Many financial advisors cite lack of intrinsic value as a case against bitcoin. But demand and global adoption, evidenced by bitcoin’s steadily increasing price, are what they should be paying attention to, as Isaiah Douglass writes today.
Also in today’s newsletter, Ekin Genç explains how institutions are investing in crypto – from putting bitcoin on their balance sheets to setting up shop in the metaverse.
Price, Not Intrinsic Value, Is the True Measure of Bitcoin’s Success
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Market efficiency, the hypothesis that states asset prices reflect all available information, has split the advisor community.
Although some advisors argue the market is inefficient, most advisors say the market is efficient and that you should just own the market. As a result, they suggest investing in diversified portfolios or passive index funds rather than attempting to pick individual stocks. They believe the price of an asset reflects its value and, therefore, the price is true.
So why, then, do so many financial advisors struggle to view bitcoin through the same market efficient lens? They often cite it as a scam, bubble or tulip mania, yet the market value of bitcoin has steadily increased since 2009 and has been the best-performing asset for years.
If the efficient market hypothesis says that a stock’s price is a good indicator of value, then the same standard should apply to bitcoin.
Price is truth if you believe in market efficiency. The longer the value of an asset is held or growing, the more it proves there is value there, regardless of whether some or all market participants agree.
You can look at the mining hashrate hitting all-time highs, the number of daily active addresses or the 24-hour settlement volume on the chain. All these charts have a clear pattern – an increase going up and to the right over the last 14 years.
And I will tell you one thing bitcoin’s price doesn’t reflect, and that is intrinsic value. Many CFAs and industry professionals trot out this line about bitcoin.
My question is, what is intrinsic value? There is no such thing – value has and will always be subjective based on an individual’s need at the time. Demand drives everything and always has.
The ego of too many financial professionals will prevent them from making a bitcoin recommendation until it’s reached full consensus. By then the asymmetry will be gone – although owning bitcoin will never be bad. The only wrong allocation in 2023 is zero.
So what is bitcoin’s price telling you today? It’s time to do your homework before the next halving and six-figure bitcoin price has everyone in a mania again.
How Are Institutions and Companies Investing in Crypto?
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For years, the idea that traditional finance institutions would invest in bitcoin (BTC) was laughable. But as of mid-2020, the institutional presence in the cryptocurrency became a reality. Many cite the foray of “the suits” into crypto as a contributing factor to the latest bull run that began in late 2020 and ended in late 2021.
Institutional interest in the cryptocurrency market excites current investors because institutions bring in fresh money, and certainly more money than retail can pour in.
Bitcoin, the largest cryptocurrency by market cap, is the gateway – and indeed the only stop – for many institutions that ventured into the cryptocurrency market.
Although bitcoin is often the first and the final step for major institutions, experimental institutions have recently stepped into other parts of the crypto industry. NFTs and the metaverse are two intertwined sectors in which institutions actively invest – rather than just passively investing in a cryptocurrency like bitcoin.
Bitcoin: The most straightforward way of investing in crypto for institutions is to hold cryptocurrency on their balance sheets. The institutional presence in crypto began in earnest when MicroStrategy, helmed by Bitcoin maximalist Michael Saylor, bought $250 million worth of bitcoin in August 2020, followed by an additional $175 million in bitcoin one month later. MicroStrategy’s big step was followed by payments processor Square’s $50 million BTC purchase in October 2021 and EV manufacturer Tesla’s $1.5 billion BTC in February 2021.
DeFi: Decentralized finance is a corner of the crypto industry with billions of dollars locked into smart contracts. Smart contracts are self-executing pieces of code that enforce contractual agreements between parties. DeFi runs on smart contracts that power decentralized apps (dApps), which offer a range of financial services such as loans, insurance and interest-bearing accounts.
NFTs and the metaverse: Some brands have circumvented the usual bitcoin-first route and headed straight into non-fungible tokens (NFTs), or digital assets mostly hosted on the Ethereum blockchain. Beer company Budweiser purchased beer.eth for 30 ETH and also launched an NFT collection. Taco Bell (YUM) sold tokens to raise funds for a variety of purposes. And Arizona Iced Tea bought a Bored Ape NFT and put it on its can.
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Press secretary Karine Jean-Pierre said the administration is watching Silvergate’s situation and likened it to other crypto companies that have had issues recently.
The bank’s own data shows the rapid acceleration of its novel crypto-banking business and how leaning into digital assets made it vulnerable to the industry’s drama.
Disclaimer: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.
