What caught my eye this week.
People are increasingly reluctant to call bitcoin’s parabolic rise a bubble. With the price hitting $11,000 this week, those who dismissed it as a fad or a fraud at $100 look like idiots.
Those who own bitcoin get it. Those who don’t are antediluvian relics.
There’s nothing like a profit to turn people into prophets.
For what it’s worth (not much) I think bitcoin is in a bubble. Probably.
I’ve spent some time this year trying to understand bitcoin, cryptocurrencies, and blockchain – the distributed ledger technology that drives them – better.
I think I’ve succeeded. This summer I had a eureka moment when I finally got that bitcoin was a financial architecture as much as it was a currency or a store of value, and that owning some meant investing in that platform.
I even thought about buying a little. Alas, bitcoin had just hit $2,500 and I’m cheap.
So I didn’t.
Oops!
Having nerdy friends from my university days means bitcoin bubbled into my consciousness years ago. I even have the archetypal friend who mined them when you could do so without a liquid nitrogen cooled garage full of Chinese programmers.
My friend used his self-mined bitcoins to buy an Apple iPad.
Oops!
Eleven reasons why the price of bitcoin may be a bubble
I’ll spare you a primer on the technology (plenty exist – see the links below). Instead here are some random thoughts as to why I think it’s probably a bubble.
1. This graph
Source: WSJ
There might be another widely traded security that has gone up like that and not come down. But I can’t think of it.
2. It’s too volatile to be a currency
A useful currency can’t go up and down 20% against the dollar in 24 hours. If it’s not (at least partly) a currency, then what (partly) is it? If it is a currency then it will have to stabilize. Have we happened upon the right price, right now? Seems unlikely. Are prices going up because they can? Seems likelier.
3. Its ascent is being talked about everywhere
Everywhere! Great sign of a bubble.
4. Seriously, even my girlfriend told me about her bitcoin
I’ve yet to see a woman quoted in an article about bitcoin, which does weaken the bubble case (it might suggest there are still huge demographics to be pulled in). Perhaps it’s begun, though. Plenty of women are into investing. Many are even readers of this blog. My girlfriend is neither. Yet this week she – well – boasted about the value of a fractional bit of bitcoin she picked up along the way. She’s never talked about shares, ISAs, bonds, interest rates, pensions – not even property prices.
5. The overnight wealth creation seems to defy common sense
At $11,000, bitcoin has a market cap of $185bn. Is it reasonable that $185bn has been magicked out of nowhere just because sufficient people believe their bitcoins are worth $11,000 a pop? Perhaps it’s not so ridiculous. Fractional reserve banking means High Street banks add to the money supply all the time. Or is it so different from a stock market being worth 1% more today than yesterday? While $185bn is a big number, it’s a tiny fraction of the world’s wealth. On the other hand, surely that valuation should be tethered to, well, something? States and fiat currencies at least have armies and taxes. And gold has rappers’ teeth. If bitcoin really is on its way to becoming a hybrid of gold and the US dollar, then I can just about accept its rapidly created market cap, except…
6. Governments will want a piece of the action
The bitcoin market is unregulated, and the bitcoin network is creating a store of wealth without governments getting any. Until governments are fully involved, I think the price can’t be trusted. What’s to stop them banning it? Fine, they’d fail, but is the average citizen going to risk breaking the law for an illicit floating world currency – let alone the average billionaire?
7. The price is self-limiting
The higher the price of bitcoin climbs, the less likely people will want to spend their bitcoins. Can it function as a currency then? Hmm, I say. It could still be a store of value though.
8. There are questions about the technology
Initially touted as incorrigible, the cryptocurrency has been splitting. Just keeping the show on the road already consumes as much energy as Ireland. Then there are the hacks that shake faith in a digital currency much more than a bank heist. (Although really stealing bitcoins from a digital wallet or store is just the same. The integrity of the blockchain is the important thing.) Questions about technology don’t mean it’s necessarily a bubble – and they don’t mean it (or blockchain) won’t succeed. Rather, this could be the equivalent of a video-on-demand Internet service in 1999 – right idea, wrong time. But for me these issues do make it harder to trust the price action.
9. Initial coin offerings
Do you know about ICOs? They are unregulated funding rounds for would-be the next bitcoins that have raised more than $3bn globally. Pretty much on the back of napkins. There’s now an estimated 1,200 new digital crypto-currencies out there. On the one hand they might seem to validate the concept – even the failure of all but a couple to gain traction might support the rising price of bitcoin, because it has gained traction. But on the other hand… really? Doesn’t this seem a little, well, nutty? Just a bit?
10. Company name changes
Companies are changing their names to mention bitcoin and seeing their valuations soar. (Here’s a British example, and a US one). Again, not slam dunk proof, but we’ve seen this movie before. Famously, adding ‘dotcom’ to a company name in the late 1990s spiked the price. More recently, I recall a tiny UK music technology firm that changed its name to something to do with rare earth mining at the top of the commodity cycle. At least, it suggests a speculative aspect at play.
11. I’m writing about it
I’ve mostly tried to keep cryptocurrency off this site because it just seemed too iffy. But here I am, adding my two pence worth. When the last blogger turns, you know a bubble is upon us.
True, some telltale signs are missing. For example I haven’t yet heard of babies named Bitcoin or Ethereum. [Update: Reader E. wrote to let us know that baby Bitcoin was recently born and named in the Crimea.]
Football managers are also getting in on the action.
A bubble does not mean a permanent bust
To end on a hypocritical ass-covering note, I’m not really sure bitcoin is a bubble.
It looks like one, smells the same, and has a letter from its mum. But occasionally the world does change. Perhaps this is one of those times.
I’m also not calling a top. Bubbles can keep climbing for years, and it’s easy to see more catalysts for bitcoin.
Think back to how the first exchange traded gold funds seemed to stoke that boom. Bitcoin futures will arrive in a couple of weeks, and I suspect ETFs will follow.
If bitcoin ETFs track the price by investing in bitcoins (rather than synthetically) then they’ll surely boost the price, at least initially. It’s still a hassle to buy bitcoin, compared to adding some alongside your trackers and bond ETFs on Hargreaves Lansdown.
Millions more punters could flood in and send the price skyrocketing! Or the ETF-afication of bitcoin could strip it of its mystique and the price could crash. Who knows?
A price collapse wouldn’t necessarily mean the end of bitcoin or blockchain, any more than the bursting of the dotcom boom halted the Internet.
Bitcoin could go on to be a household name for the rest of our lives, something we all might use. Perhaps it is the future of currencies? Maybe it is a new store of value?
It seems unlikely that blockchain technology will go away anytime soon – it’s too easy to think of applications. (As a would-be home buyer I’d love all the information pertaining to my potential purchase to have been recorded and distributed for everyone to see. It would save hundreds of emails, dozens of letters, and a wodge of money).
But bitcoin right now?
If it walks like a duck and talks like a duck, it’s a duck.
And Bitcoin is probably a duck.
I mean a bubble.
