Crypto Long & Short: Why Some Investors Get Bitcoin So Wrong, and What That Says About Its Strengths

It’s frustrating. But at exactly the exact same time intriguing.

Within the past few weeks, I’ve heard two well-respected investment supervisors say they don’t believe in Bitcoin’s distribution limitation. If it’s simple to spin up yet another Bitcoin, they claim, then there is truly no limit. Many of you reading this is going to be rolling your eyes at this point, but because it seems to be a firmly held opinion by some wise people, we should dig deeper.

We are going to find that it’s more than the usual lack of study.

To begin with, let’s look at exactly what the two investment managers I’m referring to actually said.

This can be from investment researcher and former hedge fund manager Jesse Felder’s website post of a few weeks back (my emphasis):

“Bitcoin believers rely entirely on the idea that bitcoin is limited in supply, making it far more attractive than fiat currencies that are being printed like mad by central bankers around the world. However, Bitcoin has already hard forked several times, multiplying the number and type of bitcoins in circulation. In fact, if you put together all the hard forks Bitcoin has undergone since it was first created, the number of total bitcoins has actually grown faster than the number of dollars. That’s a fact.”

And about the economies and investment podcast The End Game this past week, investment director and author Fred Hickey said (again, my emphasis):

The number five cryptocurrency is bitcoin cash! The number 12 biggest is bitcoin sv — there’s no limit to these things. If bitcoin got too expensive, they would just go to another one. These are speculators, they pile into anything that’s cryptocurrencies.”

For the time being, we’ll ignore the snide consequences that bitcoin’s marketplace is entirely speculator-driven, which speculators don’t understand how to do research (because those assertions are simply too flimsy to bother using ). Instead, let us concentrate on the misguided notion that fresh Bitcoin blockchains can be spun up whenever we need.

And let’s go deeper as to why this misunderstanding persists, and what that says about Bitcoin’s part in our evolution.

Not too fast

Most of you’re comfortable enough with crypto markets to know Bitcoin in particular. But have you thought much about exactly why?

It is only partly the technology. The blockchain code is open source and may be replicated and tweaked to make fresh bitcoin-like assets. But regardless of what they call themselves, they are not Bitcoin. Bitcoin Cash increased the block dimensions, allowing for bigger throughput at the expense of a higher level of centralization. Bitcoin SV increased block size again by multiples more.

The market tells us that investors prefer the first Bitcoin:

chart-bitcoin-vars


But have you ever noticed that an institutional investor talk at length about how Bitcoin’s SegWit scaling alternative gives them more confidence concerning the safety of decentralization than Bitcoin SV’s large scale 128MB blocks? I am confident that’s occurred; but I do not think the scalability is an integral investment criterion. It is not the Bitcoin-specific features that keep funds flowing into BTC.

It is the network effects. I’m not referring to this Metcalfe’s Law consequence of each added node. Nor am I talking about the benefits of getting more individuals to send bitcoin into (although that isn’t insignificant). I mean the industry infrastructure and solutions which spring up around the asset with the maximum quantity: the on-ramps, sophisticated platforms, professional custody, complex derivatives and, even more important, the liquidity. Smaller assets, no matter how remarkable their block dimensions, are riskier. Investors care about that, and so, no matter how pricey BTC gets, I really doubt they’ll just rotate into BCH or even BSV.

Those industry network effects, together with the underlying technology’s potential and characteristics, are supporting the current expert investor focus on BTC.

Trying to understand


Why is it hard for differently smart investors to see that? Here it gets interesting.

To see why, we need to look beyond the shortage of research and the lack of interest. Underlying these is the assumption that conventional investment paradigms still hold.

Chief among these is your not-unreasonable certainty that engineering has been replicable, and this network impacts early on are not necessarily irreversible. MySpace dropped out into Facebook, Google was not the primary search engine. It’s difficult for conventional investors to comprehend that Bitcoin is not a business, and better marketing from rivals is unlikely to generate a material difference.

It’s also hard for traditional investors to consider technology at precisely the exact same framework as natural components. After all, components just are all . Their makeup can never alter. What’s more, their usage can be deterred, but they can never be eradicated.

