Now, what is this action—which is very technical—what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar. –President Richard M. Nixon, August 15th, 1971
Turns out, the devaluation was more than just a ‘bugaboo.’ The gold window was officially closed, though few Americans were tuned in that Sunday evening to see Nixon’s address. Even fewer understood the long-term significance of his historic announcement. He had already made a big network splash the month before by announcing his visit to China that would forever change the world, and while that was meant for fanfare, this announcement was made on purpose with few watching. President Richard M. Nixon withdrew the United States from the Gold Standard to the chagrin of classical economists. This would launch a brave new world with floating exchange rates and a fiat reserve currency and would ultimately lead to the demise of the international financial order of the day. History debates the merits of the move greatly but one thing is clear, the value of the dollar was not stabilized, in the short, medium, or long-term. What is undebatable is that the dollar began a precipitous decline, along with interest rates that would last for the next fifty years. At the time of the announcement, the American public was much more focused on the soon-to-be-announced fate of Lt. William Calley of his military tribunal for war crimes related to his actions in the deplorable My Lai Massacre.
This bold move was a politically motivated one not spearheaded at the Federal Reserve but instead by Nixon himself and Treasury Secretary John Connally, who would later go personally bankrupt in the economic devastation that would follow. In the first recorded conversation on the subject, which was on July 27, 1971, Nixon said “One way to work Arthur [Burns] (Federal Reserve Chairman at the time) on this, knowing his ego, is to get him to think the idea was his.” Connally obediently replies “That’s right.” Burns never quite came around, when he discovered Nixon’s intentions he famously said “What a tragedy for humankind.” Milton Friedman would famously refer to him, because of his uncouth and self-serving betrayal of conservative economic principles as “The most socialist US President of the 20th century.”
The move was popular with the public at the time. Nixon successfully spun perhaps the most consequential economic moment in the second half of the twentieth century as a patriotic defense of the dollar against foreign speculators. His authenticity isn’t supported by his subsequently documented efforts to exert political pressure on the Fed to secure election. By the end of the 1970s, the dollar had lost a third of its’ value and the United States endured the worst economic recession since the Great Depression; the notorious period of “Stagflation.” According to Keynesian theory at the time, the robust fiscal program of the Nixon administration should have alleviated the situation but instead, it created one that was previously considered theoretically impossible, stagnating growth occurring simultaneously as rampant inflation. This toxic economic mix caused conservative investors, or ‘gold bugs’ as they were disparagingly called, to favor an asset above the fray of national assets. Which at least in their minds was gold. Investors wanted something at the time that was independent of the machinations of Great Powers and the personalities leading them. The period of economic misery that followed led to an eventual changing of the guard at the Fed, and Milton Friedman’s monetarists would have their great success in the early 80s, turning the US economy around by taking the political poison pill of a recession in 1982. This time the President did not interfere with then Chairman Volcker to his credit. When inflation went down the Fed reversed policy and Regan streamlined the Federal government and reduced taxes, resulting in strong growth.
Many want a hedge against the uncertainty of future government policy today, many did in the past as well, particularly many who’d lived through the Great Depression and the era that Americans were legally prohibited from owning gold, not to mention the Second World War. That experience had conditioned them to distrust financial institutions and government policy around assets, Gold to them seemed safe, everyone wanted gold. Indeed, during the Second World War (also that generations second crisis) when commerce broke down many people across the globe had to resort to storing wealth in jewelry; diamonds, gold, silver, and of course art. Much of this was plundered and appropriated. It seemed to many the ultimate insurance policy in a less stable world.
What’s All The Bugaboo About Bitcoin?