- Good Bitcoin primer (with more at the bottom) by Bloomberg Business
- This Motley Fool podcast is another excellent introduction [Podcast]
- Patrick O’Shaughnessy’s superb Hash Power series goes deep [Podcast]
- Smart take on the mania aspect – The Reformed Broker
News
Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1
RBS to close 259 branches – Guardian
Tenancy overhaul in Scotland hailed as new dawn for renters – Guardian
UK housing stock tops £6tn for first time – Hargreaves Lansdown
UK consumer credit growth falls to 18-month low – Guardian
Goldman Sachs warns valuations are at their highest since 1900 – Bloomberg
Under-performing Neil Woodford also sees a bubble – Telegraph
Budget reveals the savings ratio crashing towards 30p in £100 – ThisIsMoney
(Click to enlarge)
Wind and gas already beat coal on cost in US; solar close behind [PDF] – Lazard (& WSJ)
Products and services
P2P platforms rush to launch innovative finance ISAs [Search result] – FT
First time buyers: Use stamp duty drop to reduce your mortgage rate – ThisIsMoney
Fee-free mortgage deals could cost more than you think [Search result] – FT
How does your bank’s app score for useful features and safety? – ThisIsMoney
Fidelity puts numbers on its innovative variable fee fund – ThisIsMoney
New secured retail bond to pay 5.25%, but there are risks – Telegraph
Electric cars are cheaper to run than petrol or diesel (with subsidies) – Guardian
How to buy a perfect Christmas tree and when to put it up – Guardian
Five ETFs that deliver an income – ThisIsMoney
Comment and opinion
This record low volatility is setting us up for a fall – Econompic Data
The problem with performance-based fees – The Evidence-Based Investor
Rich People’s Problems: How to survive being fired [Search result] – FT
Destroy debt quicker: An easy and painless way to be more free – Financial Samurai
The downside of early diversification – Kitces
Markets don’t exist in a vaccum – Tony Isola
The FTSE 100 looks fair value – UK Value Investor
Getting your financial shit together is an emergency – The Escape Artist
John Kay on the meaning of the market [Podcast, three weeks old] – CapX
FIREhub.eu is a new aggregator of European financial blogs – FIREhub.eu
Even a passive Vanguard investor is a factor investor – Alpha Architect
Using options to stay invested in a pricey market [Podcast, for nerds like me] – Meb Faber
Off our beat
Taking back control [On Brexit] – Simple Living in Suffolk
Why 45-54 year old men are grumpy [US, but relevant to UK I suspect] – New York Times
“They don’t tell you why”: Threatened with removal after 52 years in the UK – Guardian
And finally…
“The main reason I invest is for the lifestyle and my hopes for the future. I am not talking about caviar or a nice house in the Caribbean. The stereotypical investor is usually summed up by things like that, but my experience has shown me the opposite is true. All the amazing investors I have met over the years share three traits: humility, frugality, and nerdiness.”
– (15-year old) Maya Peterson, Early Bird: The Power of Investing Young
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OK, that first chart is hilarious.
Below is the best introductory resource I have found. I’ve listened to many. It is a good dive into the tech:
http://investorfieldguide.com/hashpower/
All via a nice audio podcast, too. (The rest of the series is also great!)
I’d not invest in bitcoin because
1) If its a commodity, like gold, it has little intrinsic use, and I want my money to work, as I view value as integrated dividends.
2) If its a currency, its not a good one because of its volatility, liquidity (the transaction rate means it could take a long time to sell an investment) and cost of operation.
All currencies have an economic and environmental cost to run. The dollar has the US mint, much of the US banking system and arguably the Armed Services. Gold has all those people digging holes. Bitcoin seems to waste power, 3.4GW at the moment across the miner/verifying network, and the quoted 268 kWh per transaction, is it really that much for any transaction, like buying a coffee? I can see the logic in making bitcoins becomes exponentially more expensive in real world terms to stop inflation, but why is that linked to using the things. If that is intrinsic to the design, it should be shut down as an environmental evil, as there should be another way of funding a banking network.
South Sea Company.
268kwh per transaction! WTF!
That’s nuts
Does anyone actually know anyone who has become rich with bitcoin? I mean FI rather than iPad.
I wouldn’t touch it with yours.
“People are reluctant to call bitcoin’s parabolic rise a bubble.”
Are they?
There are thousands upon thousands of articles online calling bitcoin a bubble. Beneath any article of any type on bitcoin, there are comments about how it’s in a a bubble, with the obligatory comparisons to tulips or South Sea Co.
I do tend to agree though (currently selling a portion each time it breaks another thousand USD barrier). Very much in the “iPad” rich category rather than becoming FI category though, having bought £50 worth in 2013, primarily out of interest in the technological, philosophical aspects of it. Obviously regretting not having bought more…
First started selling when a homeless friend called me asking whether he should invest in bitcoin… Classic shoeshine boy tip moment I thought, but it’s gone up another 30% since.
I do worry about the number of people who are quite likely to lose money (particularly after my experiences trying to actually get cash out – much more difficult than getting cash in, to say the least – another factor which convinced me I should be selling).
P.S. Women and bitcoin:
http://www.telegraph.co.uk/investing/news/meet-real-life-everyday-bitcoin-investors/
@arty — I originally wrote “increasingly reluctant” then edited it this morning on a final read through. I have now put “increasingly” back in. I am mostly referring to the “great and the good” (ahem) of the financial world, who for my sins I watch getting interviewed on Bloomberg all week. E.g. Lloyd Blankfein (CEO of Goldman Sachs) pointedly didn’t call it a bubble this week, he just said it “wasn’t for him”. I think even a month ago he’d have been more strident. That’s what I mean. (Also cheers for the link!)
@all — I expect we’ll have a good debate about this, judging by the early comments! I’ve got official business (ha ha) all day so can’t add more now. Please keep it polite. (Not sure if bitcoin is yet attracting the sort of vehemence you see with gold bugs. Suppose we’ll find out.) I’ll be moderating as ever from my phone! 🙂
If my postman mentions Bitcoin I’ll short it.
Mined Litecoin for about 3 months as an experiment about 3 years ago while I had two days off when a contract of mine finished. Was about $3 dollars back then I think. Nice surprise to see all this craziness recently!
Sold a few coins about an hour ago to add to the others I sold earlier in the week leaving me with about half the coins I mined. Will probably just keep them to see how long this bubble lasts and sell the odd coin along the way.
Ok, it’s not Bitcoin, but a nice little profit for two days setup 🙂
I found the article linked below a useful summary of asset prices, with regards to bitcoin.
“Store of value” is a function rather than an asset class: something can only function as a store of value if it is naturally useful or desirable in some way. For example, commodities have value due to their employment in various industries and/or their intrinsic desirability, and equities generate an income. For bitcoin to act as a “store of value” it’ price should be anchored by its inherent value, which could always be volatile in dollar terms.
In terms of broad asset classes bitcoin is a “currency” rather than a commodity because its primary function is as a means of exchange; I find the analogies to gold (e.g. mining) misleading. For a currency to be useful its price needs to show some stability with regards to what is being used to trade; while the price of bitcoin is rising rapidly it will not be used as a means of exchange because holders will expect it to be worth more tomorrow. This is hyper-deflation.
Once bitcoin is primarily being used as a means of exchange rather than a speculative asset then it will gravitate towards its natural price, which could be very high in dollar terms if it is sufficiently useful as technology for trading. “How valuable is bitcoin as a means of exchange?” is difficult to answer at this point; nevertheless, it is an important question to consider.
https://aswathdamodaran.blogspot.co.uk/2017/10/the-bitcoin-boom-asset-currency.html
I think the South Sea Bubble is very comparable. Back then you had this new piece of financial innovation (the publicly listed company that you could buy and sell shares in) that was very poorly understood, but everyone knew was a big deal and had the potential to make people a lot of money. Hence everyone piling in! I think Bitcoin is the same. I think digital currencies WILL be a big deal, but we don’t really understand how they work, or even if Bitcoin is the one that everyone will wind up using. Just like the South Sea company.
For 268 kWh at 15p per kWh that works out at over £40 per transaction. Certainly no good for buying a coffee or even a tank of fuel. So not a very practical currency then.
Also the storing of all information within the algorithm seems to me to be a bit of a scammers dream. @TI image those property details (address, name, DoB, previous address, bank account etc.) being passed up the line along with other innocent users’ details to someone intent on identity theft.
Whether it’s a bubble or a kind of unplanned Ponzi scheme, I won’t be buying any time soon.
The Kitces article about the downside to early diversification reads like an excuse for financial advisors to get their clients into high-risk investments, likely with a hefty fee. They can tell their clients that there is time for sensible investing later and now is the opportunity to strike it rich.
Great for the financial advisor. Not so great for most clients who are gambling away money with little to show for it.
I usually find Kitces articles informative, but this one rubs me the wrong way. Maybe the heavy use of tree-growing analogies contributed to that… 🙂
Interesting Sachs article. Correlation of equities and bonds and all that. I am thinking of taking on a bunch of mortgage debt on the future upsize if rates remain low as an inflation hedge. I see it as diversification.
@therhino — *spoiler* That’s 30-40% of the reason why I’m trying to buy a property right now. No assets are cheap anymore, debt is abundant, and inflation will be a tempting way to square the circle.
Great article and timing, especially like the first chart.
