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Krypto Connect is a fortnightly commentary on the evolving world of Cryptocurrency assets and the world of finance and banking. Our underlying assertion is that we are at the early adoption phase on the blockchain and cryptocurrencies curve, but that their impact on money, assets and financial services is rapidly gaining pace.
Our goal is to:
1. Provide some education that is not “geek-speak", and
2. Keep readers abreast of what’s interesting - where the finance and banking industry collides with the Cryptocurrency industry.
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Hello <<First Name>>,
Welcome back to Krypto Connect! Well, here we are at issue #4. As usual, welcome to all the new registrants seems like we are hitting the mark for many of our readers. If you are in a hurry and may read this later, do yourself a favour and click on this and watch a 4-minute video on as succinct a perspective on why to hold it. For our money, the best and most succinct explanation to date.
Ok, cracking on with some interesting comments this week, which we are using to set the context for this issue. The two questions that I got was 1. Even if it is a legitimate new class of asset, why would I buy it? 2. What about those other digital currencies, where do they fit in? What's the difference between them and bitcoin?
1. Why do I want 'bitcoin'?
This question took us a bit by surprise, we thought it was obvious once you accept bitcoin as hard money and an uncorrelated asset but ok, let us be absolutely clear what we are talking about, bitcoin is; Non-sovereign, hard-capped supply, global, immutable, fungible, decentralised, borderless, digital store of value. Here are the use types of investment we understand;
As a Hedge to protect your capital
- Bitcoin is an uncorrelated asset, in fact, as a store of value, it acts as digital gold to preserve wealth in the case of a downturn in the economy. While there is much speculation whether there are economic clouds on the horizon, and well, let's be honest, who knows? Much of the discussion from the economic commentators now are talking of a downturn in the global economy, Germany in recession, Australia in a recession (in terms of per capita GDP) and China slowing right down. Add to that the trajectory and possibility of Australia heading into negative interest rates (again, you tell me) I would ask our readers; is a 1-3% exposure to Bitcoin a smart move?
As an investment to grow your capital
- This argument is tied into the digital gold and limited supply argument where bitcoin continues to double in value every two years, regardless of the massive corrections. Bull or Bear, there is a strong argument for some exposure to an investment that is asymmetric and uncorrelated.
- Compared to the three classic components, which PlanB (the twitter-based anonymous quant we like) identifies as having a “nice risk/ return” identity, Bitcoin can increase the return factor considerably without engendering weakness overall. He says, “(Bitcoin) risk/ return is another universe,” he says “ As such, a 1 per cent BTC component in a 99% Cash portfolio offers 10 per cent returns, but with a maximum 1 per cent loss, surpassing the S&P 500’s two-year risk/ return record every year.”
Here is his graph:
As a Day to Day Currency
Considering bitcoin as digital cash might sound a bit weird given bitcoin is slow to settle (7 transactions per second), and market cap on this ‘currency’ is $200Bn USD while some companies have $2Trillion market cap. There are however initiatives like the ‘lightning network’ which is a second layer solution to resolve the payment issue. For the moment, unless you are settling large amounts, buying coffee with bitcoin is not a good idea, given where things are trending value-wise. We’ll talk more about this in time, but for the moment, we would assume you are HODLING (Holding) for the moment.
2. Don’t cut yourself!
Another week and another fantastic podcast to listen to in the car. There’s so much to learn in this space and I’ve been at it for 18 months. I can only imagine how overwhelming it is for you, but keep going, it’s worth it.
So, this week I wanted to share what I learnt from Stephen Livera’s interview of Preston Pysh. If you haven’t come across Stephen Livera and his podcast, I highly recommend it. Here’s the link to the interview: https://stephanlivera.com/episode/109/
Okay, so why care about Preston? I don’t know how much he’s worth, but he has a very reputable podcast of his own called, ‘The Investor Podcast’, and he’s been in the investment game since the early 2000s. From what I’ve heard, I’m guessing that he’s worth a bit. He seems pretty savvy. You be the judge.
Anyway, the interview goes for an hour and I’ve listened to it four times now to pick up all of the great content.
Preston says that he first got into investing by studying everything about the “Oracle from Omaha”, Warren Buffett. I’m probably not telling you anything new when I say that a very large percentage of investors follow Warren’s “value investing” principle. For obvious reasons, Bitcoin doesn’t fit the model, so many of them have avoided it.
However, Preston believes that Buffett also looks at growth potential and if you buy into the narrative that Bitcoin will one day be a currency, then he thinks that Buffet’s followers are missing a huge “growth” opportunity.
He goes into more detail about what he thinks is just around the corner for the world’s reserve currency and he states that “we need sound money”. Will the US dollar re-peg to something “hard”? Maybe they rewind the clock to 1971 and go back on to gold? In any event, something big is coming and there will most likely be another “Bretton Woods” type conference needed.
Having set out the “Buffet-growth-Bitcoin” argument, Preston then turns his attention to what he thinks is a more immediate, exciting aspect of the Bitcoin story: the Sharpe Ratio, non-correlation and financial instruments.
Peter’s covered the first two above, so I won’t harp on them, but it’s super interesting and worth digging into. What I think is of more interest is Preston’s opinion that Wall Street is closer than we think to get into Bitcoin.
He thinks that the next Bitcoin bull market will be precipitated by the implementation of Bitcoin settled derivatives and then ETFs that are currently seeking SEC approval. That’s when he thinks that people will be saying, “It wouldn’t hurt to just have a half a per cent exposure.”
Preston does acknowledge that Bitcoin’s current market cap at US$200 billion is too small for most fund managers to pay attention to, but when it starts to approach US$1 trillion, he predicts that there will be a “flippening” in their point of view. In fact, he thinks it will start in about a year from now as Bitcoin approaches half a trillion dollars and the smarter fund manages then take a position. Then the stampede will start. Time will tell.
Anyway, if you’ve got the time, I recommend you listen to the podcast because he talks about other issues like what’s going on with the US repo market, Japanification of the world, zombie companies and lots of other interesting stuff.
That’s it for this issue. Thank you for reading and please feel free to zap through any feedback, good bad or ugly.
As usual, if you are new you can read previous issues here. Also, if you have time, grab a wine and kick back with a few of our favourite videos here.
Peter Christo & Mark Sefton