Crypto Lengthy & Brief: Why some buyers misunderstand Bitcoin and what this says about its strengths

It is frustrating. But interesting at the same time.

In the past few weeks I've heard two well-respected investment managers say they don't believe in Bitcoin's supply limit. If it's easy to power up another bitcoin, there really is no limit. Most of you reading this will roll your eyes at this stage, but since it is viewed as a fixed point of view by some wise people, we should dig deeper.

We will find that there is more to it than a lack of research.

First, let's look at what the two investment managers I'm referring to actually said.

This is from the blog post by investment researcher and former hedge fund manager Jesse Felder a few weeks ago (my focus):

“Bitcoin believers rely solely on the idea that the supply of bitcoin is limited, which makes it far more attractive than fiat currencies, which are being printed like crazy by central bankers around the world. However, Bitcoin has already forked hard several times, multiplying the number and type of Bitcoins in circulation. If you put together all of the tough forks Bitcoin has gone through since it was created, the total number of bitcoins actually grew faster than the number of dollars. That's a fact. "

And on this week's The End Game market and investment podcast, investment manager and writer Fred Hickey said (again my focus):

“The number five cryptocurrency is Bitcoin Cash! Number 12 of the largest is Bitcoin SV – there are no limits to these things. If Bitcoin got too expensive, they would just go to another. These are speculators, they pile up in everything that cryptocurrencies are. "

For now, we're going to ignore the derogatory implications that the Bitcoin market is completely speculative and that speculators don't know how to research (because those claims are just too weak to care about). Instead, let's focus on the misguided idea that new Bitcoin blockchains can be booted up at any time.

Let's examine in more detail why this misconception persists and what it says about Bitcoin's role in our evolution.

Not so fast

Most of you are familiar enough with crypto markets to know that Bitcoin is unique. But have you thought a lot about why?

It's only partly the technology. The blockchain code is open source and can be copied and optimized to create new Bitcoin-like assets. But no matter what they call themselves, they are not Bitcoin. Bitcoin Cash increased the block size and enabled greater throughput at the expense of a higher degree of centralization. Bitcoin SV again increased the block size many times over.

The market tells us that investors prefer the original bitcoin:

But have you ever heard an institutional investor talk at length about how Bitcoin's SegWit scaling solution gives them more confidence in the security of decentralization than Bitcoin SV's whopping 128MB blocks? I am sure it happened. However, I don't think that scalability is an important investment criterion. It's not the Bitcoin-specific features that keep the flow of money in BTC.

It's the network effects. I am not referring to the Metcalfe law effect of each additional knot. I'm also not talking about the benefits of having more people bitcoin can be sent to (although that's not insignificant). I mean the market infrastructure and services that arise around the asset with the highest volume: the ramps, sophisticated platforms, professional custody, complex derivatives and, most importantly, liquidity. Smaller assets, no matter how impressive their block size, are riskier. Investors care, and no matter how expensive BTC gets, I very much doubt they'll just switch to BCH or BSV.

These market network effects, combined with the features and potential of the underlying technology, are behind the current focus of professional investors on BTC.

I try to understand

Otherwise, why is it difficult for smart investors to see this? This is where things get interesting.

To see why, we have to look beyond the lack of research and lack of interest. This is based on the assumption that traditional investment paradigms still apply.

Most important of these is the not inappropriately convincing belief that technology is replicable and that network effects early on are not necessarily permanent. MySpace lost to Facebook, Google wasn't the first search engine. It's hard for traditional investors to understand that Bitcoin is not a business and better marketing by competitors likely won't make a significant difference.

It is also difficult for traditional investors to think about technology in the same framework as natural elements. After all, elements are simple. Their composition can never change. In addition, their use can be discouraged, but they can never be eradicated.

Technology, on the other hand, is developed by someone according to the selected specifications to fulfill a specific role. We can make it do one thing or the other, and sometimes it gets used for something completely different from what we intended, but that's the market for you. Technology is almost infinitely malleable in its composition and purpose. It is also capricious, generally subject to the whims of the powerful and driven by the conflicting urges for control and empowerment.

Bitcoin was created by someone, but we don't know who it is. Hence there is no one to point out as responsible. Bitcoin is constantly being updated and optimized by a small army of developers from different backgrounds and funding sources. However, it cannot be fundamentally changed without network consensus. This would only be possible if its size had shrunk to a tiny fraction of what it is today. And its use is discouraged, but Bitcoin cannot be turned off. All of this gives Bitcoin – a technology – a strangely elementary status.

There is a not-too-ridiculous mental separation here. Both of the above investors have written extensively about gold and instinctively understand the value of natural immutability and scarcity. Accepting that a technology can have similar properties is a challenge for most.