I see lot of ordinary people thinking about bitcoin like a lottery ticket hoping to get rich one day. Also they are now being incorporated into hedge funds which drives the price up. If it was as easy to buy as click of a button on HL platform I would dip my fingers in this pie earlier this year through XBT tracker.
I support bitcoin and crypto for one reason.
They are ideologically the closest form of a store of value to my own perfect idea of one.
As a 30 something saver I’ve seen my pounds, gold, shares battered – all earned or bought with income – compared to those rewarded for taking on debt for housing etc. Bitcoin is the antithesis for that. It’s a savers dream.
I’ve mined litecoin, I’ve bought btc and ethereum a while ago. I’m hodling forever. It’s now about 25% of my personal wealth, but about 4% of my family assets overall and as we always work as a team and are well diversified I see no reason to rebalance. At this point I don’t care if it all goes to zero but I’m glad to have been part of a movement that at least tries to bring some sanity to the financially corrupt world.
Does it generate an income?
If no, then its price is unsupported.
“The bubble logic driving tulipomania has since acquired a name: “the greater fool theory.” Although by any conventional measure it is folly to pay thousands for a tulip bulb, as long as there is an even greater fool out there willing to pay even more, doing so is the most logical thing in the world.” ― Michael Pollan, The Botany of Desire: A Plant’s-Eye View of the World, 2001
Replace Tulip with Bitcoin and the quote from the dustjacket of the book makes perfect sense
Of course bitcoin is a bubble…
…and you can’t even plant a bitcoin
> Initially touted as incorrigible
I don’t think that word means what you think it means.
Bitcoin is a commodity with no carry costs.
So its value is determined by the need to store the value which otherwise would be in something covered by national regulations and costs associated with it – currency, stocks, property, gold…
With bitcoin, you create your identity like a number and buy bitcoins to be owned by this identity. There is no super authority who can confiscate the value, or even know your real world identity..
There are risks though linked to tech advances:
Forks, quantum computing advances breaking public key cryptography, constant increase of computational power, all of those makes bitcoins not a reliable store of value long term…
You can buy exposure to bitcoin and Ethereum / Ether as an Exchange TRaded Note via UK based stockbrokers.
I hold both in my AJBell SIPP. You have to do telephone order and they are euro denominated so expect to pay fees and charges.
HL also offer the bitcoin EFN in their SIPP with online orders (I’ve not asked about the Ether EFT).
Personally I’m more invested in Ether as it has more applications, more developers and a shared vision for growth.
I lost most of my respect for monevator when the author announced he did not buy house for last two decaded because he thought they were over valued.
Whatever was left is gone now with him calling bitcoin a probable bubble. If this is not bubble than nothing is.
Never mind gf mentioning btc, it’s ti mentioning gf that captures the attention. Hoping you’re sharing lots of bubbles of the right kind!
Thanks for the links this week. I quite like James Max, have done some work with him and have chuckled at his Rich People’s Problems column in the FT. Thought this week’s one on being fired was very Alan Sugar perspective, but for this community, turning it upside down and thinking about FIREing the job, makes it very relevant reading.
TEA expertly delivering his stock delivery this week. All very nicely put. Must get round to that budget…
@TI – Well it would be irresponsible to live through the lowest interest rates of all time and not take on some debt, now seems as good a time as any with valuations and inflation being a bit high.
I wasn’t going to go crazy though. Maybe aim to borrow somewhere between 10-20% of net worth (inc. primary residence).
If i already had mortgage debt i certainly wouldn’t be rushing to pay it off.
So, how do I protect against inflation these days? Is the only way to borrow as much as I can? According to that Sachs article, neither shares nor bonds are likely to protect, so what options are there?
@Richard. I’ve also been wondering how best to protect against inflation. Taking on debt – because rates are low – makes sense to me for acquiring real assets, the most obvious being a home to live in. However, I don’t think taking on debt to invest in financial assets seems sensible just because interest rates are low simply because many asset prices look quite richly valued and historically strongly correlated.
For the investing portfolio I’ve stuck to wide diversification of mostly passive assets with an over-correction to be more defensive (i.e. more government bonds) than I was a few years ago. It’s not going to impress George Saros but I hope to conserve some dry powder if there is an equity market correction.
I feel like the reasons it’s probably a bad investment now are the exact same reasons it was a bad investment when it was $10 or $1, ie intrinsic value. Nothing has actually changed in that respect. The value has increased 1,000,000% (megapercent!) but predicting future movement is like reading tea leaves. I wouldn’t (didn’t) spend £1,000 on btc in 2013 and won’t in 2017. I’m comfortable with that. Friends who do own cryptocurrency are affluent enough to be able to throw some play money at it and laugh about the daily movements – no one is taking it seriously. Enjoyed the Reformed Broker take on it btw, thanks.
It’s maybe too late to enter bitcoin, but one thing I’ve learnt from this is that whatever the Winklevoss Twins touch turns into gold. I’m going to pursue a closely aligned stalking strategy from here on.
https://en.m.wikipedia.org/wiki/Winklevoss_twins
Too late to enter – that’s what I was afraid of when my parents in law asked me to assist them buying some Bitcoin early this year. And I again was afraid when just a couple of months ago, they again bought some Bitcoin.
They are up 260 percent today. Soon, they will be able to sell a single Bitcoin, making good on their entire investment. Everything after that is pure profit.
Too late to enter – many people, including myself, have thought so at one time or another, yet the fact that Bitcoin is again setting net All Time Highs implies that everyone that thought so, at any time since 2009, has been dead wrong. Bubble, perhaps. But, Bitcoin has been through many bubbles, has been declared dead more often then I care to remember, yet has always recovered.
It is possible that Bitcoin will be worth zero sooner or later. True. But it is also possible that Bitcoin will be worth 10x as much in 2018. Looking at everything that is happening right now, with futures becoming a reality in 2 weeks, perhaps even an ETF next year, me, I’m betting that Bitcoin will only increase in value from here.
In any case, what Bitcoin has thought me is not to panic in case of volatility in the market. Just hodle, and chances are everything will be fine. At the very least, holding onto Bitcoin has helped me become immune to any volatility the regular stock market may be able to throw at me. Bitcoin made me a better investor.
Thanks for the excellent summary on Bitcoin.
@TI / The Rhino – Why would you want to take on a load of leverage to buy a property when rates are set to finally increase from all time lows? I understand that if expectations of higher future inflation are realised that will erodes the value of the debt, but if you believe that real estate prices are linked to mortgage affordability, increasing interest rates (decreasing mortgage affordability) are bearish for property prices.
I would think it would be better to buy when rates are higher but prices lower, rather than paying a lower interest rate on a bigger chunk of debt linked to a purchase made when mortgage affordability (and prices) were close to all time highs. Even more so for a buyer who has enough wealth in other assets not to be dependent on a high LTV mortgage to purchase a property.
@Hodler – genuine or satire? I can’t quite tell, either way – entertaining 😉
Theres no reason why Bitcoin should be $11k when compared to all the other crypto’s that exist. Anything in the digital world can be copied. Bitcoins electricity consumption is going exponential and it currently has no function other than to sell it to someone else for a higher price I.E. greater fool theory.
Theres a great saying from the gambling world that I love, “one way to stop a run-away horse is to bet on it”. Put some money into bitcoin and watch it crash 🙂
@TheRhino
I dont know anyone whose become rich with bitcoin and I think the reason is because…
Those who bought bitcoin when it was $2 probably sold when it was $20
Those who bought bitcoin when it was $20 probably sold when it was $100
Those who bought bitcoin when it was $100 probably sold when it was $500
you get the picture…..
@TI
I agree no assets are cheap anymore that what I was saying in a comment I made here in an older post when trying to decide where to “invest” my money. Maybe its time to go back into dividend stocks? Ill be trying to buy property in the next 2-3 yrs need a bit more saving first.
@The Rhino – genuine. The overall gain is now 270 percent, and may or may not be higher or lower in an hour, or a week, or a year. Volatility and risk is extreme. The trend is up for the moment, and tomorrow Bitcoin could be down 30 percent.
Any investment that will carry you through the decades comes with risk. We need to diversify and spread our risk, this is just common sense.
I am convinced that Bitcoin has become a new type of asset class and deserves a place in my portfolio going forward. High risk, yes, high potential, you bet. Thinking that Bitcoin will go away and we can all just carry on and forget about it is just wishful thinking at this stage.