Tech, on the other hand, is made by somebody, based on preferred specifications, to meet a specific function. We can allow it to do one thing or the other, and sometimes it makes use of something completely different than what we planned, but that is the market for you. Tech is almost infinitely malleable in its composition and intent. In addition, it is fickle, normally subject to the whims of their strong, and pushed by the conflicting urges of management and empowerment.

Until Bitcoin.

Bitcoin was created by someone but we do not know who, therefore there is no one we can point to as accountable. Bitcoin is constantly being upgraded and updated by a small army of programmers with varied backgrounds and financing resources, but it cannot be essentially changed without media consensus, which would only be possible if its size shrunk to a tiny fraction of the current. And its usage can be discouraged, but Bitcoin cannot be turned off. All this provides Bitcoin — a technology — a strangely elemental status.

Here is a not-too-ridiculous psychological disconnect. Both of the above-mentioned shareholders have written widely on stone, and automatically understand the value of pure immutability and lack. Accepting that technology could have similar properties is a stretch to many.

But knowing the gap between Bitcoin along with other technology, and the similarities between bitcoin and stone, is critical for grasping how important its advancement is. It is not just about the inflation hedge provided by bitcoin’s lack and decentralization. It is about civilization.

The emergence of metallurgy was, according to a lot of theories, a cause for the development of a complex society. It’s completely possible that the emergence of crypto technology will be the catalyst for one more societal restructuring. We’ve heard those outrageous claims before from tech advocates. But we haven’t before had a tech with element-like possessions, that emerged in a technology-rich age ripe for catalysts, in a time buffeted by a lot of other society-transforming trends and events.

This confusion as to what Bitcoin is is shared by many but by no means all. Famous investor Paul Tudor Jones revealed this week that he makes it when he said:

“If really I had to guess what the future [of crypto] was going to be, I’d guess it was going to be a lot like the metals complex — where you have”prized crypto” which might be bitcoin… And you’re going to have transactional cryptocurrencies, along with the sovereigns, and they may be more like the industrial metals.”

Throughout history, profound transformations are normally not noticed by the mainstream until well after the changes are already underway. When conventional investors confound us with their own ignorance and lack of study, we need to make an effort to comprehend why. And more to the point, we should love what that says about the depth and subtlety of new definitions and new paradigms that will define society and value at the chaos to come.

Does anyone understand what’s going on yet?


U.S. stocks climbed to all-time highs and Treasury yields jumped while the dollar fell, after penalizing COVID-19 statistics and still-high U.S. unemployment strengthened expects for more national stimulus.

This constant rise no matter a poor economic outlook makes me worried. It is not only the disconnect of all markets out of main street reality; it is also that market consensus is usually a indication that things are going to turn. But with this much difference about this year, who knows when investors will accomplish that, or even if they will care when they perform.

performance-chart-120420-wide


Bitcoin also continued its rally, recovering from the slump seen per week back to yet again article profits that made stocks look anemic. The feeling still seems like that this rise is nothing like the hype-filled and speculation-driven rally of 2017. (Our Monthly Review for November seems at some of the differences)

There’ll be ups and downs, for certain. However, this time round, the marketplace is very different: more mature, more liquid and more diverse. Much like its participants.

Chain links


Maybe I should begin a new segment of the newsletter that just lists crypto-related statements and actions from institutional investors. This sort of news until quite recently happened just once every month or two. Now it’s almost daily.

Here are a few of notable ones from this week:

· Paul Tudor Jones, speaking on Yahoo Finance, gave an enchanting analogy for how the crypto markets can evolve:

“If really I had to guess what the future was going to be, I’d guess it was going to be a lot like the metals complex — where you have”prized crypto” which might be bitcoin — it’s the first crypto, the first mover… and has that historical integrity amongst digital currencies. … And you’re going to have transactional cryptocurrencies, along with the sovereigns, and they may be more like the industrial metals.”

He also said he believes bitcoin has”the wrong price for the possibilities it has.”

