Motley Fool Hidden Gems Investing - Revisiting Crypto and Meme Stocks

Episode Date: August 13, 2023

Bitcoin was supposed to be unrelated to the stock market, act as a hedge against inflation, and serve as a currency for private transactions. Maybe, it’s just a volatile store of value. Is that so bad? James Surowiecki is an editor at The Yale Review, a regular contributor to The Atlantic, and author of “The Wisdom of Crowds”. Motley Fool co-founder and Chief Rule Breaker David Gardner caught up with Surowiecki on his podcast, Rule Breaker Investing. This show is a cut of their conversation. They discuss: - Lessons from Bitcoin’s past boom, and its place as cryptocurrency’s “top dog” - The correlation between crypto and tech stocks - One company that’s tied its fate to the success of Bitcoin - Meme stocks from the lens of cash flow investing Tickers mentioned: BTC, ETH, MSTR, GME This episode is just part of an interview aired on the Rule Breaker Investing podcast. You can listen to the entire conversation here. Host: Mary Long Guests: David Gardner, James Surowiecki Engineer: Rick Engdahl Producer: Ricky Mulvey Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. one thing that's important to note is people will sometimes point to um you know the volume of transactions in different cryptocurrencies bitcoin being the most obvious but obviously what we are interested in is if if you want it to be a currency we're not interested in uh how many trades are made in that we're interested in how many times it is used to actually buy goods and services. And that number has remained very low over time. I'm Mary Long, and that's James Surwicky, a regular contributor to The Atlantic, Fast Company, and author of the book, The Wisdom

of Crowds. Back in July, David Gardner caught up with Surwicky on the Rule Breaker Investing Podcast. We're playing a piece of their conversation on today's episode. They discuss how the case for Bitcoin evolved and where its utility has fallen short, a question that investors should ask before purchasing any asset, and what drove meme stock bubbles. If you'd like to listen to the full episode, we've included a link in the show notes for you. Jim, welcome back to Rule Breaker Investing. Thanks for having me on, David. I'm just delighted to have you back. And as I said at the top of the intro, it was two years since you last appeared on this podcast. I am, to my slight credit,

I said we're going to we're not going to let three years pass before revisiting each other in this topic. And so I'm happy to say inside three years we're back. But, Jim, a lot of things have happened in the world of cryptocurrency, which since it's a rather large world, I would say have happened in the world at large these days. And I definitely want to touch some of those. But I want to start with where things were in February of 2021. The title of that podcast was Bitcoin 2021. My good friend Aaron Bush joining you and me. Bitcoin was sky high. That week, it touched over $50,000 per Bitcoin. Just to quickly trace these back now, I don't follow this actively. We have listeners who know this down pat, but I'm about to take us all briefly through the stock graph of Bitcoin since February of 2021.

So, $50,000, as you and I talked two and a half years ago, dropped to $35,000 later that year, but was back up to $64,400, all-time high, that November of 2021. You talk about volatility. Well, we'll spin it forward one year, 2022. Last year, it spent a lot of its time at or below $20,000. And as we started 2023, Bitcoin was trading right around $17,000 a Bitcoin. Today, mid-July, $29,000. So you began writing about Bitcoin, Jim Surowiecki, in 2011. Even then, I think you said you thought it was in a bubble.

But your January 21 piece you had just written for Marker two years ago said, measured as a currency, Bitcoin has failed. You probably raised some eyebrows and that's a good headline for a headline editor to get clicks. But, Jim, what were you saying then? And do you still feel the same way today? Yeah, I mean, I do feel the same way. In fact, I think and I think in a way the argument I was making in that piece, which is essentially that the original vision of Bitcoin, which was essentially that it was going to become a digital currency that could compete or in theory, I guess, even replace traditional, you know, what are now called fiat currencies, that that original vision was basically dead. that the nature of Bitcoin, both in terms of just literally technologically, that the fact that it could only do a certain limited number of transactions per hour. And I know all the Bitcoin evangelists will tell me that there are various ways they have been working on that

