Before starting a conversation on Bitcoin you should know that my feelings towards crypto currency was and continues to be …careful curiosity. This is what I also hear from people following this newsletter. So keep a good dose of skepticism as you read through this second edition. I also expect to publish the third investment newsletter soon, going back to our core companies: Tesla, Berkshire and Square and the stock market but for now I am making a one time exception with an update about Bitcoin. If you find this article a bit too dense, do not worry, we will continue talking about Bitcoin in future updates. This is just to lay the foundation. Also, if you did not do so already, please subscribe via email to new posts. This allows us to keep in touch and for me to inform you in a timely manner about changes to the newsletter portfolio. So far I’ve been using our Facebook group but now we have a subscribe form, and it’s better than a Facebook group. The subscribe form is on the right side on Web or at the end of this article if you happen to be browsing on a phone. For those that want to give me that extra bit of support please consider supporting me on Patreon here: https://www.patreon.com/user?u=43731866
Let’s start at the beginning then. What is a Bitcoin? A Bitcoin is an electronic coin or crypto-currency limited to a total of 21 million coins. That means the number of virtual coins is limited and cannot increase. It was created as a response to the US’s printing of dollars to save the banks in the great financial crisis of 2008-2009 https://en.wikipedia.org/wiki/Bitcoin#Creation.
Bitcoin’s creator (known under the pseudonym of Satoshi Nakamoto) was making sure that no central bank could ever “print” more bitcoins by limiting the number of bitcoins to 21 million and making it decentralized.
What does this mean? It means that bitcoin is a chain of transactions maintained and verified by thousands of independent miners and they all have to agree for a transaction to be valid. Miners are independent computers/actors who run the bitcoin node software.
So why do people dislike printing of US dollars so much that they went through the pain of creating an entire alternative currency. One of the biggest controversies of the 2008-09 economy rescue package is the fact that the USA engaged in what is now called Quantitative easing – a process by which newly printed US dollars were injected at the top of the economy thus devaluing the currency and the savings of those who saved up for most of their lives. Who stood to gain from these actions then?
Easy. Those who already had assets, homes and stocks watched them go up in value as the money trickled into the financial sector. Who lost? Those struggling to make a living, saving money for their first house. Their money was devalued, and their dream house now was out of reach. https://en.wikipedia.org/wiki/Quantitative_easing#Increased_income_and_wealth_inequality
This mechanism of stimulating the US economy took place not just in the US but also in the EURO zone. If you could buy 1Kg of gold with 19.000E in 2008, in 2012 you needed 40.000E to buy the same amount of gold. Not because gold grew in value, gold is just a rock storing value. It’s because paper currencies were massively devalued through printing. This is why Bitcoin was created.
Before diving into the history of Bitcoin since 2009 and I ended up investing in Bitcoin we need to explain why all governments inevitably devalue their currency during economic recessions and how Bitcoin and Gold are a protection against that. Ray Dalio in one of his excellent videos explains that as the economic cycles happen, governments and the public tend to gather more and more debt until the whole system comes crashing down because debts become too large. Once every 50 – 70 years you get an economic crisis of catastrophic proportions. When it happens, one of the tools the US can use is lowering interest rates to 0 and once that is not enough, printing money and inflating the debt away. Debts become easier to pay because everyone has more dollars/euros. Unfortunately the lenders suffer because they get back a devalued currency.
Politicians in countries that can print their own currency love to print money – voters love to receive printed money and the party keeps going until you either get hyperinflation in the worst case scenario or a real inflation of 10% every year as we’ve seen above with the gold example. In the US both republicans and democrats are no longer fiscally responsible – they race now who can print more dollars for their electorate.
The theory about Bitcoin I had formed until 2020:
As many of you I didn’t hear about Bitcoin(BTC) until 2017 when it reached incredible highs of 20.000$. The press was describing the euphoria and claiming it was just like the tulip bulb mania in the Netherlands: A phenomenon in the 17’th century where tulip bulbs were using for speculation and reached valuations that meant you could buy a house with a single tulip bulb or people would speculate on tulip bulbs that were about to be harvested next spring (futures). The speculation ended abruptly when people understood in the spring of 1637 that a lot of tulips were planted and so tulip bulbs weren’t really rare and the price collapsed instantly. So knowing this story I was happy to see the price of Bitcoin crash to 3.000$ – after all in my head it was all a bubble. The long term target I had assigned to it was 0(zero). The press was reporting on people who had lost their entire fortunes on Bitcoin and Warren Buffet called it a collective mania(and he still thinks so).
The price of a Bitcoin was going to 0 according to my theory. The press was also saying that Bitcoin had been used for buying drugs and illegal transactions. It was all bad news.
Another common objection against Bitcoin was the fact that sending it between two people could take hours until the transaction was verified by sufficient miners. This was too long for Bitcoin to be used as a currency or for instantly paying for your coffee at the coffee shop.