I will not advice anyone to buy into Bitcoin. But, I do advice not to bet against Bitcoin.
According to Bitstamp, week from Nov 28, 2011 value was 2.98 USD, about 6 years ago. Today, about 11.600 USD. That is a gain of about 300 percent, or x4, each year. Every year. Since Nov 2011.
@AI – yes, no ones got rich with bitcoin compared to say how everyone got rich with residential property. It’s very niche. I don’t even know how you buy or sell them. I remember the Mt Gox incident. It’s all so dodgy. Definitely falls into the category of something you can talk about rather than something you can invest in (invest is the wrong word here). 2-3 years prior to buying a house is a really awkward timeframe to invest over. I am in the same boat. Any suggestions gratefully received. I have very recently committed to a position on it but whether it’s a good one only time will tell!
@Lord – having seen the Social Network I can’t think of a finer pair of mentors than the Winklevoss twins. Good luck!
Had an encounter with one of the True Believers recently. One of the things they shared with me was this tweet https://twitter.com/ferdinando1970/status/935826455958884354 with the accompanying comment “good tweet from today”. My initial reaction was “haha, that’s crypto-nerd satire, right?”… but apparently not.
For those unaware: “hodl” is a corruption of “hold”, got started from a random mispelling in a forum a few years ago https://bitcointalk.org/index.php?topic=375643 The adoption of such “insider speak” jargon is something I associate with cults.
I’m not a crypto “hodl”er or trader myself and no inclination to be. These days I find myself more concerned with wealth preservation and building sustainable diverse income streams, I’m not looking for high risk punts with capital. Enjoying the crypto show from the sidelines… but it all smells increasingly like ~1999 to me. As in the aftermath of the dotcom bust, the sad thing will be when the stories start emerging about retirement pots/college funds/house deposits/life savings wiped out. That tweet’s “financial singularity” may turn out to be a remarkably good analogy, if a singularity is something which squishes your assets to zero behind an opaque event horizon.
In fact I’ve just been having some fun using google’s date-range limited search to dig up old articles on internet investing 1999-to-March 2000. Enron tipped as often as Amazon (and both thoroughly outnumbered by swathes of long gone and forgotten other companies). Think this June 1999 piece captures the spirit of the age quite well: http://archive.fortune.com/magazines/fortune/fortune_archive/1999/06/07/261087/index.htm (Yahoo price would have been ~$40 at the time that was written; it peaked over $100 about 6 months later, but was down near $4 after another half year or so. I spent much of the ride up sharing an office with some UK-based Americans who were compulsive ticker-watchers; with hindsight I’m lucky to have avoided losing more than a few K on FOMO-driven internet speculation; the bulk of my wealth stayed in an FTSEAllShare tracker which was relatively unaffected – ~50% drawdown peak-to-trough is better – “business as usual” even – than a 96% down or worse). Of course this isn’t just relevant to crypto; we may well be in an “everything bubble”… very interesting to see what Mr Woodford’s been saying this week.
@ TI / The Rhino / Richard. Can you help me square the circle on the logic behind “debt” (or leverage, whatever term you prefer) as a means of protecting against inflation?
First, I get that the value of debt is eroded in real terms by inflation, but the nominal amount (plus interest) still needs to be repaid. Second, I also get that interest rates are still low (and albeit lately rising, likely to stay relatively low for some time yet). Third, I also get that, in the past, the growth of the assets financed with debt (and, if necessary, the income used to repay debt) has often outstripped both inflation and the cost of interest.
But the protection from inflation arises not from the debt but from the asset it finances. In other words, the third point is everything and the first two points irrelevant, and debt provides no protection from inflation other than by facilitating the purchase of more of an asset that does successfully protect from inflation.
So, if you are using debt to buy property (or equities, or bitcoin, or whatever), what you are saying is that you think property (not debt) will protect against inflation. Of course, it takes two to make a market, but given current valuations (already pricing in low interest rates), I can see ways that, even if the assets are “real assets” over the very long term, they are not over many investment time horizons in the meantime.
Debt can turn a good investment into a bad one, but not a bad one into a good one.
John —
TEA has a lovely definition of debt as borrowing from your future self. In times of high inflation, the cost of the debt to your future self is lower than the utility to your present self. For “inflation” here you can use wider terms or just your own personal consumption /earnings growth — ie your personal discount rate.
This is a pure definition that doesn’t rely on the debt funding an inflation-protected asset (eg linker/equity etc), but all of these questions of “better” are asked “relative to what” — so while you are dismissive of the apparent effect of the asset providing inflation-proofing while the debt is inflated away — that’s just another way of making the same comparison — and for some a little easier to visualise.
Simpler. Nominal rates are real rates plus inflation. If you think that inflation is to rise, driving up nominal rates, then fix in some debt and make money from your apparent ability to predict the future.
Your (implicit) assumption that current nominal interest rates represent the underlying discount rate for the valuation of equities is up for debate. I think it’s directionally correct but asset values aren’t nearly high enough — bzw they won’t fall as much as you assume on rate rises.
Debt obviously serves a second purpose of making investments more highly leveraged — so the return on capital — whether positive or negative — is many time greater than it would be in an unleveraged investment. Although that is independent of the inflationary shield.
@Mathmo – “If you think that inflation is to rise, driving up nominal rates, then fix in some debt and make money from your apparent ability to predict the future.”
How do you make money from this though, other than by using the debt to hold an asset that provides a higher return than the cost of the debt (irrespective of whatever inflation does)? Perhaps a worked example might help me out here, where you are not reliant on the asset as the inflationary shield to come out ahead financially.
I understand the concept of borrowing from your future self for consumption smoothing, and that personal circumstances (e.g. needing to put food on the table now rather than later, or enjoying some experience while you are still young or alive enough to do so) can mean a positive personal discount rate makes complete sense. But this is not a recipe for making money and I am still struggling to see the relevance of this to protecting yourself against rising CPI/RPI!
The inflationary protection potentially provided by investing in property or equities (and the extent to which low interest rates are baked into current valuations) is a separate discussion altogether, and not really my point of contention.
Someone having 10% of their portfolio in crypto currency wouldn’t freak me any more than someone having 10% in gold, or my 10% in index linked cash. However, I really don’t think this is what we’re seeing and there are quite likely going to be some tears!
@John – I join you in not understanding the logic of all this; beyond –
– if my earnings rise faster than inflation I will find it easier to pay down the debt and I will be better off, but not because I have taken on the debt, that I can see anyway.
– if the asset I buy grows faster than the cost of money I will be better off or, rather, I have benefited from the gearing (as you say, sorry!)
@all — Nearly all great comments and discussion, cheers all. I’ll just add a few quick responses.
Re: Bitcoin and the ‘certainty’ of it being a bubble / the next big thing…
Smart investors talk about ranges of possibilities and assign probabilities. The more somebody talks in certainties about anything to do with the future — and often in assessing the present — the less likely I am to believe they are worth listening to. A range of possibilities implies many of the scenarios you try to assign a probability to do not come true. That doesn’t mean you were wrong to try to do so, or that there was no chance of alternative outcomes. It may mean you got (and priced) your estimates wrong! 🙂 But often it doesn’t even mean that.
Over a long career making calls you’ll find out if you’re good or bad at assessing probabilities, not over being a hero on any particularly asset/story/investment/price/whatever.
Bitcoin is interesting and difficult because of the easy availability of similar-seeming examples (South Sea Island, Tulips, Pets.com) which would seem to make it obvious to call it a bubble.
But set against that are all the innovations and breakthroughs we now take for granted that were dismissed as fads at the time (everything from electricity to cars, fiat money to personal computers). We now forget how they were dismissed as hype, as a flash in the pan, as a mania.
Something like Bitcoin is even trickier than most of those examples because unlike many innovations, there’s *arguably* a self-reinforcing quality to its ‘value’. The more people see the bitcoin price go up, the more it hangs around despite all the brickbats and occasional busts, the more people believe (/trust) in it. All currencies are one way or another a question of belief. (This is where IMHO gold is the closest match.) But equally faith in a currency can evaporate in a heartbeat.