problem, but it remains a real issue. But then I think the second thing, which is a bigger problem is really inherent in the way Bitcoin itself, it's not true of all cryptocurrencies, but Bitcoin is set up, is just that because Bitcoin has a limited and that is to say permanently limited number of Bitcoins that will ever exist in the world, it basically creates an incredible incentive for people who believe in Bitcoin to hold on to it rather than to use it. Because it essentially means that you assume the value will rise over time if more people want Bitcoin. And so using it to buy a pizza, which is the famous example, someone used it to buy a pizza many, many years ago. And I can't remember how much he would have now if he hadn't done that. It was the most

expensive pizza purchase probably in the history of the world. And so I do think that. So the argument that I was making was that, which I think is now a fairly familiar one, is that Bitcoin really was now functioning more like digital gold and that it was really serving more as a kind of, to the extent that it had any value as a currency, it was really more as a store of value. It was really an asset rather than a currency, which you basically want people to be using. And that argument, I think, is essentially correct. And, you know, you will still hear people trying to make an argument that Bitcoin will someday be a real currency. But I feel like that's kind of faded away. And Jim, would you say the same thing of any other cryptocurrency at this point?

I mean, my assumption is that Bitcoin, being the brand leader and the top dog over history, would be the one that has the best shot of all currencies to be a so-called future fiat currency. Do you see anything else emerging in the Ether, or do you think this is just not a thing? So Ether is the actually is the only other one that I think has simultaneously the brand name and then structurally could also actually in some ways probably work better as a currency because it doesn't have that limited number, permanent number. Ethereum? Yeah, set on it, basically. And Ethereum is used now within sort of the crypto ecosystem to fund certain kinds of projects and the like. But I don't think there's any real evidence that Ethereum is being used as a currency in day-to-day transactions.

And one thing that's important to note is people will sometimes point to the volume of transactions in different cryptocurrencies, Bitcoin being the most obvious. But obviously, what we are interested in is if you want it to be a currency. We're not interested in how many trades are made in that. we're interested in how many times it is used to actually buy goods and services. And that number has remained very low over time. You know, the one thing it is still used to buy is drugs and other illicit, to participate in other illicit transactions. And it definitely does still have some value there. But I think even there, it has paradoxically become somewhat less valuable as people have realized that it's not as, even though it's punitively anonymous, it's actually

not as, it's in some ways more traceable than certain kinds of dollar transactions. And so I think that's it. So I basically view these cryptocurrencies as very speculative assets. And I think that that's the way they're essentially used in the world at large. Jim, you pointed out last time we talked two years ago on this topic that Bitcoin over the previous decade had been the best performing asset class. And but also, and I quote, almost completely uncorrelated with most other assets. Yeah. Now, I'm wondering, in the couple of years since then, seeing sort of the market bounce back this year, like I'm talking about the overall stock market here. Yeah. And and then Bitcoin bouncing back, kind of looking like it's correlated with the movements of the market. Do you think that that's a change? Yeah, I think that's a great question.

And I think it's actually one of the reasons why when I look at crypto, let me let me back up a second. The question I have always had about crypto is why would I buy crypto versus buying an index fund or a rule, the rule breaker portfolio or whatever? Why would I do it? What is it that it gives me? So the argument, and I'm not obviously the kind of person that's concerned about the government, I don't know, whatever, taking my money or whatever the things are that conspiratorial minded people worry about. And so the one plausible argument that you had in the 2010s was that Bitcoin was uncorrelated, right? That it was, it gave you, it wasn't even really a hedge exactly, but it essentially diversified your portfolio. But yeah, you're right. I mean, over the last two years, and it was probably even happening

around the time we were talking. In fact, I think you could go back to 2020, when you saw you had the stimulus payments that went to younger people who probably didn't need them, and so spent them on either meme stocks or cryptocurrency and the like. What you've really seen over the last two or three years is, to my mind, a very tight correlation between Bitcoin and cryptocurrencies more generally, and then what's happening not just in the stock market, but more specifically in the NASDAQ. And so I think when you look at crypto over the last couple of years, what it actually looks like is just a tech stock with higher beta than the NASDAQ does, basically. And the moves up and down just tend to be bigger. Although,

