Bitcoin - the ultimate value investment?

I found an article called Why a Value Investor Decided to Buy Bitcoin on Reddit that detailed how a longtime value investor who manages $5.5 billion at his New York-based investment firm, Horizon Kinetics considers Bitcoin to be the ultimate value investment.


A central point in Stahl’s pro-Bitcoin argument: Traditional currencies can be “debased” as central banks print more of it and spark inflation, but there will be only 21 million Bitcoins ever made.

Barron’s: How high can the price go?

Stahl: It has to be equal to the nominal value of all the fiat currencies in the world. At least that, maybe even more because it is non-inflationary.

Many others like John McAfee predicts Bitcoin will reach a price of $1 million per Bitcoin by 2020. So with this extravagant price targets, is it justified or is Bitcoin in a bubble? Is there a fundamental case to invest in bitcoin? That is the million-dollar question.

The usual tools of valuations are useless in valuing Bitcoins. Bitcoin brings no cash flows to the owner; the only return will come via a rise in price. When there is no way of valuing an asset then Bitcoin is not a smart investment but merely a speculative asset with the price driven up by speculative hype.

Furthermore, Bitcoin is considered a currency. You measure a currency’s effectiveness by looking at how well it delivers on its 3 purposes: unit of account, medium of exchange and store of value. Store of value are supposed to keep their value; bitcoin, by contrast, is extremely volatile. Who wants to accept in exchange a currency that rises or falls 10% in an hour?

However, Bitcoin might triumph if currencies succumb to hyperinflation; hence why Bitcoin having a limited supply of 21 million is so essential to its value component. A more likely cause for future Bitcoin boom is that the technology that underpins Bitcoin proves so useful that it becomes widely adopted.

Bitcoin’s anonymity attracts illegal activity and that does not appeal to big banks or to the regulators. Some are developing their own blockchains. It is a little over the top for regulators to ban Bitcoin and I also think like Facebook, Bitcoin has strong network effects, and when more and more people hear about Bitcoin and want to become part of the action, Bitcoin will prove to be an unstoppable force.

Investors have a lot of fun investing in Bitcoin, but the real test is deciding when to get out. In Bernard Baruch’s wise words, “I made my money by selling too soon.”

 

Not necessarily the OP but I find the irony that all the anti-Wall Street guys who love BTC are now pointing to Wall Street guys talking about how they like BTC to be so great. I don't know Stahl's MO but any time he talks about how BTC is so awesome and Barron's writes an article means that more people will go out and buy some and the price will tick up and line his pockets even more. It's getting to be a self-fulfilling prophecy at this point.

My biggest issue with BTC as a legit currency is how I'd pay for somethinglike a $3 drink at Starbucks. If BTC is call it $150k per coin, I'm going to have to pay with a very small fraction of a coin but then what happens if the value of the coin goes up to $180k? Is the price of the drink going to go up 20%? Until there's a crypto out there that is reliably stable, it's just not going to be a legit way to transact.

The whole point of monetary supply is that you can expand and contract it as needed to maintain stability, what would you do with a fixed supply like BTC?

 

BTC believers gave up on the idea of using it to transact in anything when the arguments against that use became too glaring (stupid slow, $50 per transaction (currently), incredibly volatile). They argue that its not meant as a transactional currency, just as a store of value (like gold!). It's meant to be a settlement layer/ the federal reserve/ ....

Eh, you get the point

 

Right. That's something no one is thinking of. It's going to be a hassle to overcome. Not only that, doing transactions with BTC costs you about $5 to use at stores. Also, because of BTC's blocksize limitations, it can only handle 3-4 transactions per second, compared to Paypal at 200 and Visa at 1,700. So until Bitcoin addresses these hurdles first, it can't become mainstream, or at least as much as people want it to be.

 
Best Response

My biggest concern with bitcoin is when the 21M cap is hit. How do miners get compensated then? Currently, miners are awarded 5 or 15 BC for each verified transaction. When you think about it, that is ALOT of money. The process of mining is also very EXPENSIVE.

From my research, it seems like a transaction fee to consumers will be the next step at this stage OR more BC is introduced to compensate miners (i.e. inflation). As mentioned before, mining is expensive, so what do these transaction fees look like? Does it make more sense to use now only use BC in larger transactions (i.e. home purchases, contracts, etc.)? The rebuttal to this in the community is that technology will improve significantly by 2020 that the cost of mining BC will decrease dramatically.

The other biggest fear I have is that more than 50% of BC supply is controlled by ~1,000 people (primarily miners). Do these miners slowly sell off their stake as it no longer makes sense to mine BC?

The thing that I like the most about the VCs is the smart contract feature. I am more of a supporter of ETH than BC to be honest. However, I have $0 invested in any VC.

-XSX

 

OK, a couple of quick answers in reverse order:

  • Yes, almost all miners sell their BTC immediately upon reward for the reasons you mentioned.

  • Once the last BTC is mined the system will have to shift from Proof of Work to some form of Proof of Stake. Based on the shape of the ecosystem today, I suspect it'll be some kind of Delegated Proof of Stake in the case of Bitcoin, but that will probably change a dozen times between now and when the last BTC is mined in 2040. There are compelling reasons why I may be dead wrong about the move to Delegated Proof of Stake, primarily because it somewhat centralizes an ecosystem founded upon decentralization. I only mention it because that's how it looks to me now.

  • As for the scale issue mentioned in the comment before yours, there are several elegant solutions being tested as we speak. Side chains appear to hold the most immediate promise, but the Plasma chains they're proposing on Ethereum could really change the game. In plain English: the scale issue will be solved by this time next year and the blockchain will be able to move Visa-like volume.

 

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