Josh Hannah is a general partner at Matrix Partners, and the co-founder of Betfair, an online market for sports betting
In this opinion piece, Hannah offers his view on the recent swings in cryptocurrency prices, arguing that whether or not this activity amounts to a bubble is in the eye of the beholder.
While ample warnings have been written in the last two weeks about a price bubble in cryptocurrency, many seem very simplistic in their analysis, focusing entirely on the run-up in price of the leading tokens, and the frenzy around ICOs, as evidence that prices must come down.
Some very savvy investors have echoed this sentiment, with a more nuanced point of view: the long-term potential is huge, the short-term pricing is unknown, so don’t invest in a way that will leave you exposed in the event of a massive downswing. This is good advice.
Many of these new protocols and apps based around a token have an interesting premise but little, if any, market proof. By conventional investing metrics, the 'risk-reward' on the pricing of many of these seems off, even to savvy investors in the space. Unless you deeply understand the details of the new token being offered and have a strong point of view on its value, this seems more like gambling than investing.
In my view, bitcoin and ether are different. There is much that is unproven about their long-term success, but there has been a lot of de-risking of these protocols already. They have vibrant developer ecosystems, a diverse ownership base and highly liquid trading.
With that as context, there are three thoughts I would like to add to the discourse that I have not seen widely discussed:
1. Equity bubbles are a poor analogy for what is happening
One can sanely argue an equity is overvalued by forecasting future performance of the business and the resulting cash generated. In the dot-com bubble, a company called Internet Capital Group had $70m in revenue, $150m in net losses, and peaked at a $56bn market cap. You don't have to be great at math to figure out the business was unlikely to produce the profits necessary to support that value.
Bitcoin is not comparable: as a unit of value independent of any earning stream or productive use, the total money supply is untethered by economic productivity. Some, like Warren Buffett, view assets like bitcoin and gold negatively, and eschew asset investments that lack a means of producing cash flow.
But as a unit of money, it also means the value of bitcoin can sustainably grow at a much faster pace than most real-world businesses, because it is untethered by building products or services; it is solely tethered to how many people believe that it is a valid store of wealth.
The world believes gold is a reliable store of value to the tune of trillions of dollars. If and when the world believes the same about bitcoin, it will be worth 100–1,000 times what it trades for today, and that can happen at the speed limit of people 'buying in'.
2. It may be true that a price rise in BTC and ETH is being driven by speculators
However, unlike equity bubbles, the addition of new buyers to the ecosystem actually increases the value of the underlying token.
The value (given fixed supply) is simply a product of scarcity, which is going to be directly related to how many people hold the currency. An additional buyer of Tesla stock does not increase the long-term cash flow of the underlying business, but each additional speculator who decides that bitcoin is valuable increases the underlying value of the bitcoin network.
If bitcoin succeeds, there will likely be a series of tipping-points where the value jumps up due to a widely observed new plateau of acceptance.
3. Trading in and out of the token based on price movements is shortsighted
Yes, you might be clever or lucky and make some quick money, but if you are in this for the 100–1,000-times potential from here, 'profit taking' on small moves is picking up pennies in front of a steamroller.
What if Warren Buffett or JP Morgan surprises the world and announces tomorrow they are all-in on bitcoin, and the price goes up 10 times overnight and never comes back down?
If you have 'traded out' you will regret it.
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