I guess in 2023, not as big as a lot of the NASDAQ stocks have been. And that, again, to me raises the question of why. Why do I want to buy an asset whose value depends entirely on the opinion, okay, maybe not entirely, but almost entirely on sentiment rather than a stock that has actual cash flow that's going to drive valuation in the long run. And my answer, of course, is I don't really think there is a good reason to do it. Let me add one other point about this, which I think is important, which is the other argument for Bitcoin historically was that it was a hedge against inflation. And so, you know, in theory, as inflation rose, the value of Bitcoin should rise as well. We didn't see that actually. In fact, what we saw was as inflation

rose in 2021 and into 2022, the value of Bitcoin cratered. And as interest rates rose, the value along with stocks. And so that, again, just made me think like, what? So there's no, it's not actually even hedging in the way that you might think gold would or something like that. Really good points. And we're talking about the stock market a little bit and why buy this versus that. And so let's broaden this because something else has become popular in the last couple of years. And I'm thinking of so-called meme stocks as we talk now. And this was already happening a little bit as we got into the start of 2021, but it's really become much more of a thing now. So, I want to talk about two stocks, both of which we talked about

two years ago. So, you'll recognize these, even if you're not spending a lot of time rolling up your sleeves doing individual stock research. And one of them is certainly Micro Strategy. Michael Saylor, the CEO of the company who decided to take his sort of mobile software consulting company in an unusual direction when he began converting the company's assets from cash into bitcoin and then even went so far as to start raising money on the public markets simply to buy more bitcoin now this is a rule breaker stock of mine one that i've bought and held for a long period of time because i like the story of micro strategy pre-bitcoin and micro strategy for about 10 years bounced between a hundred dollars a share and two hundred dollars

a share from 2010 to 2020 in 2021 ticker symbol mstr briefly skyrocketed from below 200 to over 1200 a share it was back to 150 by the start of this year 2023 i will note it's back to nearly 450 seven months later now i'm not saying this is a straight up one-to-one proxy for bitcoin but if you look across the world of the entire stock market, I'm not sure there's any public company that is more correlated to Bitcoin itself. The market cap, by the way, $5.9 billion for the stock today. They own about $4.2 billion of Bitcoin. Is that true? I didn't realize that. And part of the debate we were having, it wasn't really a debate, but the conversation with Aaron was, you know, why buy MicroStrategy? Why not just buy Bitcoin? You got us a few minutes ago

into the why own any of these things? Like, what are we trying to do with our money? Do you have any additional thoughts about MicroStrategy? We're not even going to FTX yet. Do you have any additional thoughts about MicroStrategy vis-a-vis Bitcoin? MicroStrategy is the kind of stock that I look at and just have no idea what to do with basically. Um, uh, because sailor strategy seems, uh, you know, very eccentric to me. Um, I'm, you know, it's funny if you look on like Yahoo finance, um, it has micro strategies, uh, EPS as negative $84 a share. Wow. It's earnings per share. So I have no idea what, what, what it's actual earnings per share are right but um so uh so you know i look at that and i'm like my my concern with um i'm a very

risk averse investor much much more risk averse than i than i think is probably good good for me and and my uh concern when i look at bitcoin or uh meme stocks generally and or or micro strategy specifically is that I just don't see what stops the stock from falling once it starts, because the valuation of Bitcoin essentially depends, like I said, on public sentiment. Insofar as MicroStrategy has, to some degree, hitched its business to Bitcoin's wagon, I have the same kinds of anxieties about it. But I do think that in some paradoxical way, I guess I could see the logic of actually buying a stock in a real public company rather than in Bitcoin, especially because MicroStrategy does have some business underneath it.

