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Bitcoin: A Value Investor's Take On This Asset Bubble

Jun. 07, 2020 12:31 PM ETBitcoin USD (BTC-USD)BNB-USD, CBOE, CME87 Comments
AB Capital profile picture
AB Capital


  • Bitcoin's latest speculative boom is not one I will be participating in.
  • There are too many risks and known unknowns for me to get comfortable with the bitcoin risk/reward.
  • Take a leaf out of Levi Strauss' playbook and sell picks and shovels.

As a former investment professional, I am constantly asked about Bitcoin (BTC-USD) and various other coins in the cryptocurrency universe. In a nutshell, I am far from convinced. The analogy that Bitcoin is to the blockchain as email was to the internet seems apt - blockchain, not Bitcoin, is the key. Yet, following the bursting of the 2017 bubble, another mighty run-up has emerged this year.

Source: Coindesk

For the various reasons cited in this article, I have no intention of participating in the 2020 version of the Bitcoin boom. Instead, I see a prime opportunity to capitalize on Bitcoin's volatility without making a directional call via equity in Bitcoin-related futures exchanges (e.g., CME Group (CME) and Cboe Global Markets (CBOE)) or exchange tokens (e.g., Binance Coin (BNB-USD)).

Bitcoin Has Failed to Live Up to Its Intended Use Case

Per the Satoshi whitepaper, the initial intent of the Bitcoin cryptocurrency was for payments at lower transaction costs in a decentralized manner (i.e., without the involvement of centralized, third-party financial institutions). Bitcoin was clearly built on libertarian principles - through the network, participants were provided with a means by which to bypass the fiat currency system while maintaining transaction security.

Source: Satoshi Whitepaper

Yet, Bitcoin does not quite live up to its intended use case as P2P cash – based on a comparison with existing online providers (e.g., TransferWise (TWISE)), the cryptocurrency fails to hold its own in terms of cost, speed, and transparency.

On cost, Western Union (WU) and TransferWise remain the cheapest options by far at <1% on a $1,000 transaction. Money transfer through the Bitcoin network, on the other hand, costs ~4% (via Coinbase), which is above even PayPal's (PYPL). This seems far too high, in my view, to ever sustain mass adoption as a cash-like medium

This article was written by

AB Capital profile picture
Semi-retired investor and former buy side professional. Keeping an eye on special situations and event-driven opportunities across the equity and credit universe. All views are my own.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (87)

Luddite teacher profile picture
600% gains later and no word on the mental well-being of the author.
This article aged well..... :D
"This process seems wasteful, in my view, and I would not be surprised to see superior mining algorithms (e.g., Proof of Stake) eventually take hold."

Proof of Work (PoW) and Proof of Stake (PoS) are consensus mechanisms not mining algorithms. Mining algorithms would be the software existing in the ASICs machines.
Mikhail_Bitcoinovich profile picture
“March, for instance, saw a staggering ~50% price drop in one day. Per Coinbase, the extent of the drop was attributable to the extent of the leverage being used, with >100x leverage not unusual in this realm.”

I have heard this same argument from many intelligent people and savvy investors. I’m always surprised at how often intelligent people will repeat something stupid that they heard if it confirms their biases, and without any attempt at validating the information. Often simple 3rd grade arithmetic is sufficient to debunk the information, yet highly educated, experienced and respected people will totally miss it. This is just like the situation with Tether that I already discussed.

Yes, BitMex and others offer leverage up to 100x or 120x; and yes, that is an insane amount of leverage for an asset as volatile as bitcoin. 

But that is NOT why the price of bitcoin dropped 50% on March 12, 2020. I won’t get into all the details of what is now known as “Black Thursday”, but it should be obvious that if someone is long and leveraged 100x, his/her position gets liquidated if the price drops just 1%. So people who leverage 100x see their positions wiped out regularly. At other times the price moves favorably 2%, and they quickly get a 200% return on that trade. They are gambling. Nothing wrong with that.

So, anybody who was highly leveraged on that day saw their positions wiped out very early on. They were already out of the market before things got really bad. The massive drop was not due to them. There was a massive liquidity crisis that was impacting all assets. People who had any leverage on any asset we’re getting margin calls. As they tried to protect what they owned, they either sold what they could (including bitcoin), or in some cases leveraged their previously unleveraged crypto positions to meet margin calls on other assets. The result was a massive deleveraging event on all assets and massive losses to many investors in all asset classes. People who felt they were being ultra safe and responsible with maybe only 30% leverage and plenty of margin were getting liquidated.

