The Breakdown - Why I Changed My Mind on Bitcoin

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io and stacks2.com and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, January 10th, and that means it's time for Long Read Sunday. And there are a ton of great candidates for this piece this week, but I decided to put two together because they both had the same TLDR. On December 24th, 2020, Ed Vanderwalt, who writes about markets at Bloomberg, tweeted out why I changed my mind on Bitcoin, the full story. A few weeks later, Nick Majuli from Ritzholt Wealth wrote a piece on Coin Desk explicitly called Why I've

Starting point is 00:00:58 changed my mind on Bitcoin. So I'm going to read these both together. They form a little matched pair, and we're going to start with Eddie Vanderwalt who writes, Bitcoin crushes doubters as 224% rally proves it's here to stay. This is from December 24th, 2020. Bitcoin just won't go away. The original cryptocurrency again has commentators eating their words in 2020, yours truly included. It's now time to accept it's here to stay. Like Monty Python's Black Knight, Bitcoin believers treat near-fatal volatility as mere flesh wounds. Drops of 80% are welcome to fortuitous buying opportunities, but far from being a weakness, this is evidence of the asset class's longevity. The cryptocurrency rallied 224% this year, bringing to mind the wild advances

Starting point is 00:01:43 of 2017 as it soared to record heights. While the supply side of the schedule is algorithmically defined, I was caught off guard by the ability of the demand side to withstand volatility. Supply of the digital tokens are capped at a maximum of 21 million, which it is expected to reach in 2140, with periodic reductions and the reward for the network of computers that certify transactions. Yet supply dynamics aren't sufficient to guarantee a long-term future. Many assets have artificially limited supply. Baseball cards, limited print-round artwork, and a number of historic Ponzi schemes fall into this category.

Starting point is 00:02:18 What distinguishes the successes is how investors respond to crashes. In most cases, when a vehicle designed purely around the greater fool theory collapses, it never recovers. There has been no substantial progress made on Bitcoin as a unit of exchange. It's far from widespread adoption as a currency. Since Bitcoin's market capitalization reached $1 billion in March 2013, there have been two cycles of spikes to record highs, followed by drawdowns of more than 80%. Each of those cycles were preceded by a halving of the block reward. The first cycle could be dismissed as an anomaly, the second as a coincidence. But having again occurred in May and the cycle

Starting point is 00:02:54 is repeating before our eyes, with the cryptocurrency coming within a whisker of the all-time peak last week. To ignore it now is to dismiss the evidence of history. Like social networks, cryptocurrencies derive their value from the number of users. I could build a platform with the exact qualities of and even some improvements over Facebook, but achieving critical mass is another matter. The cryptocurrency remains a speculative asset and more needs to happen to secure its claim to preserve wealth over time. volatility would have to decline and a reliable link to inflation would have to emerge. But to bet against Bitcoin recovering from the next crash is to bet against experience. And its sheer bloody-minded survival is what gives it the best chance at eventually becoming

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Starting point is 00:04:20 Stax 2.0 is launching on January 14th, 2021. On this day, Bitcoin becomes more than just digital gold. Attendees can expect to hear talks from Albert Wenger, Laura Shin, Mani-Bali, Haidaeufiq, OKCoin, Peter Smith, blockchain.com, and others, as well as surprise announcements, app launches, panels on important crypto topics, a musical guest, limited edition swag, collectible NFTs, and more. Register for the Stax 2.0 mainnet event here, stacks2.com. That's stacks followed by the number two.com. Next up we have Why I've changed my mind on Bitcoin by Nick Majuli, who is the chief operating officer at Rittholz Wealth Management, an author of the of dollars and data financial blog. This is from January 4th, 2021.

Starting point is 00:05:06 There comes a point in every investor's journey when he must admit he is wrong about something. In my case, I was wrong about Bitcoin and whether it would ever be considered a legitimate asset class. This realization dawned on me in the last month when the price of Bitcoin passed its December 27. highs of 20,000. My prior belief was that Bitcoin wouldn't surpass these highs for many years, if at all. I didn't think that Bitcoin was going to zero, but I also didn't think it would eclipse its December 2017 peak anytime soon. Now that it has surpassed that peak by over 50%, I have come to realize that Bitcoin isn't the one-trick pony I thought it was. As Paulo Coelho wrote in The Alchemist, everything that happens once can never happen again. But everything that happens twice will surely

Starting point is 00:05:47 happen a third time. Well, here we are again. Bitcoin is on another, spectacular bull run and investors are taking notice. Now that Bitcoin has survived and thrived beyond its 2017 peak, many investors who used to see it as a joke are now realizing it isn't one. I am one of them. I have changed my tone on Bitcoin not because of the many arguments put forth by Bitcoin Bulls. For example, Bitcoin Bulls have claimed that Bitcoin would be used as a currency, that the US dollar would plummet in value, and that the halving in May 2020 would increase Bitcoin's price. They were wrong on all counts yet Bitcoin's price has still gone up. What the Bitcoin bulls were right about was the increased adoption and the ability of many Bitcoin

Starting point is 00:06:25 owners to hoddle even as price rose dramatically. These two effects, more demand from buyers and reduced supply from sellers, have helped to boost Bitcoin's price and cemented as a legitimate asset class within the investment community. As a result, Bitcoin has become a form of digital gold. You may not agree with this assessment, but if you still think Bitcoin is going to zero, you should reconsider your assumptions. Why Bitcoin is here to stay? The problem with arguing that Bitcoin is going to zero is that there are too many investors who are willing to buy it at a price far above zero. I remember speaking to many non-crypto investors before the recent run-up in price,

Starting point is 00:07:01 who said they wouldn't buy Bitcoin at $10,000, but if it dropped to $1,000 to $2,000, they would surely jump in. Well, guess what? Now that the price is currently above $30,000, some of those investors have likely increased the limit at which they would consider buying Bitcoin. Instead of buying at $1,000, these same investors may be happy to jump in closer to $10,000. And every time the price goes up in the future, these mental buy limits will go up as well, increasing the likelihood of Bitcoin's future survival.

