So… the most interesting macro move this week wasn’t from finance, but crypto.
Bitcoin and crypto prices were absolutely massacred on Wednesday night:
Timeline: Crypto Carnage
Brief summary of what’s happened this year:
8 Feb 2021 – Tesla announces it bought $1.5 billion in bitcoin, plans to accept it as payment for cars (Bitcoin: 38,000)
24 Feb 2021 – “Laser Eyes” trends on Twitter (Bitcoin: 52,000)
15 April 2021 – Coinbase IPO (Bitcoin: 63,000)
28 April 2021 – Tesla announced it sold 10% of its Bitcoin to “prove liquidity”, but also conveniently booking a profit from the sale (Bitcoin: 55,000)
13 May 2021 – Tesla suspends acceptance of Bitcoin because of energy usage. Elon Musk gets into a fight with Bitcoin Maximalists (Bitcoin: 54,000)
19 May 2021 – Bitcoin Crashes (Bitcoin: 35,000)
19 May 2021 – Elon Musk tweets “diamond hands”, marking the bottom (for now)
Interestingly, it wasn’t Elon Musk, but Coinbase’s IPO that marked the interim top in Bitcoin.
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Bitcoin – You love it or hate it
Let’s face it – with Bitcoin, you either love it, or you hate it.
But there’s a lot of truth from both sides, so we need to understand the arguments from both camps.
“A Bitcoin maximalist believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about. Most maximalists also feel strongly that altcoins (any cryptocurrency that is not Bitcoin) are not just technically flawed, but are morally questionable.” Source
For Bitcoin Maximalists – it’s like a religion for them. Bitcoin is the only one true form of money they care about. Everything else is blasphemy.
The arguments essentially stem from a mix of:
Fixed Supply + Central Bank printing – Bitcoin’s supply is determined by an algorithm, instead of man. Only 21 million coins can be created, and the supply halves every 4 years.
In a time of rampant central bank printing, this gives Bitcoin a powerful edge as an inflation hedge – the one true form of money.
First Cryptocurrency – Bitcoin being the first crypto shouldn’t be underestimated. With crypto and money there are powerful network effects, so the more people on the network the more valuable it is.
Bitcoin being the first cryptocurrency gives it a special position within the Crypto space, akin to gold.
On the other hand, you have bitcoin haters.
Big names like Jamie Dimon used to be one of them, but they have since reversed their positions.
Charlie Munger came out as a Bitcoin hater recently:
“I don’t welcome a currency that’s so useful to kidnappers and extortionists,” Munger said. “I think the whole damn development is disgusting and contrary to the interests of civilization.”
The arguments here are:
Bitcoin has no intrinsic value – Just like Gold or Fiat currency, Bitcoin’s intrinsic value is zero.
It’s value comes from the fact that people choose to believe it has value. This makes it tough to value Bitcoin using traditional valuation tools.
Bitcoin is used by criminals and will be regulated – Crypto is being regulated as we speak, just look at all the AML/KYC obligations when buying crypto with fiat. But this is probably good for the space longer term, a necessary step to gain widespread adoption
Countries like Turkey or China may ban crypto, but personally I don’t see the US or EU taking such drastic steps.
Why ban it, when you can tax and regulate it? There’s so much wealth being generated for the US – just look at the Coinbase IPO.
What is Blockchain Technology?
From Marc Andreessen:
“The practical consequence […is…] for the first time, a way for one internet user to transfer a unique piece of digital property to another internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”
Blockchain uses 3 technologies, to solve a fundamental problem in commerce – the transfer of value, in a safe and verifiable manner, without going through a trusted intermediary.
Think about it this way.
You’re a merchant in the US, and you want to transfer money to someone in Singapore to buy goods. How do you go about doing it?
In all of human history, this has only been done in 2 ways: (1) by yourself, (2) by a trusted intermediary.
(1) By yourself
The earliest form of trade – you do it yourself.
You get on a boat, you go to the other guy, and you exchange the gold/money for whatever you want.
Then you bring it back.
(2) By a trusted intermediary
And then banks came along.
So the bank says, you give me the money, and I’ll give it to the other guy, for a small fee (bank transfer).
Or better yet, the bank says I’ll give the money to the other guy for you, only when you get the goods (letter of credit).
The bank becomes a trusted intermediary, allowing commerce to flow between 2 parties.
The transition from (1) to (2) unlocked massive value across the world. None of globalization would be possible without the banking system, and banks have captured massive value.
At a fundamental level, this is how commerce has been done for much of the past 500 years.
And then blockchain came along.
The gamechanging element of Blockchain, is that it allows the same transaction to happen, without the need for a trusted intermediary.
In a blockchain world, you can buy a coin on the blockchain, send it to the guy in Singapore.
The guy in Singapore then takes the coin and exchanges it for whatever he wants.
Everybody in the world can confirm that the transaction has taken place.
There is no need for a trusted intermediary (a bank) in this chain.
If you use smart contracts (eg. Ethereum), you can even have it that the money releases automatically when a certain event happens – replacing letters of credit.
Will Blockchain’s impact rival that of banking?
In some ways, the impact of Blockchain may go on to become as big as the impact of banking itself.
It opens up a whole new world of possibilities – the ability to build decentralised systems.
I’ve talked a lot about how I think the decade we are in will be one of decentralisation, and I think blockchain will play a key role in that movement.
But – I think we are still very early.
