IT’S A CRYPTOASSET, NOT A CRYPTOCURRENCY

Bitcoin is an innovative, rapidly expanding network for storing and exchanging value among investors. As discussed previously in our article, “Inflation, Profits, and Bitcoin,” Bitcoin has some interesting characteristics:

• A Bitcoin is a slot on a decentralized, permissionless, unhackable, peer-to-peer permanent computer network.

• Only 21 million Bitcoins will be produced and 18.5 million have already been mined and circulated.

• Demand continues to grow far in excess of supply.

If it’s an asset, does it have an inherent value, like gold?  Arguments about “inherent value” are, and always will be, meaningless. Is there really some kind of “inherent value” in gold? We just decided it was valuable to us. The same is happening with Bitcoin.

It’s a cryptoasset that has the safe haven characteristics of gold and will potentially compete with it for a place in portfolios. Bitcoin is not a currency and will not be adopted as a new medium of exchange. It is not a stable store of value, nor can it be easily transmitted and exchanged for any good or service at a consistently predictable value. But, that’s not important from an investor’s perspective.

It’s Gold….Sort of

While Bitcoin may not have a promising future as a digital currency, it shares key characteristics with assets that are stores of value, such as gold. First, its control is decentralized. Bitcoin is neither issued nor controlled by any entity, institution, or government, much like gold today. In times of heightened economic or political uncertainty, this decentralized control is part of gold’s appeal, and a role that Bitcoin could eventually play. Secondly, like gold, Bitcoin has a finite supply.

So far, Bitcoin’s price is extremely volatile, varying more than 70% so far this year (gold has varied almost 15% over the same time). While gold is nearly as volatile as equities, Bitcoin’s volatility is in a league of its own. Additionally, gold zigs when other financial assets zag, typically rising in price during stock market corrections. Bitcoin’s price behavior has been less consistent, at times showing no correlation to other financial assets, while at other times trading in lockstep with growth stocks. But just because Bitcoin may not behave like gold today doesn’t mean it won’t in the future. What would it take for these gold-like qualities to become more pronounced?

And This Means…?

Bitcoin has hit a key milestone to broad-based adoption. It is becoming an integral part of institutional investors’ portfolios. This creates a foundation of demand and potential floor to its price. Bitcoin remains incredibly volatile, and its correlation with other major assets has been inconsistent, but allocations are seen as suitable among an increasing number of investment professionals, and, increasingly, it is seen as an alternative investment equivalent to a derivative or other call options, given the potential for spectacular returns. The downside is well-defined while the upside can be asymmetric and significant.

Bitcoin is an emerging asset class, appropriate for institutional investors, a hedge against inflation, market volatility and developing into a reasonable option as a safe haven asset.

ECONOMICS, ADVANCED TECHNOLOGY, AND SOCIAL MEDIA

 Fundamental drivers for pricing valuations in public markets have changed. Now, there is a new interaction among factors unseen just recently. Advanced technologies such as artificial intelligence have had a profound impact on the tools available and analysis presented to even the most amateurish investor. Social media, such as Reddit, Twitter, and other platforms, have allowed access to information and influence from media “stars” driving demand in an almost herd-like mentality driving up prices, and causing extreme volatility. Finally, technology has enabled a trading floor to be in everyone’s pocket. That same trading floor allows access to any information on anything from anywhere, and communication with anyone or, via social media, receive communication and information (regardless of how dubious) from anyone about any security or investment strategy.

These factors will cause unprecedented market volatility, along with extreme price movements for well-known (or perhaps more accurately, well-publicized) companies and their securities. While the supply of securities remains somewhat constant, demand for those securities is increasing (sometimes exponentially) because many more investors are now chasing those same securities.

The price of anything cannot escape supply and demand dynamics. Recent IPO activity is an attempt to meet growing demand (and raise capital at attractive prices). The new supply from IPO’s, secondary stock issuances, and most recently and monumentally, SPAC offerings, still do not provide enough supply to quench a growing and overwhelming demand. The valuations, especially those given to the SPAC’s, are entering stratospheric levels that could hardly be justified under normal market conditions. Successful investors are the ones who understand adding return without corresponding risk is the most critical component of successful investing, especially given the new equation for valuation:

Economics + Advanced Technologies + Social Media = Price

These three components are now inexorably linked and constitute an influential role in determining valuation from now on.

The More Things Change…

The pandemic has challenged many preconceived notions about the economy, markets, and public policy — and has impacted the way we live. But the inescapable truth remains unchanged:

There is no magic answer. No solution other than superior skill enables an investor to earn a high return safely and dependably. That is even more true in today’s low-interest rate, low return Tower of Babel world.

— Nick Mitsakos

Nick Mitsakos - Investment Principles and Strategies

 

Nick Mitsakos have completed the first draft of my book, “Investment Principles and Strategies.” Chapters of the book are posted on the website and on Arcadia’s website. The chapters are condensed versions of topics ranging from principles in thinking about investments, to innovation and its role in society, to political and public policy, as well as international trade. Economic disruption, growth, global markets, and increasing influence of central banks have created a new investment environment, in my book attempts to address the critical issues this new investment environment creates.