Celsius, FTX, Three Arrow Capital, – none of these names, which were the craze of the crypto world a mere year ago, are with us today. Companies left in the crypto-world are still around because they all did something right. Mainly , – adhered to best practices and did not screw their customers over with outright scams:
So what happened in this exciting world of crypto?
2021 was a year of free money, pump & dump schemes and unrealisable dreams of endless returns:
2022 was a year of retribution:
2023 is promising to be a year of regulation, change makers, some solid projects and technology believers
Digital Assets, like other asset classes may be approached with 2 types of mindsets:
- Gambling mindset
- Speculative asset building mindset
I will assume most of people, who are still in the game, approached crypto with the asset building mindset
But first let’s look at Warren Buffet, the genius of investing
Warren Buffet looks at his portfolio from the point of view of consistent accumulation of returns. This might not always work in the short term, but so far it has succeeded long term for him. Look at Berkshire Hathaway and ARKK. Cathie Wood’s ARK Innovation ETF soared in value early in the pandemic. Today, with the pandemic under control, Berkshire Hathaway is up, and ARKK is down. Like the fable about the tortoise and the hare, Buffett’s steady progress outpaced Wood’s blazing heights and drastic fall
What is such a shrewd investor saying about crypto?
Never invest in Bitcoin, – says Warren Buffet, – it is unproductive, it doesn’t generate anything. As Buffett reportedly sees it, Bitcoin’s value comes from the optimism that someone else will be willing to pay more for it in the future than you’re paying today
He is right in many regards highlighting that Bitcoin has failed to be widely adopted to an extent where it could be used in everyday life to pay for services everywhere. Some people did not manage to break the temptation of hoarding Bitcoin. There is no magic bullet to reduce the volatility of crypto. Bitcoin distribution hasn’t appeared to result in more equitable distribution of wealth amongst people.
All these Bitcoin shortcomings as the currency, however, currently constitute Bitcoin’s biggest strengths as a new store of value
Both George Soros and Ray Dalio agree that Bitcoin is taking gold’s market share
“It is the first time in 5,000 years that we have something better than gold. And it is significantly better. It’s much more secure, more divisible, more durable, and easier to transport. It is simply better”
Wences Casares
An interesting point Buffet makes is that he doesn’t understand crypto
“We don’t own any, we’re not short any” – Buffet says
He also says that NO ONE IS SHORT ON BTC long term. If you do not believe in the asset and think it will come to a bad ending the logical view of an investor would be to short it, just like Soros did with pound in 1992
Warren Buffet does not like Bitcoin, even then he sees no economic feasibility betting on its demise.
While Bitcoin does not produce anything we can’t really say gold does. Your golden jewellery is of use only in a society. In the exact same fashion, Bitcoin’s value is similarly a societal construct. Bitcoin is scarce by design thus it is not vulnerable to inflation. The Bitcoin protocol is unhackable no matter how many people tried. Bitcoin has no single point of failure and thus does not depend on any market participant
How Does Bitcoin Fare In Relation to Other Asset Classes?
It’s worth noting that many asset classes changed their purpose historically. Gold, for example, started being used as a store of value and a medium of exchange 6000 years ago – and because of this, over time, and because it’s shiny, it acquired enhanced aesthetic value. The rarity and desirability are considered to be gold’s top qualities.
Diamonds are considered a store of value and an investment despite the fact they are not scarce at all. The American dollar was created as a representation of the country’s gold and silver – while now it is used as a sovereign currency in the USA and a well understood (and highly relied upon for relative stability) exchange rate mechanism
How Do You Price Bitcoin?
Most experts converge on the assertion that BTC should cost either a million $ each (according to gold’s market cap) or zero. As with other constructs of value, BTC’s position is decided by society’s acceptance and that acceptance is driven by use cases. If we look at Bitcoin as a store of value and take even 1/10th of gold’s current market cap Bitcoin would fare about 43X undervalued to its real price:
We are in the 3rd bear market cycle with Bitcoin, and other cryptocurrencies, and if history is of any value, then clearly past returns or performances are not indicative of the future gains or losses.
It is, however, worth, putting any asset into perspective, and soberly compare them to other ones to form your opinion on what might be a good investment, or the next big thing.
Warren Buffet does not understand Bitcoin, and he does just fine. Maybe, if you understand this asset, you could do even better. One thing is sure:
Knowledge is Power
