Let's Talk About Bitcoin: An Imaginary Convo with a Fund Manager
The recent run up by Bitcoin to an eye-popping $40,000 has people talking about crypto all over again. Given I spent three years at the biggest company in crypto, I’ve been getting constant pings for advice.
So, people, I get it. You want me to talk about Bitcoin.
I’m not going to insult your intelligence by explaining how crypto works, because you can easily google that. Instead, I’ll talk about it as an investment. A friend who manages a fund recently called me and asked a lot of good questions, so I’ve abridged our conversation to cover the thoughts I shared with him.
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Imaginary fund guy: A friend keeps telling me to buy Bitcoin before it’s too late, but I feel like it might be already. Can you tell me what the hell is going on?
This year alone, Bitcoin has made an incredible run from its post-COVID low of $5,000 to briefly touching $42,000, doubling its all time high of $21,000. It has recently bounced around and is in the mid-30s, but even so, the 7-8x return outshines every other investment out there.
That is, except for a few other coins like Ethereum - which itself is on a bull run from $120 to nearly $1400, an almost 12x.
I remember it went up like this in 2018 and then crashed pretty bad. Why’s it coming back now?
Who knows! There are some commonly cited explanations, but hard to say which one is right. There’s the macro factors and there's the technical stuff. Starting with the macro:
“High beta asset.” Well-respected finance academics like Aswath Damodoran have noted that Bitcoin is more correlated to stocks than to gold or currencies, despite Bitcoin adherents claiming it is a mix of the latter two. That means if markets are moving up, Bitcoin likely will too.
Inflation hedge. One of Bitcoin’s interesting selling points is that there will only be 21 million ever minted. This “hard currency” approach is a total 180 from central banks right now, which are printing money in the trillions.
This has drawn some famous fund managers, like Paul Tudor Jones, into Bitcoin, as they worry money printing might spark inflation (unclear if this is true however). This is the “digital gold” argument.
Dollar demand. One irony of crypto is that even as it seeks to replace the dollar, it is also serving as a proxy for the dollar. In many countries with weak currencies, capital controls (rules at banks) make it difficult to convert your local currency into US dollars, which many investors perceive as safer for holding savings.
Bitcoin provides a good workaround. You can buy Bitcoin on a local exchange in your currency, and then trade it for a "dollar" crypto like USDT, USDC, or DAI.
This strategy has become very popular in China - where there is a huge demand for foreign assets - and even smaller countries like Lebanon. By some estimates, China makes up as much as 30% of all trading.
Other stuff. There are a bunch of other reasons cited for the recent run as well, although I consider them a mixed bag.
More institutions are allocating portions of their portfolio, following the example of Paul Tudor Jones.
PayPal, with a 350M size user base, has added the ability to buy crypto.
There was a “halving” in May, when the rate of new supply of Bitcoin drops by half. This occurs every four years and is often followed by a one year order of magnitude rise in price.
Ok, well that all sounds reasonable but also speculative, and macro tends to be a guessing game. I thought this was all about the technology? What’s going on there?
Great question! There’s a few noteworthy trends there too:
DeFi excitement. One change from three years ago is that when crypto first hit the headlines, there was almost a lot of hype and no working software.
In the last two years, tons of real progress has been made that enables users to borrow, lend, spend and invest crypto, just like a real currency. This has made the narrative around digital currencies a little more believable.
The original DeFi app is MakerDAO, which lets users create “digital dollars” with a stabilized value set to $1.
Other apps getting popular include Aave, Yearn Finance, and Ren, and many of these now have valuations in the billions.
An altcoin bull. The mirror image of the DeFi stuff is the “altcoin” market. These are cryptocurrencies other than Bitcoin.
In 2017, altcoins (aka ICOs) became a huge bubble, creating tons of overnight millionaires, until completely collapsing. Many lost 99% of their value.
Each of these new DeFi projects has also issued a coin in the last year or two, and the excitement around these projects created mini-runs in the altcoin prices.
Yearn.finance ran from $880 to $43,000 in six weeks, before crashing to $9,000 two months later.
When people make a bunch of money in altcoins, they convert their proceeds to Bitcoin. Bitcoin then goes up as people pile back in. Then another altcoin comes out, and investors flock there, making more money, until they go back and forth in waves and create a circular feedback loop that keeps pushing the price of everything up.
The eye popping returns in altcoins tend to draw Bitcoin first-timers even deeper into crypto.
Overall, multiple catalysts are coming together at once to drive the price up.
Not sure I get all of that...sounds like buzzwords to me. How much of this is real?
Some of it is and some of it isn’t. How about I tell you the rest next week?
I said it once and I'll say it again...here or on Twitter