As I say, I think the price action this year indicates it’s probably in a bubble because everything about it looks like a bubble. That’s my central thesis. But there’s a non-trivial chance it may not be!
It’s fascinating to watch. I don’t think one *has* to take part, because ultimately bitcoins will have to be spent on stuff, and stuff is what most of the other assets you can invest in provide. But of course the opportunity cost could obviously be huge if it ten-bagged again from here. (That would also mean something like $2 trillion of Bitcoin spending power had apparently been created out of ‘nothing’, which is a sum governments could not ignore. Would also likely have a macro-economic impact on inflation and so forth I’d imagine, albeit very unevenly distributed. (Boom in second hand nuclear bunkers!?) )
Re: Debt and property, good points on both sides. I really want to save this for my post, if I ever do actually manage to get through the back and forth and buy a place! But just briefly I see the big debt as a *hedge* not a strategy. It’s a hedge against very high inflation, for me — an insurance policy if you like.
Some things people are saying like “I can’t see how it helps unless the asset goes up, and/or your income goes up a lot due to inflation, and/or inflation goes up a lot more than interest rates” etc… Those caveats aren’t caveats from my POV, those combined are the reasons it’s a hedge! 🙂
There’s also the case of the drunk giving directions who says “I wouldn’t start from here if I were you.” I have long been short one UK property (a home). As Keynes says “In the long run we’re all dead.” I have been happy to run 95%+ equity exposure for the past seven or eight years because there were always cheap things to buy, but I don’t see that as so much the case now. London property still looks silly expensive, but not at a glaring overvaluation to global shares like in say 2009 or 2010. Given I need a house… etc etc. Anyway, more to come some day. Probably. 🙂
Finally, I have come to a better understanding of political risk over the past 15 years. Most people with money/power/votes own houses, and that matters. (I like to think if I had my time again this last factor would change how I approached the property market back in 2004, which was when I conscientiously stepped aside, when London first surpassed all old price-to-income ratio highs. But that could be hindsight speaking, of course).
@Mathmo — GF says hi! 🙂 Also, re: TEA coining that phrase, I’ve been using it since at least 2009 on this blog (see first comment on article below) and long before that on discussion boards. I once presumptuously thought I invented it but I am now sure that’s not true. Actually I think I picked it up by osmosis from some psychology paper or another. 🙂
http://monevator.com/the-really-obvious-thing-we-all-forget-when-borrowing-money/
I remember reading about Bitcoin around 5 years ago and not really understanding it, but that the price had gone up loads since it first came about and if the guy who bought the first thing using bitcoin (a pizza) had have held onto it instead it would be worth 1 million or something. Now it must be worth billions! A very costly pizza…
As I say I didn’t understand (still don’t tbh!) it so there was no way I was going to “invest” in it, although I wish I’d taken some more time to read up around it back then. Off to read some of those primers now so at least I can understand it now whilst still not investing as surely that horse has well and truly bolted now… surely…!!!?!?!
I’ve been buying Bitcoin since it was around £300 but only small amounts each month, as my intention was to hold a few percent in my portfolio. It’s been responsible for 80% of my gains over that time. I realise it may well be a bubble, but there is also the possibility that this is the financial equivalent of the world wide web coming into existence.
Some responses to your points as food for thought rather than direct refutation:
1 – How about Amazon? Not quite as pronounced, admittedly.
2 – It’s only this volatile as the market cap is small compared to stock and forex markets. We’re still in early adopter stage of whatever it turns into. Volatility in BTC is less than it was; look at the volatility of the less capitalised coins. Also, it’s only volatile when measured against other currencies. If everything was priced in bitcoin, it’s irrelevant.
3 – Compare ‘the internet’ 15-20 years ago.
5 – Can’t disagree, but there’s lots of cheap money about trying to find a home.
6 – HMRC have provided guidance on tax treatment of cryptos since at least 2014. I will be making the most of the CGT allowance! The exchanges are all KYC/AML compliant, so unlikely to be able to hide serious amounts from the taxman.
8 – Bitcoin is still Bitcoin. The forks have not affected the integrity of the Bitcoin network, nor it’s code. Succesful hacks have been on exchanges, not the Bitcoin code or network AFAIK.
9 – Agree, most ICOs are total scams.
Some others have mentioned Bitcoin can be copied; it has, multiple times, but there’s more to it than just the code. Network effects play a subtantial part of it, in the same way that you trust that your crispy plastic fiver will be taken in exchange for your pie and chips. Cryptos are backed by the code and their network, rather than the local government. An increasing number of people are trusting a globally decentralised ledger over their own governments who generally see fit to devalue their savings through QE. Buying a deflationary form of money with an inflationary one? No wonder it’s going up in price!
Regarding the energy usage; how much energy do governments expend on reinforcing their currencies?
Just some thoughts. I’m no evangelist but I can certainly see how cryptos ‘might’ work longer term, and in the mean time it seems silly to me not to have a little exposure. The most you can lose is your small allocation, but the benefits (more than just financial IMO) are potentially huge.
The problem with using the “but look at how big The Internet is now” argument to justify getting in on some crypto action now is that actually a heck of a lot of people lost a heck of a lot of money in that initial surge of enthusiasm for “The Internet” which culminated in the TMT/dotcom bust. Sure, The Internet is huge and changed lots of things… but it sure proved difficult for Average Joe retail investors to make money from it in the early days. Timing was everything; if you were in early enough or got out at the right time great… otherwise kiss your capital goodbye. (Either that or canny stockpicking might have helped… but good luck sorting the Amazons from the Enrons and a host of other long-forgotten companies back then). Now I’m well aware investing in cryptocoins directly is very different from investing in companies engaged in business around cryptocoins… the nearest thing to buying The Internet as a commodity back in the 90s was probably either buying up/installing miles of fibre-optic cable networks (installed capacity got way ahead of need of course – with no real plans for how to monetize it – so lots of money was lost there by the original investors) or the crazy goldrush around .com domains (an artificially scarce resource until more gTLDs were created but in any case better search engines meant less need to have a snappy “pets.com”-like domain people could easily type into their browser address bar). To some extent “eyeballs” were and still are the real underlying “internet commodity” (remarkably prescient 1997 Wired piece at https://www.wired.com/1997/12/es-attention/ ). I do wonder if there will be (or is already?) as much of a bubble in companies active in the crypto realm as in the cryptocurrency itself. Stories about companies changing their name to include “blockchain” and the share price quadruples – https://www.bloomberg.com/news/articles/2017-10-27/what-s-in-a-name-u-k-stock-surges-394-on-blockchain-rebrand – don’t fill me with confidence that things are actually any more sane in the commercial realm though.
I think there are interesting parallels with the Railway Mania of the 1840s ( https://en.wikipedia.org/wiki/Railway_Mania ). Sure, the railways were a fantastic invention and the UK got some great infrastructure out of it (probably a great contributor to continuing the industrial revolution’s growth and productivity gains)… but an awful lot of folks lost their shirts in the process. Caveat emptor!
Watch the TED talk about startup success rates. It seems the key factor is not the idea, team, finance or plan, but timing, judging when the market is ready for your product. With winner takes all common in these fields, they are hard horses to back.
https://www.ted.com/talks/bill_gross_the_single_biggest_reason_why_startups_succeed
I’d be very interested to read an article on your thoughts as to where you think the (London) property market is going to go as I’m in a similar situation – in the process of buying despite the fact I think prices are going to fall in the near to mid term. Would be interesting to compare notes (and to hear exactly why the last bear in town has turned).
@Hodler – sorry, only just saw your reply. What sort of % asset allocation do you give bitcoin then? And are you re-balancing to hold that %?
@Rob — I’ll write the article next year, once I’m in. But just to set expectations, I haven’t discovered a brilliant way of looking at the market and justifying these prices! I wish. I have a few mitigations, but from a purely financial perspective, I think the best risk/reward play would probably be to keep on renting (and saving).
Good luck with your move! 🙂
268kwh *and* $20 per transaction -> http://steamcommunity.com/games/593110/announcements/detail/1464096684955433613
You’re right that it definitely doesn’t function as a currency at the moment
+50% since this blog post was published. Fascinating.
Was trading at very nearly $20,000 today on Coinbase — i.e. people were paying a $3000 premium to get in.