What happened on March 12 was not a bitcoin problem. It was a problem rooted in the decades of excess leveraging encouraged by the loose monetary policies of the fiat system. Bitcoin was a collateral casualty.
SilentRage profile picture
Lottery is the most practical way to introduce BTC to the mainstream.

jimbo162 profile picture
@SilentRage interesting concept. I have wasted (limited funds) buying lottery tickets for years....seems like a bit of a waste for my valuable bitcoin. I must ask, have you played? and secondly can i use USD but accept winnings in bitcoin?
SilentRage profile picture

Global lottery that allows you to play in only in bitcoin. You win in bitcoin, except for the grand prize/jackpot, which pays out in USD.

I can't play, it's still illegal here in the US. Unfortunately, the individual states have a monopoly on lotto. Doubt my state would allow residents to play unless they were really desperate to generate tax revenue from online gaming....which may not be that far off.
Mikhail_Bitcoinovich profile picture
“What few account for, however, is the extent to which Bitcoin prices are manipulated - per a 2019 study, a single trader had manipulated the price of Bitcoin "sharply higher" during the 2017 run-up to $20,000 using Tether... I'll refrain from taking a stand on the study's findings, but I would note the credibility of the authors and the fact that the paper was peer-reviewed (published in the Journal of Finance).”

There are competing studies that have debunked that study. But more to the heart of the matter, using basic logic, the volume of new Tether minted in December 2017, even if 100% was used to “pump” the price of bitcoin, is simply woefully insufficient to have that kind of influence on the price. Just look at the increase in the market cap of bitcoin during that time and at the daily exchange volume.
Mikhail_Bitcoinovich profile picture
“The mining process also wastes enormous amounts of electricity... mining already uses more energy than some developed nations.”

This again needs context. The current monetary system also uses resources and energy. Without quantifying the environmental footprint of all central banks, all commercial banks, all money carriers, the production of all the paper money, etc, bitcoin’s electric usage cannot be labeled as a “waste”.

Secondly, something in the order of 90% of the cost of mining bitcoin is the cost of electricity. This means
That miners will always congregate around the cheapest electricity. And the cheapest electricity is always the electricity that nobody else wants, such as excess hydroelectric power, which would have been produced and wasted anyway, but now can be capitalized to potentially secure the world’s monetary system.
Mikhail_Bitcoinovich profile picture
“The prospect of a Bitcoin standard, on the other hand, would disrupt governments' seignorage revenue and the resulting shared benefit.”

Well.... yeah... That’s the whole point! The idea is to go back to sound money, like when it was backed by gold.
Doofnut profile picture
That’s why bitcoin marketing shows it as gold colored coin with a B on it.
Mikhail_Bitcoinovich profile picture
I really should write to those guys with some suggestions. Do you have an address for bitcoin’s marketing department?
Mikhail_Bitcoinovich profile picture
“Bitcoin's pseudonymous nature has allowed it to emerge as the preferred currency of cyber criminals. Per Chainalysis, a whopping $2.8bn worth of Bitcoin was sent to exchanges (e.g., Binance and Huobi) in 2019 alone.”

$2.8bn may seem to be a “whopping” amount if considered as a blanket statement like that, out context. But it needs to be viewed in context to truly assess if this an issue or not. For context three other pieces of data are needed:

1) how big of a share of total bitcoin’s transactions is that $2.8bn? It turns out that the bitcoin network moved $2.5 TRILLIONS worth of transactions in 2019! So, the amount tagged by Chainanalysis is just over 0.1%.

2) what is the total amount of cash (fiat) used for illicit activities in 2019, and how does this number compare to that $2.8bn on bitcoin? I haven’t researched that data, but I would expect it to be several orders of magnitude greater.

3) what percentage of the total volume of cash (fiat) transactions in 2019 was for illicit activities? Again, I don’t know the answer, but given that the illegal drug industry moves very large amounts of cash, I would not be surprised if illegal activities represented something in the order of over 50% of all cash transaction volume.
Mikhail_Bitcoinovich profile picture
Link to $2.5 trillion figure:
Mikhail_Bitcoinovich profile picture
“Bitcoin does not quite live up to its intended use case as P2P cash – based on a comparison with existing online providers... Western Union (WU) and TransferWise remain the cheapest options by far at <1% on a $1,000 transaction. Money transfer through the Bitcoin network, on the other hand, costs ~4% (via Coinbase).”