Tom Lee and Fundstrat focus on the stock market, not cryptocurrency markets. I don’t get what’s going on! What does this have to do with Bitcoin, digital currency, and the blockchain? Bitcoin’s price and properties as an asset have made a lot of people pay attention, including us. Blockchain technology is one of the most significant inventions in personal finance ever. The recent acceleration and introduction of new market infrastructures like Coinbase and other cryptocurrency exchanges have multiplied quickly. ‘BTC’ is now an investable asset and can be purchased passively without the hassle of digital wallets. Scandals have come and scandals have gone but digital assets keep proliferating. Ethereum is a new exciting asset in the space. No one at this time necessarily predicted the continued supremacy of the dollar; after all America’s payment imbalances were caused largely by war expenses in Southeast Asia, a conflict that was ending without victory. Hopes were not too high for continued American financial dominance and very few people realized the significance of a technological protocol created by a group of American banks called the Society for Worldwide Interbank Financial Telecommunications (SWIFT) in 1973. No one could have known it at the time, SWIFT is one of the main reasons banks have been able to maintain profitability despite the aforementioned multi-generational decline in interest rates. If you are looking for something that conceptually helps you understand what Bitcoin is, this obscure protocol may offer a decent metaphor, but at the same time, Bitcoin was a monumental leap in human ingenuity that solved one of our most enduring economic problems; the persistent incentive to violate trust to maximize individual gains. Because of this perpetual problem, digital financial transactions have always needed a trusted third-party to act as an intermediary. Bitcoin was created in the heat of the GFC when the trust of those third parties was at an all-time low. SWIFT and other inefficient payment oligopolies will maintain their dominance for a while but there is now a proven technological alternative that has the potential to eliminate problematic economic rents charged by the financial industry to individuals for the privilege of using the system. The cost of this in the United States is about $1,000 annually per capita. Will bitcoin replace credit cards and bank accounts? We don’t think that will necessarily be the case, but we do think technology has the potential to create unprecedented efficiencies in the economy. We’ll give you an example of how we think about it.
This simple protocol, literally a system of connecting unique identifiers to express information necessary for international financial transactions, is an antiquated technological solution that maintains dominance because it was effective and it was first. It replaced a system called Telex that’s was plagued with human error issues. SWIFT’s generation of unique codes overcame these issues and allowed individuals and businesses to accept payments on an unprecedented scale. This then led to a massive network effect.
How’s Bitcoin doing lately? Bitcoin remains firmly ahead of gold as the best asset class on a YTD basis. Bitcoin outperformed the S&P 500 in 2019, one of it’s best years in a generation, by about three-fold. Wait is that a mistake? No, it is not. Not only is it not a mistake, but Bitcoin’s performance in 2019 was its fourth-worst annual performance (less than average for an asset with a life of about 12 years). This is why we are interested in Bitcoin, we believe it is one of the best risk assets you can own in your portfolio and we recommend going OW compared to its typical slice of the investment assets pie. We realize some investors may have been spooked from the massive 50% drop that occurred during the worst days of COVID-19. The market infrastructure and demand impressively weathered that hit and bitcoin exchanges are functioning healthily again. We told our members to buy when the price of bitcoin was around $5,000, those who did have seen a significant retracement of the loss.
We are the first, and currently only, independent analyst on Wall Street to cover cryptocurrency. We obviously believe in both the current, and long-term value of it as an investment. We cover the entire asset-class from Litecoin, Ethereum, bitcoin mining developments, bitcoin price targets, and when to buy and sell bitcoin. With that being said, it is a very difficult market to navigate and has many unique rules unto itself that we work hard to identify and provide to our subscribers. We have some members that only trade cryptocurrency, and we have other members who may be looking to it as a new and exciting asset to add to their portfolio for diversification. So, don’t give your financial advisor heartburn and make him do any more extra work. This is not an easy asset class to navigate. Let us help your cryptocurrency investment be the star of your portfolio.
The Triffin Paradox
Nixon was trying to fix what had become a persistent problem with the Bretton Woods agreement of 1944, a structural problem known as the ‘Triffin Paradox’. This is the natural tendency of nations who have reserve currency status to have inherently conflicting interests between its short-term domestic political objectives and the objective of long-term international financial stability, and retaining reserve currency status. Foreign nations constantly needed excess supplies of our currency as the network effect of the dollar, and its central role in global commerce was cemented by American-funded economic expansion and rebuilding in the wake of the War. This led to a situation where dollars in circulation necessarily exceeded gold in US reserves. What we now look back on as the ‘Great Inflation’ had then begun in 1965 and wouldn’t end until 1982. One of Nixon’s intentions ironically was to curb inflation, which he did in a crude way for the first time not during a major war, by implementing wage and price controls, which shortly thereafter failed miserably.
The role of the dollar as the global reserve currency was under threat. Keynes had predicted the problem of the imbalance and suggested an internationally sanctioned, stable reserve currency called the Bancor. Many Bitcoin enthusiasts may be surprised by this. The tension between a national political agenda and long-term financial stability of the international system creates a potential for political abuse of the reserve currency status. Fiat currency, many theorize, only exacerbates the potential for political abuse and inflation that can cause serious social and political problems if unchecked. The political machinations involved with this momentous decision surely make some of our crypto enthusiasts cringe.