Sorry, breaking my own “try not to post lots of short comments” rule but I forgot the link:
https://www.bloomberg.com/news/articles/2017-12-07/bitcoin-soars-through-14-000-mark-up-more-than-40-this-month
Has anyone seen any asset that has appreciated like these crypto-currencies ever?
Even any individual stocks?
> Has anyone seen any asset that has appreciated like these crypto-currencies ever?
Maybe we can plot price of tulip bulbs or Southsea Company shares against bitcoin and look for correlations?
I am no expert, but it possible to see a future where cash is relapsed with digital currency, be it in the form of banks forcing us to use credit cards, or something like a cryptocurrency. However, like the dotcom years it seems like it would be difficult to predict who winners will be.
I want to be exposed to a digital currency future, but I do not want to rush to hedge all my bets on bitcoin. Do you think that by having a diversified portfolio, with large and small cap equity, will expose me to the benefits a digital society might bring, in a similar global equity holders are benefiting from the winners of the dotcom years? Or is the feeling that this is different because crypto is a new asset class in its own right, uncorrelated with equity?
Catchy topic Monevator..! Also a very good episode on Bitcoin’s true potential I recently listened to:
Kevin Rose Show – #16 – Bitcoin’s true potential, with Andreas M. Antonopoulos https://www.kevinrose.com/single-post/andreas-antonopolous
https://noconflictnointerest.substack.com/p/how-bitcoin-eats-the-equity-market
Interesting thesis. Thinking about ~1% of ISA into GraniteShares 3x long MSTR daily ETF to hedge risk of this occurring. Hope it won’t, but if does, might cover losses on LTBH global equities (VWRL). Thoughts?
Related to above post: Business Insider, 15 Mar 2024: JPM analysts, inc. Nikolaos Panigirtzoglou, voicing concern that MicroStrategy’s leveraged Bitcoin investments might amplify a market downturn in the future.
Michael Batnick and Ben Carlson discuss the above Zack Morris Substack on BTC and MicroStrategy at the beginning (~7 to 15 minutes in) of their Animal Spirits podcast (no. 350, entitled “Things Are Getting Stupid Again”) released on 6 March 2024. It’s also worth reading the Morris piece on LinkedIn as he gets a couple of queries there in the replies critiquing the practical mechanics of his thesis; and which he responds to in detail with his reasoning and evidence.
In the interests of balance, and lest my comment #58 be seen as bullish MSTR, as opposed to interested in the Zack Morris thesis on what Michael Saylor is up to; March Lichtenfeld of Wealthy Retirement puts the bear case for MSTR in his piece (on 19 March 2024) on Talk Markets (via the Investing.com app, so no hypertext link available I’m afraid) entitled “The Worst Stock In The World”. The title pretty much sums up his view of MicroStrategy. But whether you agree with him, disagree with him, or (like me) just plain don’t know what to think on this one; it’s a well written piece.
ecoinometrics Substack today (“no top in sight for bitcoin”) has a useful regression analysis mapping the BTC price to the performance of the NASDAQ. It’s a pretty clear correlation. On MSTR, Michael W Green had a detailed Substack yesterday (“Be better”) making a case that indexing is reducing effective liquidity and price discovery leading to increased volatility and exacerbating momentum trends. Without addressing himself to MSTR (his points are more generalised to price insensitive passive investing), it struck me that his reasoning echoes, but in greater detail, that used in Zack Morris’ piece on MSTR on 3 March.
Kerrisdale Capital came out yesterday with a report out on MSTR and BTC (https://www.kerrisdalecap.com/wp-content/uploads/2024/03/MicroStrategy-MSTR.pdf). TL:DR is they’re short the stock and long BTC.
@Delta Hedge — Sound thesis. I sold most of my MicroStrategy when the priced wobbled down from $1,500 last week sometime. Obviously not the greatest timing but this is crypto we’re talking about, you’d need to be Doctor Who to time it to perfection haha.
Anyway I would much rather have held if MSTR had a 1-1 Bitcoin valuation on its balance sheet or maybe a modest premium. I just can’t stomach 2x+, it’s bonkers
Lucky for US hedge funds that they can re-up into a BTC ETF to arbitrage this. No such luck for us. Sold my MSTR in an ISA. No BTC ETF for me. 🙁
Zach Morris has responded to Kerrisdale Capital’s report on his Substack as follows:
“Just read it. I have lots of respect for Kerrisdale, I’m subscribed to all of their reports and read most of them. Look, I get it – it’s reasonable (and, apparently, intellectually enticing) to expect the premium to collapse. I just think you’re playing with fire being short MSTR for any period of time without a tight stop-loss and a clear, defined catalyst for the premium collapsing and there are probably easier and less-risky ways to make money. My first question back to Kerrisdale would be: you say a 2.6x premium to BTC NAV is unreasonable. Well, that’s what it is currently. Why? How did it get to such “unreasonable” levels? If it got to 2.6x, why is it unreasonable to think it could go to 3.6x? 4.6x? To me, arguing that something is not tethered to reality and then betting on it becoming tethered to reality is not a good strategy. They show in their report that the premium got to 3.9x during the 2021 bull market. What happens to their trade if it gets to 3.9x again this cycle? Where is their stop loss? They concede some equity value premium to spot can be argued, but not 160%. Okay then, how much? Why? They argue than BTC per diluted share has actually not increased much since 2021 and has actually fallen in recent years. I disagree with the # of shares they’re using. It appears to me the # of shares they use in their calc is actually closer to basic shares outstanding rather than fully diluted. I use ‘adj. diluted’ from page 29 of the Q423 earnings presentation:
https://assets.contentstack.io/v3/assets/bltb564490bc5201f31/blt9fe0e76f0b8b3ab0/65c29cdcd6cf0435f215211d/microstrategy-q4-2023-earnings-presentation.pdf
By my calculations, they have grown BTC/fully diluted share at an 18.9% CAGR since Q4 2020 (from 0.0057 to 0.0099). Analogize this to a bank growing tangible book value at a 18.9% CAGR. What Price/Tangible Book multiple does that bank trade at? JPM has grown their tangible book value at 5% CAGR over the past 10 years. They currently trade at 2.4x tangible book and have averaged 1.8x over that period. Not that much cheaper than MSTR trading at 2.6x tangible book, but growing about 1/4th as fast. Finally, the counterparty that is going to send this trade south on them isn’t looking at the premium to BTC NAV. They are going to be programs that are only trading price momentum, pod shops trading index rebalance strategies that are going to try and pump the stock into the S&P 500 and then dump it on indexers a la what they just did with SMCI, and Wall St. Bets Reddit retail traders that are going to see the short interest, post Michael Saylor memes all day and try and put some hedge fund out of business a la Melvin Capital. Honestly the high nominal stock price is going to be a hurdle here because options are too expensive for retail punters. I’d expect a stock split at some point and I would consider that bullish as it would open up retail options flow”.
FWIW I think a lot turns on how index providers and index tracking ETF and mutual funds implemented the Accelerated Implementation Rule from p. 14 of the current (November 2023) version of the S&P Equity Indices Policies & Practices Methodology.
That’s the potential primary source of rocket fuel for MSTR share appreciation in Morris’ thesis; and so how it would be applied in terms of detailed practical mechanics would likely be crucial.
Zack Morris at No Conflict of Interest has just put out another excellent Substack piece on MSTR, this one looking directly to address the points made by Kerrisdale Capital:
https://open.substack.com/pub/noconflictnointerest/p/microstrategy-is-a-bitcoin-bank?
@Delta Hedge — FWIW I’m not hugely inspired by this thesis. It’s basically just a more convoluted way of saying that MSTR does well when Bitcoin does well. By far (overwhelmingly…) the main reason MSTR is compounding book value is because its Bitcoin holdings have risen in value. It’s true BTC/share of MicroStrategy has risen too, but this was surely enabled by the crypto winter. A good capital allocation decision, but not something to bank on as an operating strategy.
He makes the comparison with JPM’s growing book value. I’d argue JPM does a bunch of business operations (mortgages, investment banking, cash transfer fees, whatever) to cash to earn its 9.2% compound book value annualised return that substantially higher than the risk-free rate. If all it did with its ‘cash’ hoard was transform it via a loan to the government into an asset earning the risk free rate then its return on equity would approximate the risk-free rate, no?
