It’s fashionable these days to dunk on Bitcoin and cryptocurrency more generally. Charts like the one below lend themselves to dunking. And I must confess some schadenfreude as certain crypto shills and charlatans get some well-deserved comeuppance.
I’ve written about crypto on several occasions on this blog. While I’ve enjoyed following the space from a distance, I’ve never put real dollars on the line. As I wrote last year in my Bubble Logic post, I just can’t get my head around how to judge when the stuff is cheap or expensive.
Are cryptocurrencies actually worth anything? If so, what are they worth?
I took a stab at this myself not too long ago. It was a useful exercise although it did not exactly end with concrete results. So despite having learned even more about blockchain and cryptocurrencies in the meantime, I remain stuck.
How am I supposed to invest in something that I cannot value?
Now, there is a pragmatic solution I have not really discussed (also mentioned by one of Patrick’s interviewees). That is, you can simply look at cryptocurrencies as call options (or, if you prefer less financial jargon, as lottery tickets). Viewed through the lens of portfolio construction this is far and away the best way of approaching the problem given the dramatic skew in the distribution of potential returns. Max downside is 100% of the original investment. And max upside is what? A 1000x gain? More? That is a pretty attractive option.
Yet it still doesn’t sit right with me. It feels too much like gambling. Which isn’t the worst thing in the world. I enjoy the occasional trip to the casino. However, conflating investing and gambling does not seem like a real answer. In fact it seems like bubble logic: gamble a little so you won’t miss out and regret it.
I wrestle with the same dilemma today.
On the one hand, the narrative around crypto has definitely shifted. It’s gotten extremely negative. I’d say it’s bordering on capitulation. If valuing this stuff were as straightforward as valuing stocks, it would be time to go bargain hunting.
Unfortunately, valuing crypto is not as straightforward as valuing stocks. You don’t have cash flows to look at. You don’t have hard assets to look at. All you’ve got is supply and demand.
For what it’s worth, I don’t believe Bitcoin is a zero. Bitcoin is ultimately a faith-based asset. It has value to the extent other people believe it has value. There’s probably always going to be at least some subset of the population that believes Bitcoin has value. But as a potential investor, I have to suss out whether the size and enthusiasm of that faith community translate to a price of $0.001, $1,000,0000, or something else entirely. Then I have to assign probabilities to those outcomes. That’s simply not something I’m able to do with any real confidence.
That said, I’m not ready to write all crypto off as an investment fad or fraud.
I’m interested in crypto (and Bitcoin specifically) as a potential financial hedge against kleptocracy and economic mismanagement (China, Zimbabwe, Venezuela).
I’m interested in crypto’s potential to democratize and decentralize the issuance and trading of securities that can be valued using traditional means.
I do think crypto is here to stay, in some form or fashion. But I’m still not prepared to make financial bets on those outcomes.