I can vouch that this is factually correct, as I have tried to use bitcoin as a cheaper way to transfer money to my daughter studying overseas, but resigned myself to none bitcoin methods.

However, this fails to consider that the value of bitcoin today is not based on bitcoin’s utility today. It is based on bitcoin’s potential utility if it is successful at achieving its vision, discounted to present value factoring perceived risk.

We are still in a fiat world, so if you assume you have your money in USD and want to send it to someone overseas for them to get, say JPY, then using bitcoin requires expensive costs for onramping to bitcoin from USD and for offramping back to JPY. Of course it’s expensive!

However, if you assume a future in which bitcoin is ubiquitous and kept as a store of value and the basis for a monetary system, then there are conversions needed from and to fiat.
What is the process you are using from bitcoin until the final fiat currency?

I would think you would transfer bitcoin to bitcoin via a platform like Binance, but they your daughter would have to convert to fiat.

Is the conversion to usable fiat where the transaction fee is prohibitive?
Mikhail_Bitcoinovich profile picture
Because we are still in a fiat world, I consider my USD as my checking account and my BTC as my savings account.

She needs fiat of her country of residence for her rent and expenses. I use primarily Coinbase as my on-ramp. If I send her money from my USD (aka checking), then the total transaction cost is about 4%, as the author suggests, because of the two fiat/BTC conversions. 

If I want to send her money from my savings (aka BTC), it looks on the surface like I may be reducing my cost to 2%. However that cost reduction is illusory, because my earnings are in USD, so I will eventually incur that second 2% cost when I convert excess USD in my checking account to BTC.
Mikhail_Bitcoinovich profile picture
@aaron butler, I disagree with almost everything written in this article but I appreciate the coherent and comprehensive way in which all the bearish arguments against bitcoin were packaged here. It’s important, especially for bitcoin ultrabulls like me, to regularly read criticism about bitcoin to retest one’s investment thesis and make sure the reasons why we invest in something are still valid. So, thank you!

I’m no millennial. I have been an active investor for 37 years and consider myself a value investor and a long term investor. You may be surprised to hear that after I sold my last equity position in February, ahead of the stock market rout, I now only own cash, bitcoin, and some gold. I find this to be the safest possible long term allocation for my portfolio, while at the same time holding the most massively undervalued asset that exists, bitcoin.

I will provide next some specific arguments to rebut some of your points, trying to avoid being too repetitive with some of the other comments here.
This guy F**king get's it !!! ^
@Mikhail_Bitcoinovich I am literally in the exact same boat (but not quite as experienced of an investor), and was going to do exactly what you did: Provide counter argument to each main point, and explain why the author is dead wrong, but also I do appreciate the efforts to put together fairly reasonable bearish arguments, concerns, and risks.

I do not need to respond now because @Mikhail_Bitcoinovich has responded very well to these arguments.

The best thing to remember is Bitcoin and Gold are literally the only sound monetary assets remaining on the planet. The Bitcoin blockchain is simply the base layer, which in the future (in a peer-to-peer, decentralized money system) would compete more with the SWIFT system itself. Transaction speed and cheap value transfer is solved on additional layers like the Lightning Network, or side-chains (think of them as layers) like Liquid Bitcoin Network. This is how open network protocols all are built to have maximum robustness and scalability. The Internet uses TCP/IP, HTTP, FTP, SMTP - which all have various tradeoffs but are built atop one another (see sourcedaddy.com/...

I am also all in on Gold, Bitcoin, and small cash position for trading and/or shorting opportunities.
Mikhail_Bitcoinovich profile picture
Thank you, @Blizz_The_Wiz. It means a lot. I spend time writing these detailed comments to help others, so the positive feedback is much appreciated.

And thank you for addressing that the cheap and fast value transfer issue that the author brought up is easily addressed with second layer technologies like Lightning.

