Tesla takes Bitcoin to the Moon
Elon Musk just surprised the world with Tesla’s $1.5 billion investment in Bitcoin. When the richest man in the world invests the balance sheet of one of the largest companies in the world in Bitcoin, everyone pays attention. Elon is anything but conventional, and for him to buy Bitcoin would be one thing, but it is an entirely different proposition for the board of Tesla to approve this investment. You can bet that company boards around the world are paying close attention.
We hear regularly that institutions are coming to Bitcoin, and the re-pricing of Bitcoin from $10k to the mid $30ks over the past months shows that new dynamics are at work. The word ‘institution’ however includes a wide variety of organizations, many of which have little to do with each other but together form an investment ecosystem critical to the widespread acceptance and adoption of Bitcoin.
Institutional Involvement
Banks are important because of their large client bases and because of their deep ties to government and regulatory structures. For Bitcoin they are particularly important given their initial hostility to any type of crypto currency, and seeing several influential banks change their views and present price targets multiples higher than Bitcoin’s current price is legitimizing. Banks starting businesses that trade (Goldman), custody (Nomura) or advise clients on investing in Bitcoin (JP Morgan) makes them invested in Bitcoin’s success.
We would expect to see family offices and professional investors investing in nearly any type of attractive asset but what is interesting about the investors who have publicly come out in support of Bitcoin is their profile. Paul Tudor Jones, Stanley Drukenmiller, Ray Dalio and Bill Miller are among the most respected investors globally. Four corporates have announced Bitcoin positions on their balance sheets which is important because it shows that three public company boards have approved the investment. The highly reputed endowments of Yale, Harvard and Brown have been rumored to be holders of Bitcoin, which, when verified, will provide intellectual support for other, less confident investors. And finally, several high-profile financial institutions like Fidelity, Paypal, Visa and the trading firm Susquhanna are investing time, money, people and reputation in building businesses to serve the Bitcoin and the digital asset ecosystem.
While it is encouraging to see these terrific institutions publicly associated with Bitcoin, these names are only a tiny, tiny fraction of the total size of each of these categories. There are hundreds of large banks globally, tens of thousands of institutional investors, hundreds of endowments and foundations, thousands of public companies with balance sheets to invest and almost 3,000 billionaires with many more thousands of investors worth hundreds of millions. We have barely scratched the surface.
Bitcoin as a Digital Store of Value
Institutions are investing in Bitcoin for several reasons, but it is Bitcoin’s attractiveness as a digital store of value which is most compelling. When compared to gold, Bitcoin is superior in every category with the exception of track record duration. The other attributes, however are so superior, that it is quickly overcoming its short track record and every day Bitcoin exists, it is more likely to endure.
We live in an age where adoption is faster for every technology and why would that not apply to a store of value? And especially one that is, in fact, a technology. Below is a graph that shows the increasingly rapid adoption of technology.
What Backs Bitcoin..or Gold?
A criticism often levied at Bitcoin is that it is backed by nothing, and of course this is true, but gold is also backed by nothing, and it is only perception that makes it worth $1,800 or $10,000 or $500. No fundamentals support the current price of gold: not marginal cost to mine and not industrial uses. Yes, if the price of gold fell dramatically it would be used more as a conductor, but I don’t think investors at $1,800/oz take comfort that gold could replace copper which trades at $0.23/oz. Only demand and supply drive the price, and demand is based on a necessarily subjective perception of its value. Bitcoin’s value also is based on a totally subjective view of its value, and, as with gold, when enough people agree, on a value, that is the value. The observation that one could create 100 new digital currencies so Bitcoin can’t have value is poorly considered given that Bitcoin has already been exactly copied (via forking) over 40 times and its value has only increased.
Supply of Bitcoin and Gold
If we compare gold to Bitcoin, we see a number of similarities. Both have about the same percentage held off the market; with gold, it is the 16% held by central banks which seems unlikely to be sold; and with Bitcoin 19% is thought lost. Both gold and Bitcoin grow supply at about 1.5% per year, but in 2023, Bitcoin supply growth will half to 0.75%. Bitcoin has 11.4% left to be mined with gold approximately 20%. The largest difference is that jewelry accounts for 50% of gold use. Rather than debate if gold is used for jewelry because it is pretty or because it is a store of value, the most relevant point is that gold jewelry is held by billions and billions of people. Until we see a path for Bitcoin adoption by billions and billions, we shouldn’t include the jewelry component of gold in Bitcoin’s potential value.
The deployment of central bank digital currencies will make populations comfortable with digital currencies and, in an unanticipated side effect, drive the adoption of Bitcoin globally, but that is likely several years away. Until that process starts in earnest, $250K per Bitcoin is a reasonable target, but longer term, parity with gold is certainly achievable, and given the superior characteristics of Bitcoin, it should command a premium to gold.
Bitcoin in 2021
2021 should be an eventful year for Bitcoin with a number of very positive catalysts and also several risks of which to be aware. On the positive side, Coinbase has filed for an IPO which will essentially be a huge Bitcoin advertisement. Gary Gensler, the new SEC chair is knowledgeable on Bitcoin and crypto assets and at long last we may see an US ETF approved. The GLD ETF is the largest non-state holder of gold and a Bitcoin ETF would soon become widely held as well. 2021 also has several risks to the price of Bitcoin: The Mt Gox trustee will likely distribute the trust’s 150,000 Bitcoin which will require time for the market to digest. We may see unexpected regulatory action which would be negative, but the most specific regulatory threat is the New York Attorney General’s investigation of Tether. Tether’s role is misunderstood, but a scary headline could lead to (temporary) disruption and ultimately a good buying opportunity.
Bitcoin Adoption
Bitcoin will remain volatile for years as investors navigate the price discovery process for this new, digital store of value, but as investors continue to recognize its significant attributes, we will see price increase and, over time, volatility decline. For this to happen, adoption will need to move far beyond the current small number of initial institutional investors and early retail investors to a broad investor universe. With so many thought leaders already on board and invested, this evolution is inevitable.
MicroStrategy, Mass Mutual and Square investing in Bitcoin was important, but they all pale in comparison to the endorsement of the worlds most famous entrepreneur and the worlds most valuable car manufacturer. Tesla’s investment provides the most tangible evidence that institutions will alter the landscape by adding credibility and helping drive adoption to thousands of firms and billions of people, taking Bitcoin to the moon..or to Mars.
