You Don’t Know What You Don’t Know

“It isn’t what you don’t know that gets you into trouble. It’s what you know for sure that just isn’t so!” – Mark Twain

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My eldest child Jack recently started pre-school. As my wife and I were doing the walk around the facilities on the open day, it occurred to me how great a place this is for children, with so many brand new play and sensory activities they’ve never seen before. As adults we can forget how amazing this world is and inadvertently take so much for granted.

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It amuses me just how entertained kids are by the very simplest things. My youngest child thinks Peppa Pig is hilarious, even after watching the same episode for the hundredth time. If only life were still that simple for adults! My kids remind me constantly it is important never to stop learning and never to stop appreciating our surroundings. Every day should be a school day!

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I have historically been a relatively conservative investor, so when I was chatting to a good mate of mine almost seven years ago about this new asset called cryptocurrency, I thought, “This whole crypto thing sounds like a get-rich-quick scheme”. I turned the opportunity down without even researching. Surely you can’t merely ‘create’ a digital currency, seemingly magically, and expect people to adopt it. How wrong I was!

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As it turns out, that same friend has since retired from his day job and no doubt thinks I am crazy working nine to five. This lesson provided a valuable reminder that we should always keep an open mind, no matter how illogical something sounds. It is not my generation that will be driving the current technological revolution, but the millennials. In our industry, we cannot afford to fall behind, so we need to read as much or maybe more than the millennials around us. We need to mix with people who constantly challenge our own views! I am a strong believer we should never stop learning and evolving. We don’t know what we don’t know!

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From now on, I make a point never to turn down an opportunity to research something, no matter how strange it sounds.

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Bitcoin was the first successful cryptocurrency to be developed. It was developed by Satoshi Nakamoto whom we are not certain is an actual person and may be the pseudonym for the person/s who developed Bitcoin. This is the subject of some conjecture. In any case, Bitcoin was ‘invented’ in 2008 and by 2010 the value of a single Bitcoin grew from eight hundredths of a cent to 8 cents. By 2011 it was trading at $0.67, before climbing to $327 by November 2011.
(Source: AFR, Why Bitcoin is worth anything or nothing, 14/2/2021.)

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Bitcoin is built on the ‘blockchain’, which we suggest is a fancy way of saying the record of your investment or financial holding is confirmed by thousands of independent computers chained together. All these computers confirm the holding, instead of, say, a bank ledger recording your account balance. This is apparently one of the appeals of Bitcoin, as there is no central bank that can increase or decrease the ‘money supply’ of Bitcoins. In theory the value of Bitcoin should be protected from outside influence. Aside from a global computer meltdown, the record of Bitcoin can supposedly never be deleted as long as a single computer in the network survives.

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When I initially heard of Bitcoin seven years ago, it was trading at under USD200. This same investment now trades at more than USD47,000. I find this price action simply astonishing. Three years ago, I was happy to let Bitcoin pass me by as I never wanted to invest in something that I didn’t understand. Bitcoin honestly seemed something akin to the Dutch tulip bubble of the 1600s. I thought the 80% crash in Bitcoin during 2017 was testament to this. Recently, however, Bitcoin looks to be back with a vengeance, smashing all previous highs.

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Curiosity ended up getting the better of me and I have since been doing my best to try to understand this new ‘asset’.

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In recent months Bitcoin has been under increased media attention as it is slowly being adopted by more and more financial institutions and Fortune 500 companies. Is Bitcoin here to stay?

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It is still early days for Bitcoin and other cryptocurrencies. However, from most articles I read, many views are that Bitcoin will likely not replace the sovereign currencies we are familiar with such as the Australian dollar (AUD) and the US Dollar (USD). So then, the term ‘cryptocurrency’ may be misleading.

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Governments will likely always have a sovereign currency. However, Bitcoin might be used by some individuals as a medium of exchange like currency to transfer value, thereby allowing the transfer of funds to the other side of the world with speed and relative ease, possibly also saving transaction and foreign exchange conversion costs as well.

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My brother recently had to transfer some funds to me from London. I was surprised to see that this simple process took more than 48 hours. He could have flown on a plane with a bag full of cash and delivered the funds to my bank faster than the current electronic solution. If this were done using Bitcoin, it would have taken a few seconds! This shows how archaic the current financial system is.

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Potentially, one significant determinant of Bitcoin’s future value might possibly be to replace gold as an asset. Billionaire businessmen Michael Saylor is a big supporter of this argument. Saylor claims cryptocurrency is a much better store of value than gold, since it removes some of the problems with holding gold. These problems include the holding costs, physical weight, time to physically transfer, the cost to transfer and no jurisdiction. Saylor believes that if Bitcoin replaces gold, Bitcoin could be worth above USD500,000.