Cheers, and keep #stackingsats!
I'm just curious....if Bitcoin is not anything, then why all the articles of why it won't work?? Personally I wouldn't waste my time trying to explain, mansplain, or any other splain anything I didn't care about, or thought wouldn't work! Makes you really wonder what peoples motives are, lol! We ain't shit, make you're money however you can an leave it to the people that want to invest....pretty simple to me.
Mikhail_Bitcoinovich profile picture
I’ve asked myself this same question many times, and the only credible answer I can come up with is that people who see themselves as being financially savvy and competent investors get cognitive dissonance at the idea that there could have been such an amazing opportunity like bitcoin that they missed. They are too smart for that. This means they have to rationalize why bitcoin is a fraud, or a Ponzi scheme, or a bubble, whatever. They are actively cheering for bitcoin to fail so they can say, “See? Told ya!”
jimbo162 profile picture
Bingo....complete wealth envy and resentment. Plus the fact they simply don't understand it's concept or use case.
Because Ponzi schemes are deceptive. Everyone seems to be making tons of money - until the whole thing collapses. It is profitable to point out these schemes as they can suck people into them who are greedy and don't know how to evaluate things.
T3SLA profile picture
There's no need for yet another payment system, especially a complicated one that requires you to keep secret keys to maintain the security. Google pay works just fine when I need to send money to my kids and it doesn't cost me anything. I don't have to maintain a passcode other than my thumbprint and any problems I have can be handled through the customer service department with my credit card company. Between venmo, Google pay, PayPal and just the basic bank system there are more than enough ways to transfer money. In fact Europe is way more advanced than we are in the United States. They just text out a payment request through their Bank and the person answers it. It's not hard. The whole idea that Bitcoin gets around so-called Fiat currencies is silly because everybody's valuing it based on the fiat currency. It's either worth 9500 Fiat dollars or it's worth 3500 Fiat dollars. That kind of volatility does not lend itself to any kind of payment system. It only lends itself to gamblers who think they can call the peaks and troughs. Everything else is just rationalization, trying to backfill and justify the reason for holding it. It goes up because people on the other side have manipulated it to do that and they will manipulate it once again so they can cash out their Fiat dollars at everyone else's expense.
07 Jun. 2020
There is no such thing as "free" with google and paypal. You are giving up security and privacy so they can sell your information to marketers and it also has the possibility of being misused other ways as has been seen multiple times before.

Additionally, Google and Paypal can arbitrarily shut down accounts if they don't like what you are buying or selling, such as pornography, alcohol, legal drugs such as weed, firearms, "marketing materials" because they dont want competition, investment consulting, lots of different financial services, gambling or gaming, precious metals or stones, travel packages, martial arts weapons...you get the point. Your "free payment system" is subject to a large corporation imposing their moral beliefs on your transactions.
Doofnut profile picture
The whole privacy argument is moot since Coinbase and other crypto exchanges divulge bitcoin trading activity to the IRS.
@B1976 Well said. When reading @CaminoPeregrino comment I was thinking this naivety is exactly why we need a system like Bitcoin. So many does not understand that just because you do not pay money, does not mean you do not mean it is free. There are many ways to pay for something other than with money. And people using seeking alpha should absolutely know the meaning of the term "There is no such thing as a free lunch"
Does anybody else worry that BNB is a security?
Mikhail_Bitcoinovich profile picture
Agree. XRP should also have been a security.
Thoughts on whether Ether, once it becomes POS, could be considered a security? Don't ask me to explain why. I read somewhere that this was a possibility.
The massive manipulation of Bitcoin is the only point needed here. Just follow the money and you will always get your answer. On every price drop, billions of dollars of fake Tethers are printed out of thin air to support the price. It's blatantly obvious. They are offshore, operating lawlessly, and have the money for teams of high end lawyers to fight for them. This is undoubtedly the biggest organized criminal enterprise of our generation. I'll continue to invest in real assets. I wouldn't risk one borrowed dollar on this rigged game.
so why are you commenting if it has no worth? It's nothing and will fail. I have never seen anything that so many will think it will fail give so much time to it. Just let us idiots who believe waste our time and let it be, lol.
stonkless profile picture
So defensive, Ms. Floy
jimbo162 profile picture
"massive manipulation" with coins "printed out of thin air"...sounds more like how the FED operates.
There are altcoins that have already solved all your problems including quantum computing. BTC is just being used as a store of value now.
Luddite teacher profile picture
Wow. The criticisms you provide are from the last bubbles in 2015 and 2017. A few simple google searches and research can answer these recycled thoughts.

