Buying Bitcoin (Part 2)
A Bet on the Power Law
In the hustle-bustle of the pandemic, I completely forgot to publish Part 2 of my Bitcoin Investment Thesis. (Here is Part 1: Buying Bitcoin: A Bet on the Power Law).
The timing was certainly interesting. Soon after publishing Part 1, the price got whacked in ~half. Had I not been fully allocated, I’d certainly have bought more...sigh.
The below is Part 2 of the thesis and was authored back in Jan/Feb 2020. Enjoy!
Last time I introduced the merits of investing in Bitcoin.
We answered the following questions:
Is Bitcoin a Leader in a Large Growing Market?
Does it have a Growing Competitive Advantage?
Today, we will continue with the remainder of the investment checklist and answer the following:
Does Bitcoin have Visionary Leadership?
Could it 10X in 10 Years?
Let’s go!
Does Bitcoin Have Visionary Leadership?
Marc Andreessen, a prominent VC famous for coining the term “Software is Eating the World” has said before, when it comes to founders, he looks for a “magic combination of courage and genius”.
The person or people who invented Bitcoin is a secret. They choose to remain anonymous. But considering the groundbreaking nature of this technology, it’s pretty evident that the genius part is true here. Check.
What about courage?
Considering the multitude of hacks and price landslides that Bitcoin has suffered and rebounded from, I think it’s safe to say that the determination to not give up in the face of adversity is clearly present. It is present in the core developer community that continues to defend the decentralized nature of Bitcoin. Bitcoin has devout die-hard champions that simply don’t get phased no matter the state of the crypto-ecosystem. They have had plenty of opportunities to disappear and be forgotten. But they continue to vocally defend Bitcoin and make it better everyday. Their resolve is admirable. Their efforts are working.
Since there is no known “founder”, the future of the technology is driven by a self governing community, this provides me comfort that there is no single point of failure, and that the community itself will safeguard the future of the technology. This is very unique.
Could Bitcoin 10X in 10 Years?
Look, it’s hard to determine how much Bitcoin is worth. What we do know is that it holds tremendous promise. And if we’re even marginally directionally right, we will be very happy with our investment outcome. I like this asymmetry.
This is a classic Venture Capital bet. Remember, by Investing in Mavericks, we are looking to invest in a non-consensus future. We are buying mis-priced optionality here. It is only in the non-consensus column (see table below) where optionality will be mis-priced. And I believe Bitcoin prices today, will be seen as a bargain 10 years from now.
With that said, what does 10X mean? As of this writing, Bitcoin is hovering around $150-$175 Billion ($8000 to $10,000 per bitcoin) in market cap. That means, we’re asking, can Bitcoin be worth $1.5 to $1.7 Trillion in market cap one day?
Of course, this is unknowable. So answering this question is an exercise in creative writing.
Let’s opine on it anyway :)
Approach 1: Comparison to Big Tech
Another way to ask yourself the same question is, can Bitcoin be 50%-70% bigger than Google, Amazon or Apple? Each is about $1 Trillion in market cap today.
Can enabling communication and data transfer across a trust-less network be more valuable than organizing the world’s information? Or the daily convenience of how people buy things? Or the portable gateway to the Internet?
Perhaps.
Approach 2: The Birthing of Digital Gold
Bitcoin is sometimes referred to as “Digital Gold” which, to many, is considered a store of value. Is Bitcoin a better version of gold? A replacement perhaps? Bitcoin is only a decade old so it clearly doesn’t have the history of Gold as a store of value. But we could quite possibly be experiencing a birthing of digital gold today.
I don’t meet too many millennials who have the same fascination for buying and storing gold as perhaps some older generations do. Would they rather own Bitcoin instead? It’s certainly easier to store and transport, and to buy and sell.
Based on today’s prices, Gold’s total market cap is roughly $7-9 Trillion. So Bitcoin would need to replace 16-20% of the gold market to be worth $1.5-$1.7 Trillion.
Now, if Bitcoin goes on to become more than just a store of value, this future market cap could be significantly higher.
Approach 3: Billionaire Vanity - A Fun Thought Experiment
Now we are really having fun :)
Rich people love spending money. They buy whatever they want, be it yachts, $20 million dollar pieces of “abstract art”, or even 100 bedroom mansions! Nobody needs these things. Billionaires still buy them.
According to CNBC, there are 2600 billionaires in the world. As Bitcoin continues to go mainstream, I would imagine at least some of these billionaires would want to own at least 1 Bitcoin.
Would 1% of billionaires (only 26 of them) be willing to spend $100,000 (0.01% of their net worth) to get access to 1 bitcoin? That’s like someone with a net worth of $1 million spending $100 on bitcoin. Of course, it’s a no-brainer. And we haven’t even considered the centa-millionaires and smaller net worth individuals, and not to mention institutions.
If bitcoin continues its path towards the mainstream, a $100,000 price could feel like peanuts.
In All Seriousness though, Bitcoin Doesn’t Need to 10X
Bitcoin doesn’t need to10X in order to be a wonderful investment.
Remember, to beat the market, Bitcoin simply needs to get back to its all time highs ($20,000) in the next 7-10 years! Can it do that? I think so.
In Conclusion
As Marc Andreessen once said:
“most big breakthrough technologies/companies seem crazy at first: PCs, the internet, Bitcoin, Airbnb, Uber, 140 characters.. It has to be a radical product. It has to be something where, when people look at it, at first they say, ‘I don’t get it, I don’t understand it. I think it’s too weird, I think it’s too unusual.”
That is certainly the case with Bitcoin. Heck, Bitcoin is in the quote.
Crypto is a radical invention and Bitcoin is the leader.
To invest in Bitcoin today, one needs to believe two things:
Crypto as an asset class is here to stay and will be worth trillions.
Bitcoin will capture a meaningful portion of that growth.
This is one of the most open-ended investments I have ever made, but one I am super excited about it. Let’s see how it plays out.
In retrospect, it was inevitable - Elon Musk