Bitcoin is no longer a bubble since Elon is in on it...
A list of pro-Bitcoin arguments that changed my mind to believe its price will continue to go up. I don't think it will replace dollar or has any fundamentals, but these reasons can't hold it back...
Yesterday morning came the bombshell news that Tesla invested $1.5 billion in Bitcoin. Bitcoin shot up around +20% to $47,000/coin at one point. A couple weeks ago I was looking at the price at $30k and thought it’s gonna come crashing down. Now, there’s even rumor that Apple will soon be the next buying billions dollars worth of Bitcoin.
The title is rhetorical. Bitcoin is for sure a bubble… at least that’s our initial perception when we see such an intangible asset being at its historical high and everyone tweeting about it. But if legendary institutional investors like Stanley Druckenmiller and Paul Tudor Jones, and business titans like Tesla and Apple are buying in Bitcoin, does it validate Bitcoin’s value and now mean that Bitcoin will indeed go to the moon? Is it really a bubble? Or just the beginning of a great bull run?
We’re not here to discuss use case or social utility
Let’s set aside the normative discussions of whether Bitcoin is in any way “useful” or “positive” to our society. Many economists, political theorists, and activists have come out denouncing Bitcoin’s social impact, my thesis advisor Atif Mian included:
Others aren’t convinced by Bitcoin because “oh it’s never going to replace the U.S. dollar because the government will never make it happen” or “it’s too complex and volatile for an average American to feel comfortable holding”… All valid arguments, but the question in place is not whether you agree with Bitcoin, but rather whether Bitcoin will indeed continue to go up.
Personally, I’ve come a long way to believe that Bitcoin will continue to go up, if not in the short term (next few months) then at least in the long term (5-10 years out). Again, this is not a normative judgment on whether it’s good/useful, but it does seem to me that the common critiques against investing in Bitcoin don’t really hold.
Today I want to briefly write about some of the questions I asked and how I became more convinced by Bitcoin’s price story.
Common critiques against investing in Bitcoin don’t really hold
Some common pro-Bitcoin arguments
I will not go through all the pro-Bitcoin arguments, but the more convincing ones in general are:
Interest rate is too low nowadays, so investors are on a hunt for yield. Cash is trash, and people have to diversify their assets somewhere. Bitcoin is this new asset class that more people are becoming more comfortable to invest in.
There are only 21 million Bitcoins. Unlike the fiat currency system we currently have, nobody can “create more Bitcoin” like the Federal Reserve printing money, which has resulted in the dramatic decline of dollar’s purchasing power (I believe one statistic is -20% loss in purchasing power during Covid due to Fed’s QE). As the demand for Bitcoin goes up, however, Bitcoin price will go up and nobody will screw with it.
Bitcoin is the new gold, but it is more secure (because of blockchain), easy to store (no need a vault), technologically friendly, attractive to young people… If you believe in gold, why not also believe in Bitcoin?
Concern 1: Bitcoin isn’t backed by anything
Q: You can’t really price the fundamentals of Bitcoin like you normally do with a stock discounting its future cash flows.
A: Sure, Bitcoin isn't backed by anything except people’s faith, but that alone seems to be enough. Fiat currency like dollar is backed by our faith in the US government. Gold, to be honest, only has this “intrinsic” precious value because we recognize it’s limited in supply and commonly agreed that we’d use it as a common denominator for value – you can’t eat it and it doesn’t give you any superhuman ability. Meanwhile, Bitcoin is also limited in quantity, so as long as we collectively believe in it, it will do just fine as a measurement of value and medium of exchange.
Concern 2: Bitcoin will never replace dollar
Q: Sure the Fed is printing a lot of money, but US dollar will at least preserve its nominal value, meaning that when crises happen people still look at the dollar and see it as a safe haven currency and something that is backed by a strong government. This was articulated by Prof. Katharina Pistor in our podcast interview with her. Therefore, we can recognize that people have been tired of Fed’s money printing since 2008, but the mainstream discourse isn’t changing, and people still have tremendous faith in the dollar.
A: Bitcoin doesn’t need to replace the US dollar in order to keep going up. We just have to look at the total addressable market for assets that can be considered as the store of value. According to Cory at SwanBitcoin, a prominent voice in the Bitcoin community:
gold has a total valuation of ~$12 trillion; there are other precious metals;
broad money (everyone’s savings, Treasury notes, etc.) across all countries in the world add up to a bit over $90 trillion;
global stock market which is now at ~$85 trillion;
some percentage of global real estate (15%-50%) which is not just for the purpose of living but as a form of investment/store of value;
other miscellaneous like art, wine, etc.
Bitcoin now has a market capitalization of ~$850 billion dollars as of now being at ~$47k/coin. This is a tiny, tiny percentage in comparison to everything.