- Coinbase is a third party. You can transact direct on the bitcoin blockchain - think $500 million for a $1 dollar transaction fee with no middle man and finality within ~1 hour. How long is the waiting period when you sell stocks for everything to finalize?
- Bitcoin use case is multifaceted and not fully explored even now but the biggest one today is store of value/digital gold. There are many other use cases for that are being developed as bitcoin is software...this is early internet days. Google lightning network which is in development and should be able to do orders of magnitude more transactions per second than Visa.
- Bitcoin transactions are finalized in ~1 hour confidently. No middle man, no trusted 3rd party. Your perception of other transactions finalizing quicker are superficial and are skipping tests. Research into how long it actually takes for CC transactions, bank transactions, stock transactions actually to clear and all the inefficient middlemen in the middle. Think about cost savings and efficiency gains And counter party risk if those middlemen are cut out.
- Regarding price manipulation - How do you think traditional markets work? Bitcoin is the only true ‘free’ market out there. In March 2020 it crashed like everything else and did not have a Fed backstop. It could have gone to zero but now is above from where it crashed.

I encourage reading Raoul Pal, Paul Tudor Jones, Peter Thiel, Mark Yusko, Luke Gromen, Mark Novogratz etc and their investment theses into why bitcoin. Many free podcasts are available that will do much of the hard work for you.
Doofnut profile picture
Paul Tudor Jones didn’t invest in bitcoin, he’s only speculating on bitcoin futures. Huge difference. That allows him to take money away from bagholding crypto bugs who worship bitcoin like the second coming of Jesus. He doesn’t care about bitcoin, he only trades it to make money in dollar terms.
- There are already plenty of reliable ways for rich people to send lots of money. The only thing that is potentially novel about Bitcoin is the ability to do microtransactions and BTC can't even do this.
- Bitcoin is not a 'store of value'. People don't understand what that even means. A store of value is something that can be reliably contracted in. USD is a store of value for instance, when you agree to pay $1000 a month in rent over 6 months. BTC is a horrible store of value. What you mean to say it is a highly speculative thing that can go up rapidly but also go down rapidly. As the price gets higher it becomes riskier to buy. It tends to only enrich early holders, who of course wish to encourage new people to buy in so they can dump on them. This is not sustainable nor anything like a store of value!
- Bitcoin absolutely needs a trusted third party. It is not some magical thing that evades financial regulations. If you want to actually spend your Bitcoin you still need to have it recorded. You need to pay tax. You have to sell it for fiat currency on an exchange. You are still subject to money laundering laws and so on. It is actually a lot simpler to just use the existing financial system unless you are trying to evade laws. That does happen to be one of the major uses of BTC with unregulated exchanges like Binance fooling people into being large money washing participants for criminals. This will end soon and people are likely going to have their Bitcoins frozen by court. Bitcoin is highly traceable which people don't seem to understand.
- Bitcoin is one of the most manipulated 'markets' (casinos) out there. Its only 'use' for people is really as a giant unregulated casino to trade with all these hundreds of other worthless tokens on shady exchanges. Gambling is fine but let's call it what it is. The flip side of the lack of regulation is, if you get dumped on by whales or your Bitcoins are stolen, or there is some other issue, you don't have much recourse right now.
Funny all of this, but if it was useless as you say, you wouldn't even waste ur time, lol.
Levi Strauss Market Cap- $6billion
Bitcoin Market Cap- $160billion

A bet on the sector is a speculative bet so choose the higher upside bet. Levi’s , CBOE, CME or ICE have no chance vs BItcoin the next two years. Much better off buying tech stocks and bitcoin.
jimbo162 profile picture
@DerrickXIII well at least the author got something right, he calls bitcoin an asset.
riddix profile picture
At least Levi's are useful.
Absolutely right. Bitcoin can never work as money or be useful without scale and use as a commodity ledger by big business. BTC as it stands is basically, a ponzi scheme and pure speculation.
07 Jun. 2020
I don't think you understand what a ponzi scheme really is.
I have no reason to "Buy BTC". For it not to be a ponzi scheme it needs some kind of real value. I am not going to buy something just to enrich some hodlers who want to dump on me!
Doofnut profile picture
Perhaps not a Ponzi scheme but definitely a greater fool scheme.
07 Jun. 2020
Since all the points made have been enervated a couple years ago already - even the point about quantum computing - I am not going to derail the arguments by myself except the author reacts to this comment and wants me to take the opposite side. Otherwise, just google it. Have a nice day everyone!
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