Today on Market Vizion, we're going to talk about one thing that is on everyone's mind. Most financial advisors aren't talking about it, and we'll talk about why. We're talking about Bitcoin.
Is Bitcoin Really the Crypto Currency of the Future?
We're going to talk about both the bull side and the bear side. Bitcoin is supposed to be the crypto currency of the future - even the currency of the future. Everyone seems to be gravitating towards it, right?
The argument is that for Bitcoin is that it's part of the blockchain technology. It's part of this massive leap forward in data holding, data transparency, and data consistency. When we apply that to currency, we get this "magical" currency that should hold value apart from the devaluation of hard currency.
You see, we all know that hard currency has to de-value over time. Why? Because that's the only way politicians get away with spending more than they're taking it in taxes. They create a situation of inflation so that 20 to 40 years from now, the money they borrowed to buy off today's voters is cheaper to pay back. As a result, you get this consistent devaluation of currency over time.
Trying to Answer the Problem of National Currency Inflation
It's not just the United States, it's every currency. The big challenge is when you get places like Venezuela. Their devaluation of currency is accelerated, and people go from rich to poor very quickly because the currency is devaluing too fast.
That's what all governments try to avoid, but most of them eventually lose control of that runaway snowball.
The argument for Bitcoin is that Bitcoin will be a repository of currency value that stands apart from those government structures.
- There's no indebtedness of the economy
- There's no changes in the political spectrum
- There's just the transparent blockchain technology that would become a repository globally
It would stand apart from any of politically manipulated national currencies. That's the argument for it.
The Short Term Bull Case for Bitcoin
I can also tell you why, at least the near term, Bitcoin should continue to appreciate in value for a whole variety of reasons. All of them come back to supply and demand dynamic that Bitcoin is not excluded from.
So let's talk about why Bitcoin should appreciate or zoom up in the near term. I don't mean even this week or this year. I mean over the course of the next 10 years. Here's why that's happening.
Bitcoin Has a Limited Supply
Number one, there are a limited number of Bitcoins. Almost all of them have been found. As more money continues to pile in, you get more demand with a limited supply - prices rise accordingly, right? Pure supply-demand dynamics.
By the way, 95% of all of the Bitcoin in all of the world reside in 2% of the wallets. Think of it this way, 5% of the Bitcoin is being traded by 98% of all the people who have Bitcoin wallets. So 98% of all the buying and selling is happening with 5% of the Bitcoin. Massive demand, little supply, crazy price appreciation.
But is just as simple as pure supply-demand? The truth is a little more complicated - it's actually worse than that because the market (specifically the investment bankers) aren't going to let the limited number of Bitcoin change the demand dynamics. They're going to create artificial tracking indexes.
Creating Tracking Indexes for Bitcoin to Artificially Increase Supply
The latest one is being put out by Anthony Scaramucci. Remember Mooch? Mooch was Donald Trump's talking head for about two and a half weeks? That's the guy who's out right now, talking to the SEC, trying to get them to let him open up a Bitcoin tracking index.
It doesn't actually own Bitcoin, it just "tracks" the Bitcoin valuation by an index.
Here's the problem, one of those things already exists today. It's valued at about 250% of what the underlying Bitcoin is worth. Why? Supply and demand dynamics. Supply and demand is not suspended magically just because it's a cryptocurrency.
As the market and the investment banks create these investment vehicles that are supposed to mimic or track Bitcoin, the supply-demand dynamics now get applied to that artificial index.
Now you have the publicly traded asset that's supposed to track the underlying Bitcoin, and it's already run away up to 250% over the actual valuation of the underlying Bitcoin.
What does that give you? You now have the Anthony Scaramucci's of the world trying to create more of these indexes. Why? Because if we create more supply, it'll match the demand.
The Problem: Bitcoin is not Backed by an Asset
The problem is that you're not talking about a real asset - you're talking about a cryptocurrency that doesn't actually exist. There is no actual hard asset here.
The problem we have using Bitcoin as an investment is if it's a currency, it's supposed to be a repository of value.
If it's an investment, then there should be an actual business model, there should be hard assets, earnings, income, and dividends. Bitcoin doesn't have any of those things.
Bitcoin is just this manufactured cryptocurrency that resides in wallets.
Why Aren't Financial Advisors Talking About Bitcoin?
Now to the reason financial advisors aren't talking about it that much. In short, it's because we're limited to what are actually approved, regulated investment vehicles. There are none using Bitcoin that are approved for most of us.
There are a few organizations and institutions that are contributing to the demand on that one index out there right now by purchasing Bitcoin. But I couldn't purchase one for you - you'd have to purchase it for yourself.
It's worth mentioning again, we're talking about 250% of the supposed underlying value, and the underlying value is completely driven by the Bigger Idiot Doctrine.
The Bigger Idiot Doctrine says I'll buy it today at an inflated price in hopes of being able to find a bigger idiot tomorrow to sell it to.
Bitcoin is Becoming an Investment More than a Currency
Yes, there's a bull case for the capital appreciation, for the limited supply, massive demand, and the prices going crazy. You can see that, but that's not a pure repository of value. That's not an inflation-adjusted currency. That's a capital-appreciation bet, right?
What do we talk about when we talk about capital appreciation? You can't eat it. It appears in bull markets, and it disappears like the mist in bear markets and rarely, if ever, can you actually put it on a plate and eat it like a steak. At this point, Bitcoin falls under this category.
The Future of Bitcoin Looks to Be Volatile
This Bitcoin question is a fascinating thing. I encourage you to bring this up in your conversations with your advisor or with us if you have questions.
I can certainly make the bull case in a short run, but I can also give you the rationale behind why Bitcoin should be expected to be a very volatile asset for a very long time. Those supply-demand dynamics are such that it's going to create volatility, and it's still not going to pay you to own it.
I hope this is helpful for you. As always, here at Vizionary Wealth Management, we're here with perspective for the decisions ahead. Don't hesitate to reach out or call if you have questions. Take care.