that means anyone can freely take the code and use it for their own purposes, that has absolutely no real impact on the underlying asset. E.g. JPM Quorum has no impact on Ethereum prices, the same way companies using TCP/IP protocols doesn’t make any technological companies benefit from it per se.

While many actors believe they are investing, the Greater Fools Theory is in place.

That is, Bitcoin is being bought on the expectation that a greater fool is going to pay a higher price for it in the future and not because it holds any intrinsic value. Most of the market participants believe there will always be a greater fool ready to buy when they want to cash out, until there’s not.

There’s nothing new under the sun, such market dynamics have taken place in numerous occasions through markets history.

Case studies: Tulip Mania & South Sea Company Stock, Dot-com bubble
There is plenty of information on the internet regarding these cases, you can do your own research and traze the parallelisms.

Two friends meet in the street, and Jim tells Sue he has some great sardines for sale.  The fish are pedigreed and pure-bred, with full papers and high IQs.  They were individually de-boned by hand and packed in the purest virgin olive oil.  And the label was painted by a world-renowned artist.

Sue says, “That sounds great.  I could use a tin.  How much are they?” and Jim tells her they’re $10,000.  Sue responds, “That’s crazy, who would eat $10,000 sardines?”  “Oh,” says Jim, “these aren’t eating sardines; these are trading sardines.”

The Bitcoin “investment” ecosystem believes they are the smartest boys around while the reality is the whole community is dominated by arrogant, overenthusiastic fanatics, fueled by emotions who will refuse to even listen to anyone who holds a view other than theirs.

Note: Here I refer to the investment-trading ecosystem not to the technological-developer one which shows a completely different attitude and approach most of the time.

This could sound like a highly anecdotical and subjective glimpse but I’m afraid the reality backs me up here. A walk around any forum, chat, Twitter, community and so forth where Bitcoin/cryptocurrencies are discussed will show you I’m not exaggerated.

I’ve seen it all, from plenty of people trading solely based on TA indicators to people throwing accurate price predictions based on mathematical models.

Those not owning the asset are regarded as stupid and the argument of how much money they have missed for not having betted on BTC is often used.

Many market participants are focusing all their investment capabilities on a single cryptoasset or a basket of them, forgetting principles like diversification and focusing solely on the upside potential while totally ignoring the risk management of their portfolios.

This arrogance, lack of humilty and self-criticism could be an indicator of extreme market mania. Such attitudes are simply a recipe for disaster.

While cult followers believe Bitcoin’s use as a medium of exchange justifies it’s price a paradox comes into play.

Allegedly Bitcoin is supposed to be a currency, however its acceptance as such is still quite small and niche, its value relies on the possibility to exchange it for fiat currency, mainly USD, that is, it relies on the liquidity of the market to provide a widely accepted fiat currency in exchange.

Then the paradox comes into play, the faster and higher Bitcoin prices rise the less it makes sense to use it as a currency because…who would be willing to pay for a product or service with something that it’s going to be worth twice as much tomorrow than today? You rather stock as much of that as you can waiting for it to multiply its value.

While most actors in this particular market believe they are somehow able to assess Bitcoin’s value all they are doing is pricing it.

Aswath Damodaran Professor of Finance at the Stern School of Business at NYU sums it up in a great fashion on the following table:

Be that as it may not everything is so dark

Everything I’ve said above I believe it to be a good description of the current picture regarding Bitcoin, obviously, otherwise I wouldn’t have stated it. Nevertheless not everything is pessimistic nor bubblish and this is exactly why I find markets so interesting, the juxtaposition of views is constant but in the end the market puts everyone on their place…or does it? Since we are only aware of all the bubbles that exploded but what about these that never burst?

It could be the XXI century gold

Gold has traditionally been seen as a sort of currency and store of value, if a fraction of the faith, that is the amount of capital put into gold transfers into Bitcoin or the new inflows move towards BTC instead the prices could go much higher.

Because what’s Gold after all? Simply a big enough and widespread consensus that grants it store of value properties, so far nothing has contested gold in this fashion but that doesn’t necessarely have to stay like that forever.

Doing a few numbers shows us the potential upside for Bitcoin in case it managed to acquire such status.

Whether you like it or not Bitcoin has some superior properties that no other asset possess

First of all it’s deflationary, the total supply of Bitcoin is determinated by a given set of mathematical rules and no arbitrary political entity can artificially modify it, unlike it happens with fiat currencies.

The cost to store it is basically non-existant, it’s easily transferable and highly divisible, also it grants privacy and annonymous payments. It’s a decentralized system which makes it less prone to be hacked and to gubernamental control or censorship.

I could keep going on but its technological kindnesses are well known, to sum it up, its properties are way superior to gold or fiat ones as a potential store of value and medium of exchange.

Bitcoin has a moat

It has obvious network effects, the more people and businesses accepting it the faster it will expand and the higher the amount of market agents assessing it as a store of value the more it can consolidate itself as such.

It is a brand, Bitcoin is widely recognized as the main cryptocurrency and the more this idea permeates throughout the market participants the bigger its moat might grow.

Conclusions

I’m aware this is a highly controversial topic among the investment community, Bitcoin has what I would call a cult supporting it but also huge detractors behind.

Personally I like to stay in the middle ground, always observant from the center of the classroom and trying to come up with my own conclusions, while it’s obvious I’m highly skeptical regarding BTC-as-an-investment I believe it’s a good investor trait to be able to maintain a given vision when one is sure about it but also to remain openminded. It’s also as fundamental to being able to quickly change our minds whenever the facts change or new information is added.

Too low resistance makes us prone to herd behaviour but too much rigidness turns us vulnerable to fracture.

As for the time being I don’t own any Bitcoin or any other cryptocurrencies and I don’t plan on doing so in the near term. I strongly believe that right now prices of such assets are solely based on speculation, the Greater Fool Theory and the fear of missing out which all lead to herd decission making and eventually to disaster.

Inflows are being prompted by past returns and the risk appetite seems to be insatiable, moreover I would say risk is not even being taken into account.

You want to take risk when others are fleeing from it, not when they’re competing with you to do so.

 

Here timeless Howard Marks quotes some characteristical bubble checks that I believe apply to this case:

If that’s going to be the case forever only time will say, meanwhile I’ll keep observing. It shouldn’t be different this time, should it?


So far so good these are my thoughts on the matter, this ideas have been going on in my mind for the past months and I thought it was about time to write them down.

If you want more sound and articulate opinions on this topic I can recommend you three pieces I consider a must:

There They Go Again…Again

Yet Again

The Bitcoin Boom: Asset, Currency, Commodity or Collectible?

Thanks for reading!

Notes: Along the article I don’t make any distinction between cryptoassets and cryptocurrencies which is absolutely wrong but I think it works just fine to achieve the purpose of the article which is to think over Bitcoin. I also make references to currencies market capitalizations which is technicaly wrong yet I apply the same principle as with the previous case.