When do you throw the rules out the window? As you may know last summer I took a crash course in Investment Theory and Practice at RWM University. Spend enough time with the learned texts of Ritholtz, Brown, Batnick, Carlson and Isola and eventually a grand narrative of investing will emerge. One of the tenets, not particularly flashy or exciting but containing real truth, is this: Learn from the best. And it wasn’t exactly a secret as to who they thought the best were….
Warren Buffett, Peter Lynch, Jesse Livermore, Paul Tudor Jones, maybe a dozen or so more. While all had or have nuances to their investment philosophy, it is safe to generalize and say that they invest in what is real.
And so to Bitcoin. What is real about it? Well, the underlying blockchain technology is real and is here to stay. Jason Zweig writes, “Earlier this month, Vanguard Group, which manages nearly $5 trillion, announced that it will use blockchain technology to improve the delivery of market prices for its index funds and other assets.” The blockchain is real and is having a market impact on how we move capital. The blockchain isn’t something unique to Bitcoin; Bitcoin is just one implementation of that technology. Zweig continues, “It’s far from clear that Bitcoin will prevail as the currency of choice across blockchain networks. The technology of blockchain can be adopted by almost anyone and adapted to almost any purpose.” Bitcoin to me is a lot like the currency used in the USA before centralization. Individual banks would register their own paper currency, backed by themselves, for use in their region of the country. This period of time was transformational to the development of paper currency, a transformational technology that had real lasting value. But only one of those paper currencies mean something today and that is the greenback. The rest are merely collectors items. The idea that Bitcoin, the first blockchain ‘currency,’ will become the end all be all seems to me to be ahistorical and not at all preordained.
Don’t take my word for it though, I’m no Nobel-winning economist like Robert Shiller, who had this to share in an interview with Quartz.
“Quartz: What are the best examples now of irrational exuberance or speculative bubbles?
Shiller: The best example right now is bitcoin. And I think that has to do with the motivating quality of the bitcoin story. And I’ve seen it in my students at Yale. You start talking about bitcoin and they’re excited! And I think, what’s so exciting? You have to think like humanities people. What is this bitcoin story?
It starts with Satoshi Nakamoto—remember him? The mysterious figure who may or may not be real. He’s never been found. That has a nice mystery quality to it. And then he has this clever idea about encryption and blockchain and public ledgers, and somehow the idea is so powerful that governments can’t even stop it. You can’t regulate this. It kind of fits in with the angst of this time in history.”
I share that angst. I don’t trust governments, big banks, or online gambling sites but I do trust the greatest investors of all time. “Invest in what you know.” Yup, I did just use that super simplified and overused quote. Peter Lynch was being earnest when he wrote that and lived by that saying. When Josh Brown bought his first bitcoin during the Summer for ~$2,000 he was not investing in what he knew. He was gambling, just like the vast majority of people today who own this crazy asset.
The most damning thing I read about bitcoin came from Buffett's partner, Charlie Munger. "You know it is one thing to think gold has some marvelous store of value because man has no way of inventing more gold or getting it very easily, so it has the advantage of rarity. Believe me, man is capable of somehow creating more bitcoin. … They tell you there are rules and they can't do it. Don't believe them. When there is enough incentive, bad things will happen." These words sung to my teenage angst more than any of the things proponents of bitcoin share. I believe in greed more than I believe in altruism.
CNBC published an article in 2014 titled, How Bitcoin Really Changed the World. It’s ironic because the article doesn’t mention how Bitcoin changed the world but rather how it will change the world. “With many people still trying to wrap their heads -- and become confident in using -- bitcoin, widespread adoption of applications that incorporate the blockchain is unlikely. Until then, developers may need to aim for creating better user experiences according to Mike Hearn, a Bitcoin developer.” Three years have passed since then and is Bitcoin any more real? The blockchain sure became more real but Bitcoin has stayed more or less the same.
What I can’t seem to understand is why people would take millennials’ views more seriously than the greatest investors who ever lived. The average age of the Bitcoin subreddit has to be something around 20 and I guarantee half of them couldn’t explain to you what a dividend is. Wisdom is something that comes with experience and time, and millenials don’t possess either.