It is frustrating.But at the same time, interesting.Why Some Investors Get Bitcoin So Wrong, And What That Says About Its Strengths
Over the past couple of weeks, I’ve heard two well-respected investment managers say that they don’t believe in bitcoin’s supply limit.If it’s easy to spin up another Bitcoin, they claim, then there is really no limit.Most of you reading this will be rolling your eyes at this stage, but since it seems to be a firmly held view by some smart people, we should dig deeper.
We’ll find that it’s about more than a lack of research.
First, let’s look at what the two investment managers I’m referring to actually said.
This is from investment researcher and former hedge fund manager Jesse Felder’s blog post of a few weeks ago (my emphasis):
“Bitcoin believers rely entirely on the idea that bitcoin is limited in supply making it far more attractive than fiat currencies that are being printed like mad by central bankers around the world.However, Bitcoin has already hard forked several times, multiplying the number and type of bitcoins in circulation.
In fact, if you put together all the hard forks Bitcoin has undergone since it was first created, the number of total bitcoins has actually grown faster than the number of dollars.That’s a fact.”
And on the markets and investment podcast The End Game this week, investment manager and writer Fred Hickey said (again, my emphasis):
“The number five cryptocurrency is Bitcoin Cash! The number 12 biggest is Bitcoin SV – there’s no limit to these things.If bitcoin got too expensive, they would just go to another one.These are speculators, they pile into anything that’s cryptocurrencies.”
For now, we’ll ignore the snide implications that bitcoin’s market is entirely speculator-driven, and that speculators don’t know how to do research (because those assertions are just too flimsy to even bother with).
Instead, let’s focus on the misguided idea that new Bitcoin blockchains can be spun up whenever we want.
And let’s go deeper as to why this misunderstanding persists, and what that says about Bitcoin’s role in our evolution.Not so fast
Most of you are familiar enough with crypto markets to know that Bitcoin is unique.But have you thought much about why?
It’s only partly the technology.The blockchain code is open-source and can be copied and tweaked to make new bitcoin-like assets.
But, no matter what they call themselves, they are not Bitcoin.Bitcoin Cash increased the block size, allowing for larger throughput at the expense of a higher degree of centralization.
Bitcoin SV increased block size again by multiples more.
The market tells us that investors prefer the original Bitcoin:But have you ever heard an institutional investor talk at length about how Bitcoin’s SegWit scaling solution gives them more confidence as to the security of decentralization than Bitcoin SV’s whopping 128MB blocks? I’m sure that has happened; but I don’t think the scalability is a key investment criterion.It’s not the Bitcoin-specific characteristics that keep funds flowing into BTC.
It’s the network effects.
I’m not referring to the Metcalfe’s Law effect of each additional node.Nor am I talking about the advantages of having more people to send bitcoin to (although that is not insignificant).
I mean the market infrastructure and services that spring up around the asset with the highest volume: the on-ramps, sophisticated platforms, professional custody, complex derivatives and, even more important, the liquidity.
Smaller assets, no matter how impressive their block size, are riskier.Investors care about that, and so, no matter how expensive BTC gets, I very much doubt they’ll just rotate into BCH or BSV.
Those market network effects, combined with the underlying technology’s characteristics and potential, are behind the current professional investor focus on BTC.
Trying To Understand
Why is it hard for otherwise smart investors to see that? Here it gets interesting.
To see why, we need to look beyond the lack of research and the absence of interest.Underlying those is the assumption that traditional investment paradigms still hold.
Chief among these is the not-unreasonable conviction that technology is replicable, and that network effects early on are not necessarily permanent.MySpace lost out to Facebook, Google was not the first search engine.
It’s hard for traditional investors to understand that Bitcoin is not a business, and better marketing from rivals is unlikely to make a material difference.
It’s also hard for traditional investors to think about technology in the same framework as natural elements.After all, elements just are.Their composition can never change.What’s more, their use can be discouraged, but they can never be eradicated.
Technology, on the other hand, is created by someone, according to chosen specifications, to fulfill a specific role.We can make it do one thing or another, and sometimes it gets used for something totally different than what we intended, but that’s the market for you.
Technology is almost infinitely malleable in its composition and purpose.It’s also fickle, generally subject to the whims of the powerful, and driven by the conflicting urges of control and empowerment.
Until Bitcoin.
Bitcoin was created by someone, but we don’t know who, so there is no one we can point to as responsible.Bitcoin is constantly being updated and tweaked by a small army of developers with diverse backgrounds and funding sources, but it cannot be fundamentally changed without network consensus, which would only be possible if its size shrunk to a small fraction of today’s.And its use can be discouraged, but Bitcoin cannot be turned off.
All this gives Bitcoin – a technology – a curiously elemental status.
Here lies a not-too-ridiculous mental disconnect.Both of the above-mentioned investors have written extensively on gold, and instinctively understand the value of natural immutability and scarcity.Accepting that a technology can have similar properties is a stretch for most.
But understanding the difference between Bitcoin and other technologies, and the similarities between bitcoin and gold, is essential for grasping how significant its development is.
It’s not just about the inflation hedge offered by bitcoin’s scarcity and decentralization.It’s about civilization.
The emergence of metallurgy was, according to many theories, a trigger for the development of a complex society.It is entirely possible that the emergence of crypto technologies will be the catalyst for another societal restructuring.We’ve heard those outrageous claims before from technology advocates.
But we haven’t before had a technology with element-like properties, that emerged in a technology-rich era ripe for catalysts, at a time buffeted by so many other society-transforming trends and events.
This confusion as to what Bitcoin is is shared by many, but by no means all.Renowned investor Paul Tudor Jones showed this week that he gets it when he said:
“If really I had to guess what the future [of crypto] was going to be, I’d guess it was going to be a lot like the metals complex – where you have “precious crypto” which might be bitcoin … And you’re going to have transactional cryptocurrencies, along with the sovereigns, and they may be more like the industrial metals.”
Throughout history, profound transformations are usually not noticed by the mainstream until well after the changes are under way.
When traditional investors confound us with their ignorance and lack of research, we should try to understand why.
And more importantly, we should appreciate what that says about the depth and subtlety of new definitions and new paradigms that will define value and society in the turmoil to come.
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