Ok But I Still Don’t Understand Exactly What Bitcoin Is?
There is no doubt that Bitcoin started out as a political statement and many initially viewed it as closer to a toy than a store of value early in its history. The easiest way to describe it would be in the context of a class of stocks we’ve been recommending on the equity-side, casinos. These were out of the risk-tolerance of many in March, but those who took our advice profited handsomely if they purchased them. Now imagine the entire economy is a casino company. What would happen to the economy, and the operating leverage of the company, if the chips kept track of themselves? The Bitcoin White Paper authored by a pseudonymous author who referred to himself as Satoshi Nakamoto was a modern-day economic equivalent to when Martin Luther nailed his Ninety-Five Theses to The All Saints Church in Wittenburg on the 31st of October, 1517. Once nailed, it could not be undone and the consequences for human society could not have possibly been comprehended at the time. Thesis number 86 was stated, when translated into English as the following: “Why does the Pope, whose wealth today is greater than the wealth of the richest Crassus, build the basilica of St. Peter with the money of poor believers rather than his own?” The primary practice that provoked this first act in one of the greatest ideological transformations in human history was the unseemly practice of the Church charging indulgences to poor parishioners in exchange for their ‘assistance’ in getting God to move the souls of their loved ones from purgatory to the eternal Kingdom of Heaven. Many see a similarity between the obviously corrupted incentives in this arrangement and the incentives of the state with a limitless printing press. Governments have tended to inflate away their debt, at the expense of the lower-income quintiles, with the alchemical Central Bank power that seems to flout the incontrovertible law of scarcity. Hence the employment of Luther’s 86th thesis in our description of Bitcoin, and what it was created to achieve. Unlike fiat currency which can be magically shifted from ‘purgatory’ or the Fed’s balance sheet, to member banks and inflated and printed with abandon, Bitcoin is inherently scarce (by virtue of its innovative design) and is deflationary. This means, as long as users continue to go up and there is consistent demand, compared to most demand assets it’s pretty easy to determine what the long-term path of Bitcoin will be; up.
Don’t Fly A Plane Without Instruments— Seriously
Cryptocurrency investing is not for the faint of heart, or at least it hasn’t been in the past. While at times it has been correlated to mainstream investment assets, at other times it hasn’t. This is why we advise investors to think of crypto-investments and Bitcoin in particular in the long-term. We treat it like a stock you want to own, or an emerging market you want to invest in; after all, we are well-established equity analysts. If you are used to investing in equities, our rules and analysis will make sense to you and we also think that a lot of our crypto analysis dovetails nicely with our wider macro-analysis.
Many people ask us how we can be bullish on US Equities and Bitcoin at the same time. Isn’t Bitcoin a countercyclical hedge, like gold? While a similar relationship has been observed during some past market conditions, one of the benefits of Bitcoin as an asset is that it is not highly correlated to other major asset classes, making it an excellent diversifier in portfolios that provides a lot of upside. We have developed proprietary valuation models for Bitcoin that we believe approximates its fundamental value in a way equity investors can understand. We certainly wouldn’t want to invest in the crypto market without the tools we’ve developed.
We are bullish on Bitcoin and think the US dollar will maintain its reserve currency status. We are bullish on US equities for other reasons we won’t elaborate on too much here, but we will say that we believe Bitcoin is a generational trade. You may hear through media coverage or other crypto sources that adoption is way higher than we think it is. We think about half a million people trade cryptocurrency regularly, which is quite a nascent market. We can offer investors wishing to learn about and invest in the space better tools, capabilities, and analysis than any other service. We also have Tom Lee’s 10 Rules Of Investing In Bitcoin which is the first quantitatively informed roadmap investors can use as a firm and actionable guide when investing in Bitcoin and other cryptos. Additionally, some of our proprietary tools like our Bitcoin Misery Index. Our Senior Crypto-Research Analyst David Grider has also developed a proprietary valuation model for Bitcoin that we think will be particularly useful for veteran equity investors.
Bitcoin Is Not Your Grandfather’s (Or Your Parents) Asset, But It Will Be Going Up For The Same Reason
The internet had very few users in the early 90s. Those few users, in its early stages, were associated with low stock prices of names that are now the bluest of the blue-chips. We did an in-house study to determine what was behind the rise of the best-performing stocks on the market like the FAANGs. We surprisingly determined that about 75% of the gains from those stocks actually have very little to do with company management, new features, or the like and more simply to do with the global adoption of the Internet. In other words, the growth that you are getting exposed to in the best of the growth stock is network growth; the growth of the internet users, by being monetized, is what outperformed wider economic growth.
