Bitcoin Makes A Run At Its Old Highs
Bitcoin has the eyes of speculators on it again; as we write it is approaching its all-time high of about $69,000, which it reached in November, 2021. Now that the Securities and Exchange Commission has approved spot bitcoin ETF products from major Wall Street firms, the digital currency is attracting the attention of a wider audience than just speculators.
For years, when others have suggested that regulation would be the death-knell of bitcoin, we have countered that regulators codifying their approach to crypto assets would be extremely bullish, as it would begin to draw the attention of institutional investors with deep pockets and an enduring desire for exposure to differentiated and uncorrelated asset classes.
This has been our model of bitcoin, and of digital assets generally, for the near-decade that we have been giving them professional attention: they are a new asset class, one which shares certain characteristics with existing, traditional asset classes, but also has new characteristics of its own which are particularly desirable in the contemporary world. After its somewhat wild and chaotic birth and infancy, the digital asset class is just beginning to settle down and mature; financial authorities are starting to get a grip on regulating it; and major institutional actors in the world’s financial ecosystem are taking notice and beginning to dip their toes in the water.
This process suggests an approach to valuing bitcoin. Warren Buffet and Charlie Munger famously dismissed it because it generates no cash flows; of course, neither does gold, and gold is among the most ancient of desirable assets (perhaps along with land and cattle, the most ancient). In spite of the fact that it generates no cash flows, gold has been an extremely useful component of investment portfolios at various times in financial history; the classic observation is that an ounce of gold has bought a good suit for 200 years. Compared to the decay of fiat currencies, it has long been a powerful store of value.
In many respects, bitcoin is a form of digital gold. It has some functionality for everyday exchanges, but not much -- the network’s throughput is too low by several orders of magnitude for it to serve as a mass payment mechanism. (There are side projects trying to address that, such as the Lightning Network, but they are unproven and may prove to have disqualifying flaws.) But bitcoin has high utility as an accessible form of value storage that is independent of central banks and corrupt local financial and legal systems. To the large portion of the world’s population that lives without the benefit of a robust rule of law and reliably enforced property rights, buying bitcoin serves the same purpose as buying gold -- and is a lot easier, contracts no storage expense, and is much easier to move.
At this point, there are many investors who have a decent grasp of the mechanics of bitcoin and understand in essence why it is not “fake” or “fraudulent,” whatever the shenanigans of its punters have been during its raucous infancy. However, it is still a mystery to others. If you would like a basic orientation in the technology, our 2018 presentation at the Las Vegas Money Show might be helpful. This presentation, of course, does not include more current developments such as the arrival of spot bitcoin ETFs. We will continue to keep you up to date with many significant developments through this newsletter.
Valuing Bitcoin
As bitcoin approaches its old highs, how do we think rationally about valuing it?
We think it makes sense to consider bitcoin’s value in relation to the value of gold. The total current value of above-ground gold is somewhere in the vicinity of $13.4 trillion. The current supply of bitcoin is approximately 19.6 million. If bitcoin took 10% of the global “market cap” of gold, one bitcoin would therefore be valued at about $69,000. We believe that bitcoin’s superior characteristics -- its electronic accessibility, its easy storage and transmission, and its distributed, independent governance -- will probably continue to challenge the historic supremacy of gold as a vote of “no confidence” in government and as a defensive value-store against fiat profligacy.
Of course, in this regard, it is not irrelevant that this year, total public and private global indebtedness reached $313 trillion a few weeks ago -- some of which is collateralized but much of which is “secured” by nothing more than the assurances of the entities who have sold the debt. With the U.S. as a case study, incremental additional debt on top of a large existing mass of debt becomes rapidly less effective at sparking GDP growth.
The bitcoin challenge to gold will intensify the more bitcoin achieves mainstream acceptance, adoption, integration, and regulation, and thus bitcoin’s penetration relative to the total market capitalization of gold will likely increase. It is certainly easy to imagine a longer-term price target for bitcoin well above $100,000 -- not of course to be reached without considerable volatility, of which the past few years have provided ample evidence. (We should also bear in mind that some significant portion of the 19.6 million bitcoins mined thus far are probably lost forever, with encryption keys thrown away on old hard drives years before the currency achieved any significant or stable value.)
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