I think where we are today for crypto, is like the internet in the 1990s.
A lot of hype, a lot of bubbles, a lot of speculators in this phase.
Did internet stocks crash along the way? Absolutely.
But did the internet go on to change the world? Hell yeah.
And using blockchain to solve money is only one potential use case. There’s no reason to stop there.
Everything from land title to objects (NFTs) to voting can potentially move to blockchain.
I think we’ve barely even tapped the true potential of this technology.
In 1995, it was hard to imagine the Ubers and Meituans that would one day rise from the internet.
Same with Blockchain.
What is the intrinsic value of Bitcoin?
How do you value something which has no intrinsic value or cashflow?
We need to reason from first principles here – so what are other asset classes with no intrinsic value or cashflow, but still have value?
Gold, and the USD.
Neither gold nor the USD has intrinsic value. Unlike rice or oil, it’s not something that can be eaten or has practical use.
The reason they have value, is because people choose to think of them as valuable.
Same with Bitcoin.
You can call it a greater fool’s theory, or you can call it an MLM. Not incorrect descriptions.
How to approach Bitcoin (or Crypto) investing?
Going back to the internet example.
Let’s say you’re investing in the Internet space in the 1990s.
You know that the internet will go on to change the world.
But you don’t know which companies will do it.
You want to buy the Amazon and Googles, but avoid the Pets.com.
How do you do it?
Crypto as VC investing
As it turns out, the VCs have figured out the answer long ago.
You just buy them all.
So the way VCs work is that they go out there, and they invest in 100 startups.
95 of them go bust.
4 of them break even or make a small return.
1 of them becomes Facebook, and delivers a 1000x return.
So that 1 investment, made up for all the losses elsewhere.
And that’s just how I see the crypto space today.
I genuinely don’t know if Bitcoin or Ether or Pancake is going to change the world.
But one of this may. And if it does, that’s a heck of a lot of upside there.
Crypto as a call option
Ray Dalio talks of Bitcoin and Crypto as a call option on a digital future, and I think he’s absolutely spot on.
These guys out there, with decentralised finance (DeFi), they’re trying to build an alternative to the existing financial system.
Sure, most of them will probably crash and burn. That’s the nature of startups.
But just maybe, one of them may go on to come up with the Blockchain version of Google, or Facebook, or Amazon.
And absolutely change the world as we know it.
And what I’ve learnt from my time investing, is to never bet against human ingenuity.
Without human ingenuity, we’ll still be cavemen without fire.
With crypto – the bet is asymmetric.
The max you can lose is the amount you put into crypto. The max you can gain if they build a new financial system, is theoretically unlimited.
As long as you position size, don’t use leverage, and put in only money you can lose, then you’ve manged your downside. And the rest is upside.
Why I bought the dip
The past week, I bought a bunch of Ether, I bought a smaller amount of Bitcoin, and I also bought some alt-coins like Cardano.
I really think of them as call options here.
The worst case is that the option expires worthless, and I lose the money I put in. No biggie, it’s a small % of my portfolio.
Best case crypto does change the world, and some of the coins go up a lot.
In other words – it’s a call option on a digital future.
But…is the bottom in?
Back to the internet example, there will be bubbles and crashes along the way.
If you bought tech in 1998 you needed to live through the Dot Com bubble and the 2000 crash.
So leverage in this space is not wise. Only put in money you can lose entirely.
Personally I’m not sure if the bottom is in yet.
Too many people buying the dip, too many HODLers.
Doesn’t feel like a capitulation.
Please don’t blindly follow me in though. I think the sell-off will take some time to play out, and rising yields in 2021 are going to crush a lot of risk assets, everything from high flying tech to crypto. We’ve already seen that in SPACs and IPOs, and it’s starting to expand to the broader market.
It’s also gotten to the point where a crypto crash could trigger a broader risk-off in the NASDAQ, given how correlated everything is today.
So yeah… watch your risk, and be patient. Even for me I only deployed a small portion of capital the past week, with plenty more to go in if (when?) the crash plays out.
How to buy Bitcoin, Ethererum, or Crypto (for Singapore Investors)
I wrote a guide on this a while back, so do check it out here.
Long story short – Coinhako if you want something simple and fuss free, Gemini or Binance if you buy bigger amounts and don’t mind more complexity.
Referral links below if you need:
Get US$10 of bitcoin after you buy or sell US$100 of crypto:
20% rebate on trading fees:
Stock to flow model
An anonymous guy on the internet (Plan B) used stock to flow to value Bitcoin.
The core idea is simple – you measure the amount of stock in the world today, and you divide it by the amount of new supply each year.
For example with Gold – there are 185,000 tons, and 3,000 tons produced a year. This gives it a stock to flow of 62.
Bitcoin’s stock to flow is about 56.6.
And because Bitcoin’s supply halves every 4 years, you can plot a valuation based on this:
It’s a brilliant model, but I don’t think it is perfect.
It doesn’t take into account demand growth, and it doesn’t take into account macro factors.
But there are enough people out there who believe in it, that could easily make it self-fulfilling.
Another big one is inflation and central bank printing. A lot of people there see crypto as the best hedge against inflation.
I don’t know if they’re right or not, this asset class just hasn’t been around long enough.
But it doesn’t matter if I believe it, what matters is whether enough people out there believe it.
Whatever the case, really interesting to watch this one play out.
Would absolutely love to hear your thoughts!
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