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“The beauty of stocks is that they do sell at silly prices from time to time. That’s how Charlie and I have gotten rich.”

- Warren Buffett

Thursday Investable Mailbag

Q: Is crypto an investable asset class?

Not according to the chief investment officer at Goldman Sachs, no. “We do not think it is an investment asset class,” she told the Wall Street Journal this week, while comparing the renewed enthusiasm for crypto to the tulip mania of the 1600s. 

I can see her point. 

Strictly speaking, I'd like to define “investment” as something you can make a return on without ever having to sell.

This is not the case with crypto — even with those few cryptocurrencies that make and return profits, the profits are denominated in the same token you’ve invested in. So, if you can’t sell the token, you can’t make a return.

But I don't make the rules (unfortunately), so that is not anyone’s definition of investment.

You can’t, for example, make a return in gold or art without selling, and people consider those to be investable asset classes — so crypto must be, too. 

That does not, however, mean you should invest.

The problem with thinking of crypto as an investment is that you may lose sight of the basic fact that you will eventually need someone to buy it from you.

Like gold and art, crypto is a “greater-fool” asset class — your return is entirely dependent on someone paying you more than you paid someone else.

In the case of crypto, I think they probably will!

But anything where the return requires a willing buyer at higher prices is better thought of as a trade, not an investment.

In both trading and investing, it’s important to know what game you're playing, and thinking of crypto as an “investment” suggests you should buy and hold it and (with the possible exception of bitcoin), I’m not sure that’s great advice.

Crypto, in my opinion, is a tradable asset class, not an investable one.

Q: Is bitcoin money?

Bitcoin is commonly referred to as money, but hardly anyone uses it that way — so, no, I don’t think it is. 

You might argue that it’s gotten more money-like recently as bitcoin is now the unit of account and means of exchange for ordinals (NFTs on Bitcoin).

But that’s like saying my American Airlines frequent flier miles are money because I occasionally use them to buy an overpriced drink on a flight. 

I haven’t actually heard anyone make that argument, though. 

Mostly, people consider bitcoin money because they view it as a store of value — but this is a misnomer: Bitcoin is the asset kind of store of value, not the money kind.

What makes money a store of value is that its purchasing power is predictable from one month to the next (predictably a little lower is better than unpredictably higher). 

There is nothing predictable about bitcoin’s short-term purchasing power, so it fails as the money kind of store of value.

Even if you’re as bullish on bitcoin as Cathie Wood (who has raised her price target for bitcoin to $3.8 million), that kind of store of value makes bitcoin an asset, not money.

Q: Can’t it be both?

In theory, yes. 

Like gold was hundreds of years ago and Canadian Tire Money is today, bitcoin could be an asset that people also use as money (aka “commodity money”).

But we’d need a few things for that to happen: 1) its purchasing power would have to get much more predictable (Canadian Tire Money, for example is conveniently pegged to the Canadian dollar), 2) it would have to develop some utility beyond being an unpredictable store of value and 3) people would have to stop HODLing their bitcoin and start spending it.

It could happen. Institutional inflows and a ballooning market cap could dampen volatility, bitcoin could become the utility token for a layer-2 ecosystem of applications, and maybe the Lightning Network could finally catch on.

But the evidence to date has pointed in the opposite direction — even the people who most need an alternative form of money have so far preferred USDT (on Tron, no less) to bitcoin.

That might change with the advent of cheap transactions on layer-2s, but bitcoin will remain an asset until it does.

(A tradable one.) 

Q: What’s the bull case for MicroStrategy?

That’s a good question because the bear case is so glaringly obvious, I can’t help but wonder if it’s too obvious.

MSTR trades at 2.6x fair value and as inexplicable as that seems, I have enough respect for markets (acquired the hard way) to think there must be some reason why people are willing to buy bitcoin at $177,000 via MSTR instead of buying it directly for $68,000.

Unfortunately, I can only speculate as to people's motives, because no one seems to be making any kind of sensible argument for why they’re doing that. 

The best sales pitch for MSTR that Michael Saylor could muster in a recent conference appearance was to recommend it as a way to get exposure to bitcoin if you don’t have access to either spot bitcoin or the ETFs.

That can’t be a lot of people, however, so I don’t think it explains the huge premium that MSTR trades at.

The only logical reason for buying MSTR at current prices is because you think it will continue to create value for shareholders by selling overvalued shares to buy bitcoin. 

(Selling overvalued shares is a benefit to existing shareholders.)

It’s not totally unprecedented — people buy REITs at a premium to NAV because they think the REIT will create value for both current and future shareholders by continuing to buy real estate cheaper than they can sell shares.

But buying real estate is a pain and buying bitcoin is easy, so I don’t know why you’d pay MicroStrategy to do it for you.

Also, people buy REITs at, like, 1.2x NAV, not 2.6x.

2.6x is silly — more reminiscent of the crypto ponzi token OHM than it is of REITs. 

Admittedly, OHM might have worked out if buyers kept paying a big premium for the token indefinitely.

And maybe that will happen with MSTR shares, in which case it could work out for current buyers. 

But current buyers should know that even Michael Saylor thinks MSTR is trading at a silly price.

Saylor has been selling his MSTR shares and using the proceeds to buy spot bitcoin — an only-in-crypto financial phenomenon that’s kind of like the CEO of ExxonMobil selling his XOM shares to buy oil futures instead (which would never happen, to be clear).

Crypto may or may not be an investable asset class, but it’s definitely an entertaining one.

― Byron Gilliam

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