The last challenge to Bitcoin’s supremacy was the emergency of hundreds of crypto-currencies threatening to take away it’s leader status. If making your own crypto currency was so easy, what made Bitcoin special? It seemed nothing. It seemed a newer better crypto currency was just around the corner.
So, to recap, a slow to transact, easy to abuse, crashing currency that was being copied. How did Bitcoin emerge from this?
To my big surprise and of many others’ Bitcoin came back in 2020 from the 3000$ and started making quick jumps to 6000$, 9000$ and 14.000$ moving in tandem with the stock market and especially with gold. This was especially visible in the 2020 march crash. So how can Bitcoin behave just like gold when it was obviously deemed a bubble?
I would later find out by reading Lyn Alden’s article in August of 2020 that she had also had the same objections as many of us and concluded that Bitcoin had transformed from a slow currency to a digital gold. A way of storing value. In other words if you’re afraid of currency devaluation you buy either gold or Bitcoin and in 10 years you still have the same quantity of Gold or Bitcoin. Nobody can print more of these. I had also found out that Bitcoin gained market share over all the over copy-cat crypto currencies and became the one, the only one people really trusted. An anonymous, distributed, decentralized, limited digital gold.
Meanwhile, my favorite investment podcast (The Investors Podcast) started suggesting that large companies in SIllicon Valley were on the verge of investing in Bitcoin instead of keeping their cash in US dollars to protect against inflation. With interest rates at 0% and the government creating money out of thin air, inflation seemed like a very real danger. I also found out that Bitcoin gained legal status in the US which meant nobody could ban Bitcoin anymore. China did, however.
So I wondered, could it be true that large companies were going to exchange their hard earned dollars for Bitcoins? I did not know, so after listening to tens of hours of Bitcoin podcasts I decided that I also need to protect my cash against inflation after selling one of our houses and that Bitcoin was a good candidate. A part of my cash was saved into a Gold ETF, the other into Bitcoin.
Turns out, the hosts from The Investors Podcast were right and Microstrategy invested 275million dollars in Bitcoin. Later Square, a company we invest in, exchanged 50 million $ in Bitcoin.
The hosts but other guests on the show suggested that many other big companies are thinking about doing the same (Google among them) and that the trend would continue.
Lyn Alden did some research and said that Gold stores just a tiny part of the world’s wealth: 10 Trillion dollars. Bitcoin’s total value was just 200 Billion dollars so it would be sufficient for the same amount of money to flow into Bitcoin , and the price per Bitcoin would have to increase 50 times.
Other models include the famous Stock-To-Flow model that predicts the price of a Bitcoin will go to over 100.000$ in 2020/2021 due to the reduction of Bitcoins that miners get rewarded with. Ironically, that Stock-To-Flow model as created by a Dutch citizen.
This is where a value investor should raise an eyebrow and ask: Isn’t it just too good to be true: That bitcoin will grow 10-50 times in value because everyone wants to buy it? The answer is that just like Gold, Bitcoin is not a productive asset, it doesn’t make you money while you hold it. The way to calculate it’s intrinsic value is based on how much value it stores and unlike tulip bulbs, it’s limited in quantity. What you can also do is compare the market cap of Gold and Bitcoin(1:50). It’s also much easier to buy 2 Bitcoin that to store a few Kilos of gold at home. You can pay with Bitcoin and it’s infinitely divisible.
So, if Bitcoin is a store of value and large companies and small retail investors place their trust in it, what’s next? Most people in the community seem to believe that Bitcoin is about to grow exponentially as the US government considers ever increasing money printing to rescue the economy. Both Gold and Bitcoin are believe to be excelled hedges against inflation due to the rapid devaluation of US dollars and Euros. Lyn Alden recommends to her readers that they conservatively store 1% of their wealth in Bitcoin because if it truly grows by 50x you will still profit enormously. I personally grew very confident in this asset class and allocated 5% of my wealth to Bitcoin (and I already regret not going at 10%). It is my recommendation to every reader of this newsletter that you at least consider owning some Bitcoin.
You dont need to buy a full Bitcoin (it can be divided into 100.000.000 units called satoshis). I recommend buying Bitcoin on an exchange like Kraken and I recommend storing it in your personal wallet (My recommendation is BRD Wallet https://brd.com/). Keeping your bitcoins on an exchange is unsafe and if stolen, due to it’s nature, they can never be returned. Another way to loose your coins is to forget your private key. Take the time to remember it and be careful when setting up your wallet.
If you’re thinking what you should do yourself, you can choose to invest 1%, 2% or 5% in Bitcoin or nothing at all. If you grow really confident like Michael Saylor – Microstrategy’s CEO – you can invest $275 million. I recommend buying in small batches, essentially dollar cost averaging just like we do with stocks. I will buy Bitcoin for the virtual portfolio of this newsletter – I am allocating 10% (500$) of the 5000$ portfolio value to Bitcoin. I should repeat that this is a higher risk than a value investor would like to have and the decision is a very personal one. I hope this article serves as a good starting point and you can continue studying on your own. We can come back to this article in a couple of months and laugh or cry if it turns out to be true.