In the early 1990s the internet had tens of millions of users and today it has 4 billion. This is why those companies went up so far in value. They held valuable digital ‘real estate’ in a new economy at the dawn of the information age. If you bought exposure to the internet you did well. Bitcoin’s platform is currently dominated by the first generation of users, that will change. As long as human beings are consistently using computers, Bitcoin is more permanent than anything including seemingly mighty political orders and values. The intrinsic value of a decentralized ledger that creates enormous potential for new economic efficiencies is what we are buying. The network effects that benefitted the FANGS will also benefit Bitcoin because it is a proven protocol that works. Privacy is diminishing and the premium on privacy for legitimate and illegitimate reasons will persist and increase.
Like SWIFT, Bitcoin is the first, and like SWIFT we believe that there’s a lot of value to be the first in the situation at hand; where network effects drive returns. One key characteristic that they share is that even though the technology exists to have a better process than the monopolized payments system in the US (you can transfer money instantly from phone to phone in Somalia), the network effect gives continued relevance and value to the platform. Given the magnitude of the problem that Bitcoin solves, and the changing dynamics of whose and what economic activity goes in and out of favor with the state over time, and which currencies fall and so forth, there will always be a need for Bitcoin, and there will always be a community of people who will find and store value in it.
The Halving
The fundamental valuation model we created for Bitcoin suggests that 2020 will be a good year. Halving events are subject to a lot of opinions and speculation, but we are unequivocal that it is bullish for the medium and long-term. We also do a lot of analysis on the supply side. We find it can help make the conceptual connection from one investment class to another, because after all, although Bitcoin’s origins, uses, and history may be cloaked in mystique and notoriety at the end of the day it is a supply and demand asset like anything else. We calculate that the available supply to the market will be significantly diminished leading to upward price pressure. This is the thrust of our analysis. We genuinely love to provide analysis in such a new and exciting market. If you’re a trader and you like to time the market, we’d love to help you though we don’t advise it for beginners. Timing the market for Bitcoin correctly is very hard and if you sell at the wrong time, even if you buy shortly after you can miss out on the bulk of your potential gains. We’ll help you avoid making that mistake with our easy-to-follow, actionable rules.
Bitcoin is the most prominent of all cryptocurrencies and for investors new to the space, it is the easiest to invest in. Over the last few years the market infrastructure has significantly developed; there are now futures and options exchanges for instance. It has been almost 12 years and there has not been a single fraudulent transaction on the blockchain. This in itself, we believe, demonstrates the value of Bitcoin, and despite its’ volatility and some past associations with unseemly actors or activities, we stand by our view that Bitcoin is potentially one of the best long-term investments you can put in your portfolio. In fact, the very reason that people use Bitcoin in highly risk-prone criminal transactions is precisely the reason it has value. Despite its association with the criminal, if you buy Bitcoin Goldman Sachs isn’t going to be able to aimlessly (and criminally) shift your deliveries around to jack up their storage fee. Or what about the greatest bank robbery of all time? We’re talking of course about when the banks robbed everybody and got away with it with pretty minor slaps on the wrist, the Libor Scandal. These two episodes illustrate why some people don’t trust the ‘trusted’ third parties that they have to use. Now they don’t have to.
The Ultimate Momentum Play: Most Of What You Think About Bitcoin’s Future is Wrong
Many investors think incorrectly in our opinion in ‘Bitcoin versus the dollar’, or simply of it as ‘Bitcoin instead of the dollar’. Many investors incorrectly think of it as only good for a hedge asset. We do find it makes for an excellent uncorrelated hedge asset. However, most hedges typically don’t consistently outperform the wider markets returns in a variety of conditions, they are supposed to mitigate downside loss, not give extra risk-adjusted return to your portfolio. So, thinking of Bitcoin only as a hedge might not be the optimum portfolio strategy, particularly if you’re young and intend to follow our Hold On For Dear Life (HODL) strategy, which we greatly advise over getting fancy for those new to crypto. Despite the often infernal response we can receive from the notoriously cantankerous Bitcoin community, we maintain (and so does the data) that despite the previously observed counter-cyclical protective characteristics Bitcoin has had in the past, it is 100%, firmly and indisputably a risk-on asset.
