Industry: Crypto


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Posted 08/23/2020

Bitcoin (BTC)





bitcoin Long cryptoasset cryptocurrency

Building off of the original crypto-asset post here, this post lays out the investment case for the 'original' crypto-currency - Bitcoin.

We liken bitcoin to digital gold - both should go up as real interest rates go down. Ethereum is more similar to silver (see ETH post). This post is primarily an amalgamation of recent frameworks and investment cases for Bitcoin - from "Pomp" (Anthony Pompliano) to a publicly traded company, to Paul Tudor Jones. Bitcoin compared to gold (from Pomp's recent letter on Buffett buying gold, here. Here is a quick rundown of each aspect to consider:

Scarcity – It is becoming abundantly clear that Bitcoin has provable scarcity and gold does not. There are 21 million Bitcoin in the total supply (hard cap on that number) and there are just over 18.4 million Bitcoin in the circulating supply. These numbers are provable in the Bitcoin code base and by simply syncing a Bitcoin node to the network and querying for the data. Gold has an estimated total supply and circulating supply, but no one knows the exact numbers of each. They also can not prove either gold number either.

Portability — Gold is heavy and difficult to move in any serious size. Bitcoin is a fully digital asset, so it can be moved anywhere globally almost effortlessly.

Divisibility — Gold is difficult to divide into smaller amounts than you are currently holding. You could shave some off or have your gold bar professionally broken down, but it would be nearly impossible to do risk-free yourself. A single Bitcoin, on the other hand, is divisible by 100,000,000 fractional units called satoshis. This makes it infinitely easier for someone to use Bitcoin for transactional purposes compared to gold.

Physical applications — Gold is well known for it’s resistance to corrosion and rust, while also serving as a great conductor of heat and electricity as well. Bitcoin has none of these elements, nor does the Bitcoin community believe these properties are important for determining superior money.'

MicroStrategy decided to shift $250M cash balance into Bitcoin, and laid out the reasons here: MicroStrategy Adopts Bitcoin as Primary Treasury Reserve Asset. Excerpts from the letter: '“Our investment in Bitcoin is part of our new capital allocation strategy, which seeks to maximize long-term value for our shareholders,” said Michael J. Saylor, CEO, MicroStrategy Incorporated. “This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. Since its inception over a decade ago, Bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions. MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy.”' Mr. Saylor continued, “MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively. Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty. We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.”

In considering various asset classes for potential investment, MicroStrategy observed distinctive properties of Bitcoin that led it to believe investing in the cryptocurrency would provide not only a reasonable hedge against inflation, but also the prospect of earning a higher return than other investments. Mr. Saylor articulated the opinion, “We find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. Bitcoin is digital gold – harder, stronger, faster, and smarter than any money that has preceded it. We expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fueled the rise of so many category killers in the modern era.”

And another helpful framework from the Paul Tudor Jones macro letter / analysis, here. Excerpts from the letter: 'Quite often, how the markets respond will be at odds with your priors. But remember, the P&L always wins in the long run. With that in mind, in a world that craves new safe assets, there may be a growing role for Bitcoin.' '"I am not an advocate of Bitcoin ownership in isolation, but do recognize its potential in a period when we have the most unorthodox economic policies in modern history. So, we need to adapt our investment strategy. We have updated the Tudor BVI offering memoranda to disclose that we may trade Bitcoin futures for Tudor BVI. We have set the initial maximum exposure guideline for purchasing Bitcoin futures to a low single digit exposure percentage of Tudor BVI’s net assets, which seems prudent. We will review this exposure guideline regularly."' '"I also made the case for owning Bitcoin, the quintessence of scarcity premium... It is literally the only large tradeable asset in the world that has a known fixed maximum supply. By its design, the total quantity of Bitcoins (including those not yet mined) cannot exceed 21 million." 'Bitcoin reminds me of gold when I first got in the business in 1976," he wrote. "Gold had just been productized as a futures instrument (like Bitcoin recently) and had enjoyed a heck of a bull market, almost tripling in price. It then corrected almost 50% in nearly two years similar to Bitcoin’s 28-month 80% correction! You can see the similarities in the two charts below.' Net net, the frameworks laid out above help provide multiple perspectives on the same asset. We remain most positive on the underlying technological concept ('blockchain').


The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. Further info here.

CrowdCent's Take

GPT-3 TL;DR: "This post is a quick roundup of some investment perspectives on Bitcoin as an investment asset. We liken it to digital gold - both should go up as real interest rates go down. Bitcoin will be more sensitive to real interest rates than gold because of its utility as a transactional currency. This will likely result in it going more 'parabolic' than gold. The valuation case is still open-ended, but should Bitcoin eventually fully appreciate, we believe it would make up a large share of what is still a very small crypto-asset market."

We're planning to build a digital asset (cryptocurrency) thesis model and analysis. Stay tuned for probability explanations of digital asset ideas.

Model Output

Probability of outperformance: - %

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Useful additional perspective on Bitcoin. Lyn is particularly thoughtful about the macro environment + how Bitcoin fits in.

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Another great article that provides helpful context. @LynAldenContact

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