Billionaire Howard Mark's pessimistic views on Bitcoin caught my attention as it runs contrary to the views which have supported my investment in Bitcoin.
These views expressed have so many counterpoints and nuances that its hard to know where to begin. So lets starts with a key concept of technology investing. The first observation is that any new technology whether its Amazon's retail internet model or Intel 's semiconductor chips is exceptionally difficult to value especially in the early days of the technology. No one back in 1997 would ever have guessed that Amazon would now be worth $500B+ in 2017. Even if Amazon is overvalued by 100%, the company is still a juggernaut in the retail, distribution and cloud computing markets.
Similarly, no one and I repeat no one is smart enough to quantify the value of blockchain technologies. Today the market cap of the crypto sector with 830+ currencies is $90B (see https://coinmarketcap.com/currencies/views/all/) . What will this be in 10 years? $200 billion? $1 trillion? It is simply impossible to know, but we can be nearly certain there will be crypto billionaires at some point in US dollar terms so long as the blockchain economy continues to grow with proven use cases across sectors of the economy, e.g. currency remittance, digital transactions, gaming, music distribution, security trading, social networking, etc.
What about use Bitcoin's use case of preserving wealth for people from countries with unstable currencies? If I am a wealthy person in a South American or African country with hyperinflation or a confiscatory government, what options do I have for preserving wealth? Cash or bonds denominated in the local currency could be subject to large losses as the currency devalues. Emerging market banks are infamous for freezing assets and anyone from an EM country will have a story of losing everything to a corrupt bank. Bitcoin is a natural vehicle for storing wealth and transferring value across borders since there is no third party middle man controlling the funds.
What about Bitcoin's use case of providing a hedge to depreciating fiat currency in an era of irresponsible central bank policy? Investors can buy gold ETFs, inflation linked bonds, crude oil call options, commodity ETFs, any instrument they wish. They will not work as hedges to provide protection against central banks inflating asset values and prices since these instruments don't measure the price level or rents or the cost of living that consumers actually deal with. Many traders have attempted to hedge inflation and sadly have lost fortunes on option premiums that declined to zero or ETFs that went down. There was no easy way to hedge the risk of central bankers at least until crypto currencies came along.
What about Bitcoin being too volatile for ordinary investors? Bitcoin declined 30% in two days, therefore it's an inappropriate investment for high net worth investors or retail stock market investors. They will surely panic and sell their Bitcoins before the returns are earned. Truth be told any investment in technology will be similarly volatile particularly if you invest early in the technology cycle. Amazon stock peaked around $110 in 1999 and declined to $6 in 2001. Needless to say investors that held their Amazon shares and or bought more shares made fortunes holding their shares through 2017.
What about the bubble in fixed income that Mr Mark's hedge fund has been able to exploit to the tune of a $3B market cap on his Oaktree publicly traded asset management company (stock ticker OAK)? Is the fixed income market also a pyramid scheme? Or are global bonds just another "safe" asset for the big banksters to short at the top and leave Joe Retail holding the bag when the game comes crashing down? There is an element of hypocrisy or the pot calling the kettle black when Mr. Marks calls bitcoins a pyramid scheme.
Thank you for reading and welcome your comments.