But, you know, that ride from – I actually – I didn't realize it went as high as $1,200. I thought it had peaked at like $800. It was brief. It was brief. But that ride from $1,200 to $150 and then tripling or close to tripling this year, it just makes me feel anxious just thinking about it, basically. Well, this has been an ongoing, I would say, constructive criticism that you've been leveling at this situation, which is that how can these things really, especially Bitcoin, how can they really be stores of value when they're this incredibly volatile? Now, gold has been volatile at different points, and especially if we imagine when humanity, I can't date this, I'm not sure we all know, but whenever humanity decided officially to start saying, yeah, gold, yeah, I'll trade you that for food, whenever that officially happened, I bet gold was a volatile asset class back then. And it remains so thousands of years later, but it nevertheless does, to my mind anyway, once again confirm how right you were, Jim, going back more than a decade, basically saying this is not a currency.

This might be a store of value. And, in fact, I remember Aaron saying on that podcast two years ago, and I quote, I think that even if it has failed as a currency, said Aaron Bush, it doesn't really matter. It doesn't necessarily need to have lots of utility in order to hold lots of value. In some ways, Aaron concluded that's the point. But it does remind me, Jim, and you were talking to this earlier a little bit, that in fact that it's not spent on a regular basis makes it in some senses a better store of value. And so just sitting there in digital vaults being speculated on ironically makes it more valuable than it were being used. At least that's how some people seem to think about it. Well, one, I think the other thing that's true is there is obviously to some degree, you know, thinking makes it so.

Right. If enough if if as with gold, if we collectively decide or enough people collectively decide that something is valuable and it will continue to be valuable, et cetera, at some point it becomes genuinely valuable. And the one thing I would say, which is really obvious, is that the structure of Bitcoin, this limited number of coins will ever exist, does give it the fundamentals that will allow it to essentially hold value over – can allow it to hold value over time because you don't have to worry about more Bitcoins being produced. And so it does have that. And while I remain somewhat baffled that Bitcoin is – one Bitcoin now costs $30,000 a coin, I am less baffled by Bitcoin than I am by the purely, utterly speculative things like Shiba Inu or Doge or whatever, the multiple other, as they call them, shit coins that are out there basically. the fact that people are well i mean i guess people bet on those like they bet they go to the casino maybe it's maybe that's the best analogy in some ways and that leads us to the one other meme stock i wanted to talk about and this is one a lot of people know and that's game stop and game stop is a company that i was a customer of for so many years it was a stock

recommendation of mine a long time ago back in its golden age back when i was buying new games at game stop the bricks and mortar stores and then returning it to game stop to get value back so someone else could buy the used copy. And GameStop, as the video game industry really became mainstream, whether it was sales of hardware or sales of software, I highly esteemed GameStop. However, it, too, got caught up in the craze. I think most of us know this. It wasn't the only one, AMC and others. It's a little bit of not just meme stocks. Are meme stocks, Jim, a meme themselves for our age? And if they are, if you want to go there, would you put Bitcoin in there with them? And what conclusions are you starting to draw about

how we're investing our money? Well, you know, the way I kind of think about it is that there clearly are connections between meme stocks and crypto. You know, there's a lot of overlap, I think, in the kinds of people that invest in them, at least historically. You saw, you know, the kind of the bouncing crypto, the huge bouncing crypto happened around somewhat roughly coterminous with the bouncing meme stocks. Although, you know, meme stocks, it was up and down even in 2021. I think the thing that's been most interesting to me about it, and to me, in some ways, the meme stock phenomenon has been, if not more confusing or, let's say, disturbing than the Bitcoin thing, it seemed odder in a way. The way I would put it is, I come at investing,