We don’t need to have Bitcoin replacing US dollar (though some do believe that); we just need to ask “what is the fair share of Bitcoin in this total addressable market for store of value?” 1%? 2%? 10%? Whatever proportion you come up with, it implies that Bitcoin is going to be dramatically more expensive than today’s price. However you slice it, Bitcoin is very early in its development.
Concern 3: Bitcoin is too volatile for average investor
Q: Bitcoin isn’t very liquid; a low amount of outstanding shares available; so it tends to be very volatile and often spikes suddenly. An average investor won’t want to open their brokerage account every day seeing the price dropping -30% in a morning.
A: Easy fix. Just hold it long term. If you do believe in the long-term trajectory, just hold it for 5-10 years. You may be down by 50% at one point but then a few months later double your money. Just ride out all the waves, and if you have the patience, why not?
Concern 4: It’s too expensive to buy now
Q: One of my friends said that he’s not doubting Bitcoin; he’s just not comfortable buying things at their all time high when he doesn’t fully understand it.
A: How much of the current price has already been priced in the Covid shock and Elon Musk’s tweets? Well, in the words of a friend of mine: “the beauty of Bitcoin is that there are no fundamentals, so nothing to price in…”
Price is relative. If you look at S&P 500 over like the past 10 years, it’s been hitting all time high almost every month. Every day people ask “are we in a bubble” and “are things too expensive.” The stock price for Amazon and other tech giants are also at an all-time high now, but it doesn’t mean Amazon won’t continue to grow its business and hit higher marks. And had you invested in these stocks at their all-time highs last year, you would’ve still made a lot of money by today.
It all depends on the investment horizon. Compared to a year from now, maybe we’ll have a downward correction for Bitcoin that drags down its price by like -40%+ back to like $25k/coin, but 5-10 years out that -40% drop won’t really matter anymore when Bitcoin hits $500k/coin (according to the Winklevoss twins).
Sure, we’re at an all-time high, but that reason alone shouldn’t discourage people from investing in a product.
Bitcoin’s value jumped over 20% to $38,566 on 1/29 after Elon Musk changed his personal Twitter bio to #bitcoin. If you looked at that and thought it was too much of a bubble, then what about yesterday when it jumped over 20% again?! It is entirely likely that Bitcoin will continue to jump many more times, as more companies (like Apple, possibly) announce their purchase.
Concern 5: What if our current “hunt for yield” ends soon?
Q: To many, much of the crave for Bitcoin is because bonds and stocks don’t give enough returns. Apollo Chief Economist Torsten Slok called Bitcoin as the “symptom” of the hunt for yield. So, if central banks can get us out of the current low interest rate dilemma, the hunt for yield will be less dramatic. More money will flow back into equities and bonds and much less to Bitcoin.
Won’t this huge money surplus thing just be a temporary phenomenon? When I talk to Princeton academic economists, many see this current period as a temporary period in the very long run of history in which somehow the monetary policies aren’t working as effectively. But “we will eventually go back to normalcy” with better growth, higher interest rate, less stock market bubble, less craziness for Bitcoin…
A: But why would the current low interest rate environment be temporary? There seems to be no evidence that suggests that the Fed can easily exit their money printing programs. In the words of my friend – “Hope is nice but why?… Just buy some Bitcoin.”
Even if the Fed manages to restore the economy back to some glorious “good old days,” it will take many years, and by then you’ll have lost many years of growth in Bitcoin value.
Concern 6: What if I’m just still not sold on this whole Bitcoin thing?
A: You really don’t have to be, and you shouldn’t be entirely sold. Despite all the nice mental exercises and market observations above, I don’t think anyone should put more than a couple low percentage points of their entire asset into Bitcoin or cryptocurrency at large.
It also depends on each person’s risk tolerance. If you have $5,000 in savings from a summer job to invest, then perhaps $500 (10% of portfolio) into Bitcoin is fairly reasonable. If your parents ask you whether they should put 10% of your entire family’s portfolio into Bitcoin, you should certainly say no and advise them to dial that ratio down to 1% or so.
The idea of owning some Bitcoin is that you can start to have skin in the game. That is the real test of your conviction and prediction for the world. At our young age (assuming that most of my readers are also very young like me), I think the learning experience is valuable, and owning some Bitcoin will force us to update our beliefs about the world in unexpected ways.
These are some of the big-picture reasons that swayed me to believe in the future of Bitcoin. Having interviewed many political theorists and economists who explained to me why Bitcoin won’t work, I used to be a big skeptic, but I’ve come to realize that I don’t need to be a believer in the politicality of Bitcoin to be a good investor or observer…
Going to bed…
To be continued…
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