· Larry Fink, CEO of BlackRock, the largest asset manager in the world, acknowledged that bitcoin has”caught the attention” of lots of folks, and that the rickety cryptocurrency asset category could”evolve” into a global marketplace asset.

· The study arm of New York-based AllianceBernstein, an international investment manager with $631 billion in funds under management, generated a study note for clients that acknowledged that its initial rejection of bitcoin within an investment asset ago in January 2018 was wrong.

· Guggenheim Partners, with over $230 billion in assets under administration, has filed a charge with the U.S. Securities and Exchange Commission to permit its $5 billion Macro Opportunities Fund to pay up to 10% of its net asset value in the Grayscale Bitcoin Trust (GBTC — Grayscale is owned by DCGas well as a parent of CoinDesk).

· A study note from Bloomberg Crypto posits that bitcoin might more than double its present worth in 2021, reaching 50,000, predicated largely on demand-supply mechanics.

· Fidelity Digital Assets‘ CEO Tom Jessop said this week that bitcoin is an “aspirational” store of value, but that its volatility prevents it from being one now.

· Steve Forbes agrees, saying that bitcoin could potentially become the”new gold,” but it’s not there yet.

· PayPal CEO and President Dan Schulman told the audience at tech conference Web Summit that, for cryptocurrency,”the time has become.” He also insisted that”you can do more together with [bitcoin] than simply ride the ups and downs.”

Put simply:

Grayscale Investments (a subsidiary of DCG, also parent of CoinDesk) declared on Wednesday stocks of its Grayscale Ethereum Trust (ETHE) will split 9-for-1, a move that will boost liquidity and perceived worth of the stocks.

TAKEAWAY: While cryptocurrencies could be fractionalized (it still surprises me that some people believe you have to obtain a complete bitcoin), hope stocks cannot. So, exactly like with equity shares, it could be convenient to lessen the unit price, to create the shares more accessible to retail investors. ETHE remains only available to licensed traders on issuance, but holders may sell to the general public following the first six-month lockup. This move should make this easier and could increase the ETHE premium (the difference between the trust share price and the underlying value, currently at 124 percent, based on Ycharts) to even higher levels. This, then, will make it more appealing to accredited investors, boosting new inflows.

ethe-premium-1m


Struggling to get your head around whether ether (ETH) could be a better investment than bitcoin (BTC), and if not, why not? This explainer can help.

S&P Dow Jones Indices plans to launch a customizable cryptocurrency indexing service in partnership with all crypto data supplier Lukka at 2021.

TAKEAWAY: This could signal more crypto-related goods to come from financial companies in the brief term.

New York Digital Investments Group (NYDIG) raised $150 million for two new funds to purchase cryptocurrencies.

TAKEAWAY: This really does more than verify that the developing institutional interest in crypto markets. Additionally, it reveals how big some of the obligations: NYDIG’s Digital Assets Fund I, which invests solely in bitcoin, received $50 million from 2 unnamed investors, although the NYDIG Digital Assets Fund II increased $100 million from just one investor.

Personal German lender Hauck & Aufhauser has been launching a cryptocurrency fund in January 2021. The fund is going to be called the HAIC Digital Asset Fund and will maintain a variety of cryptocurrencies, also is directed at institutional investors. TAKEAWAY: Here we’ve got a bank that provides crypto finance. One of the first, by no, means the final.

My colleague Michael Casey aptly points out this bitcoin beats gold on most of the recognized benefits, except perhaps for allure and beauty — and they are cultural constructs.

TAKEAWAY: Yes this does imply that bitcoin’s appeal is also maybe a cultural construct, and possibly also will not be permanent. That is not a bad thing — which suggests progress. And the arc of history is very long.

Nearly 20% of PayPal users have traded bitcoin working with the PayPal app, according to a report published this week from Mizuho Securities. TAKEAWAY: This amount comes from a sample survey, so cannot be taken at face value. But even if it is remotely right, and even if the quantities are small, this result implies that approximately 25 million users have bought BTC.

Source: CoinDesk, Ycharts


 

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