and I think mainly because of the time I spent at The Fool in the mid-1990s, I come at it in some ways from a very traditional point of view. And that is to say that the value of a company really should reflect the discounted free cash flow of that company in the future, you know, with some real option value attached to it in terms of other possibilities, but that that's basically what you're trying to do. That what you're really trying to think about is if I own this company, literally, if I own the entire company, how much cash would I be able to get out of this company over the, in the future? And then how much am I willing to pay for it, you know, in order to get a reasonable return on, on my investment. And, and, and while that sounds kind

know, traditional, it obviously applies to all kinds of companies. And as obviously the pool and rule breakers have demonstrated, you can use it to think about a whole range of companies, including ones where, you know, the future earnings are entirely on the come where right now they have no earnings, whatever. And we've, we've seen that with, you know, the tech companies that dominate today. So, so when you come at it from that perspective, that was the part of the meme stock frenzy that just was where it really did feel like a pure bubble, where it really did feel like people were buying these stocks, not because they thought these companies were going to be really valuable in the future. There was some rhetoric around GameStop that Ryan Cohen

was going to transform it. And obviously, even now, it's at $23 a share, which I think its low was around, what, like six or something like that before the thing took off. So they may very well have improved certain things about their underlying business. But when you looked at the valuations at the peak, what it really felt like, and I think that this is the part of it that feels symptomatic of a cultural moment. It felt like people were basically just saying value of a stock is entirely in the eye of a beholder. And if the market says it's worth X, then it is really worth X. And I just found that and still find it as someone who thinks a lot about investing and valuation, I found it just A, wrong, and also just really disconcerting and kind of amazed that people were,

you know, we're very familiar with bubbles. But this was something different from, like this was different from a bubble where you know other everyone's buying it and it makes you kind of think okay wait you know what maybe they're seeing something i'm not so i should just get on this train and and you know maybe and and maybe they're right maybe cisco really is going to be worth 600 billion or whatever it was worth in in 20 in 2000 this felt more like yeah we all kind of know it's not really going to be worth this it's not worth this but we are going to essentially make it worth this by collectively deciding it is and um that was just like it was so wild to watch um and you know i wrote about it and the the backlash against

stuff if you criticize this was incredible uh because you know if if it is all about what we believe you don't want anyone to try to question what you believe because it can shape the thing and you know that's all the stuff on wall street bets about diamond hands and you know kind of urging everyone to stay strong. It was amazing to watch. I mean, incredible. It is amazing. And you're right that that feeling of, well, I'm going to buy this thing. I don't really know if it's worth this, anything close to this or not. But I have a near term conviction. And by the way, it's always near term. Can I give you one other example? I mean, the stock that I was really that to me was the kind of extreme version of this was Bed Bath and

Beyond, right? Where, especially toward the end, right? So Bed Bath & Beyond was one of these meme stocks and it saw similar rises and falls. And that was a stock where for a short period of time, people were convinced that again, Ryan Cohen, who's this kind of the sort of secret wizard behind these stocks, that Ryan Cohen was going to transform Bed Bath & Beyond and he was going to spin out the baby business, which people were saying was worth, you know, huge sums of money and billions of dollars. But, you know, if you went to a Bed Bath & Beyond store, just to do that old Peter Lynch thing, like if you went to a Bed Bath & Beyond store, you just realize like, there's nothing here. This is chaos. They don't know what they're, you know, basically, this is

a retailer that is no has no longer has a real reason to exist, and is just not doing any of the things you need a retailer to do um and then if you looked at its balance sheet and its debts it just seemed clear okay it's but that it was doomed essentially um and even but even when beyond would say things like we're not sure we think we're not we're not sure we're going to be able to continue as a going concern people would still find a reason to to buy and um that was what was amazing. You know, even as it fell down, you still had days where it would double or triple over the course of a day, because it essentially became a kind of slightly more expensive version of a penny stock. As always, people on the program may have

interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow, Fools.