The Bull case for Bitcoin

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The unloved

Morningstar publishes numerous articles on environmental, social and governance investments, believing that the ESG movement has the power to stay. However, the company has not adopted bitcoin in the same way. It’s not that Morningstar actively opposes cryptocurrencies. On the contrary, its researchers are not equipped to assess them. Morningstar’s tools, derived from traditional investment analysis, assess assets that generate cash. Cryptocurrencies don’t.

My skepticism of bitcoin’s forecast extends beyond Morningstar’s efforts. I doubt everyone. I don’t believe in boosters who claim the practical importance of bitcoin because they were wrong. I also don’t believe those who set price targets for bitcoin, as their predictions are based on landfill. As Bloomberg’s Matt Levine once wrote, the correct price for bitcoin is somewhere between zero and the value of all global currencies combined. Beyond that, one cannot say.

I am also not convinced by the detractors of Bitcoin, despite their pedigrees. Nassim Taleb (author of The Black Swan), Jamie Dimon, Warren Buffett, and economist Nouriel Roubini, among other notables, have all dismissed bitcoin as worthless. If the debate were on a conventional investment, I would not oppose it. But bitcoin is different. Since it is a conventional investment, it protects against inflation, rather than standing alone as an asset. It also serves as a collector’s item.

A different goal

This is how bitcoin should be valued. The question with collectibles is not whether they perform a useful function, but rather whether their appeal will continue. Often this is not the case. Beanie Babies, Franklin Mint coins, and Hummel figures came and went. Woe to those who bought them at a high price, hoping to sell them to a bigger fool. (When my son left home, I gave him the Beanie Babies I bought as a kid, at their original price of $ 5. He passed the offer on.)

But of course, many other potential collectibles become real items, such as postage stamps, rare coins, and sports memorabilia. Stamps aren’t mailed, coins aren’t spent, and baseball cards are, well, nothing. To some extent, gold bars could also be called a collector’s item. Unless the metal is fashioned into jewelry or used for industrial work, it is of no use. Yet gold retained its value for several millennia.

Two factors

Far be it from me to claim that bitcoin is the modern equivalent of gold, or even the next reverse Jenny. It may be a passing fancy. If bitcoin fades away, however, I would expect its decline to come later rather than sooner. I am writing this for two reasons. First, money is easy, and that doesn’t seem to be changing any time soon. Second, the potential buyers of bitcoin far outnumber the actual owners. This party seems to be in its early days. (As college kids might say, it’s “before the game”.)

Easy money is important because cryptocurrencies are aimed at bull markets. While bitcoin is often viewed as an alternative investment, for those wary of conventional securities and the governments that regulate them, bitcoin thrives on loose central bank policies, just as traditional investments do. In March 2020, when the financial panic struck, bitcoin fell more than the S&P 500, then zoomed in after central banks primed their pumps. The same has happened to Bitcoin’s main rival, Ethereum.

In short, the prices of bitcoin, as well as those of other cryptocurrencies, have been supported by asset price inflation, caused by extremely low interest rates in developed economies. These same interest rates have spurred a variety of other activities, ranging from stock market booms to the development of the NFT (non-fungible token) market, to the explosion of sports gambling, which has doubled in size over the past two years. When money is cheap, people spend. If it stays cheap, as it seems likely in the near future, they will keep spending.

Additionally, bitcoin has an advantage that NFTs and gambling do not have, which is that it is increasingly viewed as an investment. Last week, Jason Zweig of the Wall Street Journal reported that, according to a survey by fund provider Bitwise Asset Management, only 9% of financial advisers put their clients’ money in cryptocurrencies. However, of the 91% who had not made such purchases, almost one in five planned to do so before the end of 2021.

It is a great financial firepower. And, of course, according to the latest news, advisers who want to incorporate cryptocurrencies into their practices, especially bitcoin, now have additional options. Two exchange-traded funds, ProShares Bitcoin Strategy (BITO) and Valkyrie’s Bitcoin Strategy (BTFD), currently exist, and several more will be launched soon. These funds have a few quirks, due to the operational difficulties of holding bitcoin in a registered fund, but investors were not deterred as ProShares’ fund became the first ETF to attract $ 1 billion in ‘active during its first two days of operation.

In conclusion

In the absence of an unexpected damaging event, such as a coordinated global effort to crush cryptocurrencies (which the Chinese have attempted, but other major economies have not emulated), or rates of Soaring interest that is strangling the money supply, it’s hard to see what could reverse the current bitcoin price. It seems to be in a virtuous circle, where its price increases create new demand, which further increases its price, etc.

My instinct as a player begins and ends with investing in stocks. I have just returned from several days in Las Vegas, without paying a penny to the casinos. (Although stupidly, I handed the Bellagio $ 22 over, opening a bottle of Fijian water. It tasted like any other.) I wouldn’t buy any form of collectibles or blankets. against inflation. (Over time, stocks protect against inflation; that’s enough protection for me.) So, I won’t buy bitcoin. But I understand why the others are.

John Rekenthaler ([email protected]) has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar’s investment research department. John is quick to point out that while Morningstar generally agrees with the opinions of the Rekenthaler Report, his opinions are his.

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