MSTR doesn’t do anything with its BTC as far as I’m aware. It doesn’t even lend it out. It just sits there. I suppose one could argue this ‘uses’ Bitcoin by amassing a hoard that will be used ‘when’ more of financial services runs on Bitcoin, but we simply haven’t seen this yet. The market is baking it in. However it’s again very hard to see what MSTR is doing here to make its BTC worth more than the BTC held in an ETF. If it was developing its own BTC financial architecture that would turn on its hoard then fair enough, but it’s not?
p.s. Consider an investment trust that traded at a premium to book value because the market believed the manager would add value beyond the growth of trust’s portfolio, by skilfully changing that portfolio over time. Hence management earns a premium as the market expects the portfolio to grow faster than a snapshot of the underlying.
But here the underlying and the portfolio are the same thing. If you agree with Saylor that BTC is the future then you can buy exactly the same portfolio as him (BTC). So why pay a premium.
You could even approximate it further by putting say 10% into a software play (maybe Constellation Software or HG Capital) and periodically harvesting some of the latter’s return to buy more BTC, but that’s getting a bit silly now 😉
Just my 2c, I like MSTR and hold it to be clear, albeit in far smaller size after reducing on premium concerns a couple of weeks ago. So I have my biases etc. 🙂
Thank you for your thoughts @TI. I’ve no idea what to make of MSTR tbh. It’s maybe a corporate equivalent of Schrödinger’s Cat, in a simultaneous superposition of being the worse and the best company out there, and either worth in the $200s at the very most (if the premium collapses and BTC ‘fails’), or possibly (eventually) way (maybe way way) more than $1,500/$2,000, as now. This is crypto, so anything could happen. I’m trying hard to separate out two quite distinctive and different types of belief here:
– Belief in whether BTC and/or MSTR are a good thing (you know my views on that); and,
– The appropriate level of credence, given the limited and complicated evidence, in hyperbitcoinization actually happening within an investable time horizon, and of MSTR playing a pivotal role if it does.
Also worth noting that the JPM book value comparison is apples to oranges, as FAPP, the value of MSTR is overwhelmingly in its assets (BTC) and not in its earnings; whereas JPM trades at just 12.2x earnings (forward P/E, only a slight premium to its peer group, on 11.3x).
If you own JPM then you have a business with diversified operating cash flows and profits.
Contrastingly, if you own MSTR then you basically just have a stake in an acquisition vehicle for BTC, which, ultimately, is a statement of belief in an idea (i.e. in a digitally ‘scarce’ store of value, where the scarcity is achieved through Proof of Work computation).
Personally, I don’t share that belief at all, but I have to concede the objective observation that many do now, and that their belief has persisted, and the numbers of the believers in it has expanded over time (and, seemingly, still continues to expand), notwithstanding the absence of a use case for BTC outside of that belief.
If BTC is a belief system, then the persistence of belief in MSTR as a means of leveraging BTC is perhaps no less credible than belief in BTC itself. Hence perhaps the endurance of the MSTR share price premium over book value.
@Delta Hedge — It’s apples to oranges because Bitcoin doesn’t do anything, or make any earnings. Imagine if the whole story was the same, but with one of the cryptos that facilitated staking. Then you’d have earnings from the MSTR stash.
Yes, on the one hand it’s a futile comparison. But that futility is, I’d argue, revealing something about the limits of the thesis advanced that MSTR should actually trade at a premium to book because JPM does. 🙂
This further (more in depth) reply from Zack Morris to the MSTR shorter sellers just came out tonight:
https://open.substack.com/pub/noconflictnointerest/p/a-response-to-kerrisdales-microstrategy?
If anyone reads this who is interested and not (yet) a Mogul, then you might want to go subscribe to Monevator as a Mogul to read today’s (4/4/24) @TI piece for Moguls.
@Delta Hedge — Truly appreciate the plug (and I do like how you return to older comment threads and keep them up-to-date 🙂 ) but I would warn anyone not to be too giddy about signing up for Moguls just on the back of my brief comments about MSTR. You’ll probably be underwhelmed. 🙂
Of course if you’d like to sign-up just for the usual diet of monthly long and hopefully entertaining missives from one investing fanatic to another, then please do! 🙂
Another take on the premium to BTC (and other non-obviously explained premia):
https://open.substack.com/pub/yetanothervalueblog/p/weekend-thoughts-broken-correlations?
Like the description of MSTR as “meme adjacent”.
From Morning Star today. Note predicting 298k BTC acquired by YE 2025 compared to 214k now:
https://www.morningstar.com/news/marketwatch/2024040865/buy-microstrategy-stock-because-bitcoin-should-double-in-2-years-analyst-says
Although MSTR has taken a swoon with the most recent dip in BTC below $70k it now has its 1st express non-US based imitator. From Coindesk today: “Metaplanet (3350), a Web3 infrastructure provider, saw its Tokyo-listed stock rise almost 90% in two days after saying it was adding $6.56 million in bitcoin (BTC) to its balance sheet in partnership with Sora Ventures, Morgan Creek Capital’s Mark Yusko and others”
Nice primer on MSTR premium creation, with further links therein on earlier examination of crypto companies:
https://open.substack.com/pub/marketlab/p/explained-how-microstrategy-prints?
Interesting comparison to the MSTR premium. Phoenix Digital Assets (PNIX on the Aquis Exchange) at the end of March 2024 had a NAV (in 508 BTCs, 8,814 ETHs, and 86,396 SOLs; alongside some 732,899 Optimism tokens, 57,902 Cosmos tokens, 225,362 Near Protocol tokens, 60,938 Iron Fish tokens and 203,220 stablecoins) of £74.5 mn, equivalent to 7.38p/share. NAV could be reduced by up to 1.1p/share due to a tax charge. Shares currently 4p, so trading at a discount of circa two-fifths of unadjusted NAV.
Ecoinometrics notes today that if BTC had followed a growth trajectory similar to the past two halving cycles then we would expect BTC to be worth between $100k and $300k per coin already, and it’s $62k today.
The Last Bear Standing (‘LBS’) substack appears to have prefigured some of Zack Morris’ meta thesis on MSTR/BTC in this piece from a few days before (1st March) the No Conflict of Interest piece (3rd March):
https://open.substack.com/pub/thelastbearstanding/p/saylors-quotient
In a successful piece of bootstrapping, LBS sees the premium as the very ‘asset’ which justifies the premium because it can be used (through the financial engineering of the stock market) to accrete evermore BTC per MSTR share, even on a fully post-dilution/new issuance basis.
LBS doesn’t, unlike Mr Morris, identify the possibility, if MSTR gains entry to the S&P 500, for tracker passive fund flow capture through mandated price insensitivity, nor the opportunity which might be birthed by a short squeeze.
Just at the moment, both MSTR’s premium is compressing (a bit) and the BTC price is falling, which between them might perhaps eventually set up conditions to emerge for a more attractive entry point into MSTR.
Ok. So to avoid the incorrect impression of shilling BTC or MSTR, and for the avoidance of doubt:
– ideologically/values-wise I’m crypto hostile (I think it’s bad for the world); and,
– practically speaking I lean crypto skeptical, i.e. in terms of it’s investability (coming in somewhere around #28 above from @Learner).
I do think though that there’s potentially some speculative convexity opportunity here in terms of ‘play money’ stakes (say with ~50 bps of available investment capital), having regard to what @TI says above at #42 about ranges of possibilities and assigning probabilities.
So, here’s the price points for each of the first 4 halvings so far:
November 28, 2012: $12.50
July 9, 2016: $638.51
May 11, 2020: $8,475
April 19, 2024: $61,067
It seems pretty clear that, as coin value has risen, so the amount of new capital infusing into BTC needed to move prices a given % has increased.
But it’s not obvious that the amount of capital needed to move coin values an absolute $ amount has trended.
The Market Value / Realised Value ratio (the notional ‘capitalisation’ of all mined coins divided by the price level of BTC at the time each coin last moved on chain) has moved in a band from 0.7 (crash/ despair) to 5 (parabolic rise/euphoria).