Many people buy Bitcoin for an emotional reason, or perhaps as a political statement, but if you’re still thinking of it that way we urge you to stop. If you’re doing that, it is fine, but that’s not how you’re supposed to treat investments. We have firm rules of when to add to your position and when not to that will help keep your cost-basis low to gain exposure in your portfolio in the most quantitively driven way that is available to individual investors. Perhaps US monetary policy and the prospect of a future of Modern Monetary Theory makes you just about as mad as anything else in the world. That’s not a reason to buy Bitcoin, sorry, it may have been in the beginning but it’s well passed time to stop considering this high-performing asset a toy or political statement. Political philosophy is not an investment strategy, and we want to help make this incredible feat of computer engineering work for you and your portfolio. Let us help you. You won’t regret it.
We think it is highly unlikely that the Federal Reserve or fiscal authorities will blow up the dollar’s reserve currency status anytime soon. We pay a lot of attention to debt markets since equity, being junior in the capital structure tends to follow bonds. We constantly watch out for issues that could cause market panics, like potential negative interest rates, but as of now, we see equity markets and the policymaker support of them on a good and stable footing. Part of this is the natural tendency of the reserve currency to be the asset investors prefer during flights-to-safety. What this effectively means is that the United States gets enormous capital inflows whenever markets are bad or uncertainty is high, even during the 2008 Financial Crisis which was largely a result of abuses and regulatory oversights within its national financial system. Another reality that many who make investment decisions off of political beliefs or apocalyptic predictions should remember is that many foretold that Japan’s Central Bank would surely not be able to operate effectively at the Debt/GDP ratio that the world’s third-largest economy had. These predictions were wrong and BOJ showed Central Banks can defy gravity, at least for a time.
Tesla was considered a risky, millennial stock with a valuation way too high. It was also singled out in the 2012 election as the premier example of lousy government investment sense. The stock is a perfect example of an asset ‘of the future’ being priced in the ‘markets of today.’ We believe Bitcoin is one such asset, but because of the unique characteristics it possesses, we understand the upside could significantly exceed what is traditionally available to investors in equity markets. That being said, we typically recommend that investors only comprise 1% to 2% of their total portfolio in cryptocurrency assets. Within the crypto-class, we are currently OW on blue-chip Cryptos, including Bitcoin.
TSLA was dead money for a long time despite consistently improving sales, production, and other key metrics. If the fundamental rules of stock valuation were the only thing driving price, then it should have been going up in line with those metrics. What was far more important for TSLA was when it would meet certain thresholds that would make it an appealing addition to the portfolios of Russel 1000 money managers. Many analysts and others wrote off the stock and management strategy as departed from reality, and in a way it was, it was departed with secular realities of the past. This can be hard for markets to spot, it may be a good predictor in other ways, but markets and investors often miss transformational moments.
A lot of people speculate the crypto institutional adoption is just around the corner. We think you should listen to us on this rather than other sources. We specifically service over 200 major institutional financial clients and we happen to know for a fact that they are constrained from participating in a way that many people theorize until the crypto market is much bigger. We estimate that the crypto market still has a long way to go and needs to increase by about ten-fold in size before major institutional adoption comes.
However, when this adoption does come, we think that Bitcoin’s price action will be similar to the recent parabolic moves upward for TSLA, or the long upward slog of the best growth stocks on the market. We think of Bitcoin as a major growth investment that will not replace currency, although it will for some transactions and in some communities, but what it will really do is create a lot of economic efficiencies and replace a lot of the monopolistic services banks force customers to pay for.
And An Emerging Market Play?
Remember when BRICs were all the rage? A basic tenet of economics is that capital flows from more developed economies to less developed, in many cases, because of something called the ‘catch up effect’ which essentially means capital will have higher returns and will be more productive at of course the cost of greater risk, in developing economies compared to their more developed counterparts. This is why the first to brave the litany of risks that come with such investments often get wiped out or rich, and often not much in between. Certainly, wild swings and coup d’ etas give investors more heartburn then your typical plain vanilla ETF and have always been at the riskier end of the spectrum. We believe Bitcoin is literally an extension of the digital economy. Like many emerging market investment risks are plentiful and attention-grabbing, but returns and the ability to HODL made many bold investors very good, above-market returns. We believe this analogy captures our attitude toward Bitcoin as an investment and we would love to help you get exposure in the best way possible.