Starting point is 00:07:27 But Nick, Bitcoin doesn't have any intrinsic value. Well, guess what? Neither does gold, which has a 10 trillion market capitalization. So if you want to argue against Bitcoin in intrinsic value terms, then you have to argue against gold too, because both the price of gold and the price of Bitcoin are based around one thing and one thing alone. Belief. The belief that these assets will have value in the future.

Starting point is 00:07:46 And right now, the collective belief in Bitcoin is increasing. The cult is becoming a religion. Don't just take my word for it, though. There are plenty of articles that discuss this increased adoption within the investment community. And if this trend continues as it probably will, then we are even less likely to see a future without Bitcoin. How will Bitcoin behave? Now that Bitcoin is here to stay, you might be wondering how it will behave in the future. Will increased adoption lead to higher prices? I have no idea. What I do know is Bitcoin is a speculative asset class, therefore, we should look at other speculative asset classes as a guide for how Bitcoin might behave. And I believe there is no better speculative asset to use for this comparison than the

Starting point is 00:08:22 early years of gold as an investment. Well, gold has been around for millennia as a form of money. It wasn't until August 1974 in the U.S. that it was an investable asset class. And in the six years following its reintroduction to the investment community between 1974 and 1980, gold tripled in value in real terms. But since that tripling, it hasn't performed all the that well. Though Bitcoin is unlikely to follow a similar path to gold, it is likely to exhibit similar behavior. This means Bitcoin will continue to have huge run-ups and price followed by violent crashes that last many years and possibly decades into the future. We've already seen this kind of behavior from Bitcoin before, and I'm quite confident we will see it again. The difference between

Starting point is 00:09:03 Bitcoin and gold is that Bitcoin is still gaining adoption among investors. Will that continue at its current pace into the future? Who knows? However, if Bitcoin's market capitalization were to match that of gold, it would be worth over $500,000 a coin. This is why some investors are so bullish on Bitcoin. However, there are still some reasons to be bearish. The main one is that Bitcoin is associated with some of the most speculative investment activity out there. This is most apparent when comparing its price movement to the price movement of another speculative cryptocurrency Dogecoin. Though you may not have heard of Dogecoin, it is an alternative cryptocurrency altcoin that is kind of an inside joke on the internet. And since Dogecoin's price is a clear indicator of speculative

Starting point is 00:09:42 behavior, if we look at the correlation between Dogecoin and Bitcoin, we can get a better feel for how much speculation might be occurring in Bitcoin at any point in time. As you can see, over the last three years, the correlation between Doge and Bitcoin has been quite high, with the most recent correlation reading around 0.8. But if we compare Dogecoin to gold, we can see that the correlation between their prices tends to center around zero. This is just more evidence that Bitcoin is associated with speculative activity and will continue to behave like a speculative asset in the future. Is there a right way to invest in Bitcoin? Though I have changed my mind on Bitcoin, I haven't necessarily changed my view on how one should

Starting point is 00:10:20 invest in it. I believe the only prudent way to invest in this asset class without any long-term negative repercussions is to hold no more than 2% of your portfolio in it. I wouldn't recommend this approach for everyone, but it may work for some people. By limiting your exposure to 2% of your portfolio, you're unlikely to get rich, but you're unlikely to go bankrupt either. Why 2%? This was the allocation I got when I worked out the optimal portfolio back in October

Starting point is 00:10:42 2017. Anything more than 2% adds too much risk per unit return to your portfolio, and anything less than 2% reduces your returns per unit risk too much. Of course, the optimal portfolio is the best solution for the past, not the future. Either way, I don't see the harm in a 2% allocation, but please do your own research first. The biggest risk I see to owning Bitcoin going forward isn't a price crash, which is inevitable, but the possibility of a government ban on ownership. This might seem outlandish, but in April 1933, the U.S. government banned the ownership of gold bullion and coinage for all U.S. citizens. The reasons for that ban are very different from a Bitcoin ban that could happen today. But with the recent Securities and Exchange Commission

Starting point is 00:11:20 complaint against Ripple, I wouldn't rule it out completely. Lastly, I might be wrong on many things I've stated today or in the past, but I don't blog so that I can be right. I do it so I can learn more about investing and get closer to the truth. As economist John Maynard Keynes or Paul Samuelson supposedly said, when the facts change, I change my mind. What do you do, sir? So I know a lot of you guys who are listening won't agree with a lot of the substance or some of the continued critiques or skepticism or certainly the 2% allocation. But I think the point in why I wanted to read these to you is that we're going to see a lot of this sort of sentiment change where people aren't ready to become full-on Michael Saylars, but they have to acknowledge that through

Starting point is 00:12:02 sheer force of will and manifestation, this thing is now unignorable. And you have to think that for every one person who's willing to say and change their mind publicly, there are hundreds, if not thousands more having similar feelings, but who aren't in the public light and not putting their sentiment out. You have to think that many of those folks will be the people who, when Bitcoin does inevitably retrace, buy every dip on the way down and then again back up because they feel like they were a little bit late to the party. Anyways, guys, I hope you're having a great weekend. I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why I Changed My Mind on Bitcoin

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