But I can’t see an obvious time series trend as distinct from the ratio (MV/RV) correlation with market regime type.
Given this, it seems a perhaps somewhat reasonable proposition that a net dollar into BTC in 2011 would move the absolute price level per coin (not the percentage, relative increase) by the same amount as in 2021, or indeed right now.
The spot bitcoin ETFs had net inflows of roughly $12.1 billion at the end of the first quarter of 2024 according to BitMEX.
Obviously, gross inflows were much higher than this, but with HoDLer’s either bailing on Grayscale’s 1.5% p.a. fee or deciding that the hassle of self custody wasn’t worth it; much of the flow has just been within BTC’s own ‘ecosystem’.
So it’s the net inflow figure for wholly new capital into BTC that matters here.
Now, that $12.1 bn net inflow in 2-3 months coincided with BTC appreciating from around $40k to about $70k; so an approximately $30k rise.
Not all of that can be attributed of course to the ETF flows. But surely more than several thousand dollars of increase can.
Assuming very rough and readily that say 40% was down to ETF net inflows, then that’d be a $12k price increase per coin occasioned by $12 bn net inflows over a couple of months, or $1 mn of net inflow required per $1 increase in price per coin in that period.
Extrapolating wildly here, $1 tn of net inflow into BTC in a couple of months might then (on these admittedly rather woolly and questionable assumptions) cause BTC to pop by $1 mn per coin.
Now $1 tn sounds an awful lot, but it’s small change within a financial system with $100 tn invested each in global equities and in invest grade bonds.
And I think that this may be where Saylor is ultimately going with this: i.e. he’s aiming to achieve diverting ~0.5-1% in short order (months) from global holdings of equities and bonds into BTC in order to seriously try and pump the BTC price to $1 mn per coin.
If he can actually get MSTR into the S&P 500 and just keep issuing new shares at a premium to NAV to buy BTC by relying on price insensitive S&P 500 index ETFs (making up more than 50% now of the equity market) to buy the new share issuance then he could perhaps trigger a stampede into MSTR and BTC (and in any event pump the BTC price somewhat all by himself).
It sounds crazy, but perhaps it isn’t quite as crazy as it sounds.
Even if it is crazy, Saylor does seem to have drunk very deeply indeed from the crypto Kool Aid vat, so he might just not give a damn, and will try this come what may.
And with TSLA in difficulties now whose to say that Elon won’t pile in behind Saylor?
It would be a distraction of sorts for the market from the TSLA EV business stalling (as compared to the prior market expectations of a robo taxi near future, and TSLA pivoting seamlessly from a capital intensive manufacturer to a high margin low cost SaaS provider).
Some might say that this is what Saylor has in effect already done with MSTR as the underlying software business there is not exactly a paradigm of dynamism and growing market share.
Who knows? But there does seem to be reason of sorts here behind the MSTR NAV premium.
That premium might seem untethered from all economic sense and reality; but there’s actually a sort of ‘narrative arc’ through which it kinda sorta makes ‘sense’ – a narrative arc in which the premium is not about the NAV and more to do with an option price/premium on Saylor’s strategy, but without having an option expiry to contend with.
BTW @DW #44 point 8 is technically incorrect: (per Bitcoin maxi Charlie Shrem on HackerNoon): “On Aug. 15 2010, an unknown hacker nearly destroyed Bitcoin. The hacker generated 184.467 billion Bitcoin out of thin air in what has become known as the Value Overflow Incident. Satoshi Nakamoto quickly hard forked the blockchain to remove the 184.467 billion Bitcoins, which is the only thing that saved Bitcoin from dying an early death that day.” Still that was a long time ago now and the source code must be the among the most studied, tried and tested out there.
Three superb (although I far from agree with all of what they each say) takes on BTC from, contrastingly:
A BTC sceptic:
https://open.substack.com/pub/yetanothervalueblog/p/the-bitcoin-halving-and-miners-part
A market technician:
https://open.substack.com/pub/capitalflows/p/bitcoin-strategy-the-macro-liquidity
A card carrying BTC maxi (full on through the looking glass):
https://open.substack.com/pub/jessemyers/p/why-the-yuppie-elite-dismiss-bitcoin
As a crypto hater (philosophical preference/ethical values) and skeptic (outlook for speculative return) what the above three address are fundamentals (hard money/digital scarcity case) and technicals (macro liquidity driven momentum).
What they all to an extent miss, but which the Morris piece in March 2024 alights upon, is filling the marginal, incremental dollar of demand gap. Namely, how to keep forcing money (fiat) into BTC when the ‘natural’ (voluntary) demand is/becomes saturated?
Hard cap limited supply (and reducing new supply/increasing BTC difficulty) based arguments don’t address this point.
Whilst there will be an elasticity to demand element (i.e. the more people who have believed in and do believe in BTC then the more future people will believe in it, a momentum in credence if you will); IMHO this is insufficient in and by itself to continue to force ever greater value onto coins.
There also has to be an strong element of involuntary demand, and that’s where MSTR turning NAV premium into BTC price increases via the use (once MSTR is in the S&P 500) of forced price insensitive buying (of MSTR new stock issuance) by equity index trackers comes in.
Morris’ argument in effect is that this completes the demand-supply circle, leaving no gap.
Time will tell if and how this all plays out.
A reminder via Ecoinometrics today of why without ongoing net new demand BTC can’t continue to appreciate in price:
https://open.substack.com/pub/ecoinometrics/p/bitcoin-cannot-grow-without-the-etfs
Crypto advocates should focus on how to increase demand (both voluntary and involuntary demand) rather than modelling based of prior price patterns and price appreciation.
Financial asset market momentum is very different to physical momentum.
In the later, as approximated by Newtonian mechanics, objects will continue with constant non-accelerating velocities until they’re acted upon (e.g. by interactions with other objects, thereby transferring momentum, or with a force, such as gravity is simplified to in the Newtonian scheme – obviously it’s not actually a force but rather a curvature in spacetime under relativity).
In financial markets, in stark contrast, price momentum is not self sustaining. Instead it requires continuous levels of net demand.
Of course higher prices can lead to expectations of ever higher prices, but this normally blows out in a parabolic top which is unsustained.
The demand issue is arguably more important for BTC to address as compared to other financial instruments given both the thin use case (outside of speculative asset/appreciating Store of Value) and the absence of economic cash flows.
The ever readable Josh Brown (Ritholtz’s Wealth Management, on 17 Apr 2024, downtownjoshbrown.com), in ostensibly dealing with rising rates’ impact on equities, manages to also nicely sum up my own feelings towards crypto with this piece of wordsmithery:
“The crypto people stepped over every line. There is no banking or anti-money laundering or securities law on the books they didn’t violate. And not just once or twice. The entire existence of Bitcoin flouted both the word and spirit of the rules. Its proponents woke up each morning on the wrong side of the red line and with every investment and project they stepped further away from it. And yes, a few went to jail and bunch of others got sued. But in the end, they won. It’s a trillion dollar asset class, never going away, now accessible in every brokerage account in America and via exchange-traded funds on the New York Stock Exchange. What red line? Saying “f*** you” to the norms and the boundaries has literally given birth to an entire industry. Bitcoin’s primary use case is speculation, even after fifteen years of trying to make it do something else. It’s secondary use case is humiliating people who refuse to accept its existence. You need a third?”
Worth checking out Michael Saylor’s presentation to the 2024 Bitcoin Conference in Nashville. It’s more illuminating than DJT’s or RFK Jnr’s appearances. On YouTube:
https://youtu.be/O9KnBcWMkpw?si=L2U7eLmoFioGdjJT
Although a certain Roger Ver seems to have taken the title first, Saylor’s his own Bitcoin Jesus.
Bottom line is Saylor’s base case is for CAGR of 28% to 2045 and $13 mn per coin, bull case 37% and $49 mn and bear 21% and $3 mn. Those correspond to 7%, 22% and 2% of his medium, high and low estimates for total global wealth in 2045. The bull case sees CAGR smoothly falling from 55% (averaged over the past 5 years) to 20% in 2045. The bull case would see the notional nominal BTC ‘market cap’ pip a quadrillion dollars in 2045. He has well and truly drunken the crypto Kool-Aid 😉