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He continues to make the case for Bitcoin as a potential replacement for other stores of value or wealth such as bonds, index funds or property. In this instance, Bitcoin may hold a value of USD6m or greater.

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Saylor made his fortune turning $50m in the late 2000s into over $500m by very publicly investing in the FAANGs – Facebook, Apple, Amazon, Netflix and Google – and he published a book on this investment ‘theme. I do believe Saylor is worth listening too. He currently holds more than USD1bn of his own funds (personally and in his company) in Bitcoin.

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The head of Pendal Australia’s (previously BT Investment Management) income and defensive strategies, Vimol Gor, has also started to look at Bitcoin. This is truly remarkable as Gor’s role is to advise on defensive assets, yet he is considering one of the most expensive assets in history as a defensive strategy. Gor said: “Gold and maybe silver are pretty much the only assets out there you buy as a store of value … Bitcoin is the new gold but it’s better than gold because it has a finite supply and is instantly transferrable. Also, gold costs you to own it, Bitcoin doesn’t”. In the same article Gor said: “… The Government bond market is largely irrelevant now, you have trillions of government bonds which aren’t going to move and offer minimal returns”. To me this is amazing. Here we now have one of the most renowned bond managers in the country suggesting to look outside of bonds and instead consider Bitcoin. Gor goes on to promote that buying Bitcoin is like buying a call option on the digitisation of the financial system.
(Source: AFR, How to invest in cryptocurrencies, 13/2/2021).

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The queen of digital disruption, and whom I believe to be a modern-day Warren Buffet, Cathie Wood, has held Bitcoin in her portfolio for several years. Wood believes Bitcoin will continue to be one of the best performers in her investment universe. She believes corporations may start to substitute their cash holdings for Bitcoin. MassMutual (Massachusetts Mutual Life Insurance Company) recently invested USD100m in Bitcoin; MicroStrategy (Michael Saylor’s business) invested all their funds. Square has invested 5% of their funds; Tesla recently invested 1% of their funds into Bitcoin; while PayPal has enabled the buying and selling of Bitcoin on their platform. If companies in the S&P 500 were to invest only 1% of their funds in Bitcoin, this would result in a USD40,000 increase in the price of Bitcoin. According to Wood, should the very same US-only companies invest 10% in Bitcoin, this could see a USD400,000 rise in value (or near 1000%).

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Wood argues that if you look at Google Trends for the recent Bitcoin rally compared to the Bitcoin rally of 2017, the recent rally is not full of speculative activity. This provides Wood a great deal of comfort to continue to invest in Bitcoin.
(Source: Yahoo! Finance Interview: Why Ark’s Cathie Wood remains bullish on Bitcoin, Tesla. 3/2/2021).

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An institutional investor survey conducted by J.P. Morgan in December 2020 revealed 30% of asset managers, owners and hedge funds planned to invest in digital assets during 2021. Ray Dalio’s Bridgewater Associates, J.P. Morgan, Mastercard and insurance firms like MassMutual have all been very positive on Bitcoin in recent months, referring to a hedge against inflation or instead a broader bet on anarchy.
(Source: AFR, Bitcoin’s Back – and it’s different this time, 12/2/21).

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Recently a friend of mine sent me a photo of a bakery in Yamba of all places (NSW Mid-North Coast) that accepts Bitcoin for payment. Is this a sign of times to come?

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On the other hand, there are plenty of haters. Bitcoin requires a significant amount of energy to create – or ‘mine’, as the production process is referred to. One of the more notable commentators on the subject is US economist Nouriel Roubini, who teaches at the NYU Stern School of Business. Roubini claims: “… The fundamental value of Bitcoin is zero and would be negative if a proper carbon tax was applied to its massive polluting energy-hogging production”.^† Of course, there is also a very logical case to say that Bitcoin is worth nothing; I can’t say with 100% certainty it isn’t. However, price is what you pay and value is what you get and the price is doing a lot of talking at the moment!
^† (Source: AFR, Bitcoin’s Back – and it’s different this time, 12/2/21.)

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The price is the price. There have been extraordinary gains claimed to have been made by a lot of people who have bought Bitcoin.

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We at Emanuel Whybourne are certainly not advising our clients they need to have Bitcoin in their portfolio. We hold the opinion that buying Bitcoin is speculative; this type of strategy goes against our investment approach and philosophy, as well as Warren Buffet’s first two rules (1. Never lose money, and 2. Never forget rule number 1). However, we are certainly watching the cryptocurrency space and if you buy a Lotto ticket with an expectation of a win or search for ‘blue sky’ gains in stocks when trading, then maybe you could consider Bitcoin – but it is not for the faint-hearted!

Regards,

Tim Whybourne and Craig Emanuel

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