However, understanding the difference between Bitcoin and other technologies, as well as the similarities between Bitcoin and gold, is important to understanding how important its development is. It's not just about the inflation hedge offered by the scarcity and decentralization of Bitcoin. It's about civilization.

According to many theories, the emergence of metallurgy was a trigger for the development of a complex society. It is entirely possible that the advent of crypto technologies will be the catalyst for further social restructuring. We've heard these outrageous claims from technology advocates before. However, we have never had a technology with elemental properties that emerged in a technology-rich era, which was ripe for catalysts and at one time was shaped by so many other socially transforming trends and events.

This confusion about what Bitcoin is is shared by many, but by no means all. Renowned investor Paul Tudor Jones showed he was getting it this week when he said:

"If I had to really guess what the future (the crypto) would be, I would guess it would be very similar to the metal complex – where you have" valuable crypto "that could be bitcoin … and you & # 39; We will have cryptocurrencies for transactions along with states, and they may be more like industrial metals. "

Throughout history, profound changes are usually not noticed by the mainstream until long after the changes. If traditional investors mistake us for their ignorance and lack of research, we should try to understand why. More importantly, we should understand what this says about the depth and subtlety of new definitions and new paradigms that will define value and society in the turmoil to come.

Does anyone know what's still going on?

US stocks climbed to all-time highs and government bond yields rose as the dollar fell after COVID-19 stats deteriorated and persistently high US unemployment supported expectations for further federal stimulus.

This relentless surge despite the poor economic outlook makes me nervous. It's not just the separation of the markets from the reality on the high street. It is also that the market consensus in general is a sign that things are about to change. With so much difference this year, who knows when investors will realize this or if they will care if they do.


Bitcoin continued its rally as well, recovering from the slump a week ago to regain gains that made stocks appear anemic. The feeling still seems to be that this surge has nothing to do with the hype-filled and speculation-driven rally of 2017. (Our monthly review for November covers a few differences.)

There will be ups and downs for sure. But this time the market is completely different: more mature, more liquid and more diverse. Similar to its new participants.


Perhaps I should start a new section of this newsletter listing only crypto-related statements and actions by institutional investors. This type of message only occurred once every few months until recently. It's almost daily now.

Here are some notable ones from this week:

· · Paul Tudor Jonesgave an enchanting analogy for the evolution of crypto markets on Yahoo Finance:

"If I had to really guess what the future would be, I would guess it would be very similar to the metal complex – where there is 'precious crypto' that could be Bitcoin – it's the first crypto, the first mover … and has this historical integrity among digital currencies. … And you will have transactional cryptocurrencies along with states, and these may be more like industrial metals. "

He also said that he believes Bitcoin is "the wrong price for the opportunities it has".

· · Larry Fink, CEO of BlackRockThe world's largest asset manager admitted that Bitcoin has drawn the attention of many people and that the emerging cryptocurrency asset class could develop into a global market value.

· · The research branch of New York Alliance Amber, A global investment manager with $ 631 billion in assets under management produced a research report for clients that acknowledged the initial rejection of Bitcoin as an investment asset in January 2018 was wrong.

Guggenheim Partners, With over $ 230 billion in assets under management, the Securities and Exchange Commission has filed an amendment that will allow its $ 5 billion Macro Opportunities Fund to put up to 10% of its net asset value in the Grayscale Bitcoin Trust (GBTC – Grayscale is owned by DCG, also parent company of CoinDesk).

· · A research report by Bloomberg Crypto expects Bitcoin to more than double its current value in 2021, reaching $ 50,000, largely driven by the demand-supply mechanics.

· Fidelity Digital Assets"CEO Tom Jessop said this week that Bitcoin is an" ambitious "store of value, but that its volatility prevents it from being one now.

· Steve Forbes agrees, saying that bitcoin could potentially become the "new gold" but it's not there yet.

· PayPal CEO and President Dan Schulman told the audience at the tech conference web conference that "the time is now" for cryptocurrency. He also insisted that "you can do more with (Bitcoin) than just ride the ups and downs."

Grayscale investment (a subsidiary of DCG, also parent company of CoinDesk) announced on Wednesday that the shares of the Grayscale Ethereum Trust (ETHE) will be split 9-for-1, which will increase liquidity and the perceived affordability of the shares. BRING AWAY: While cryptocurrencies can be fractionated (it still surprises me that some people think you need to buy a whole bitcoin), trust shares cannot. As with stocks, it may therefore be useful to lower the unit price to make stocks more accessible to retail investors. ETHE is still only available to accredited investors upon issue, but holders can sell to the general public after the first six-month lock-up period. This move should make this easier and could push the ETHE premium (the difference between the price of the trust share and its underlying value, which Ycharts currently says is 124%) to an even higher level. This in turn will make it more attractive to accredited investors and encourage new inflows.

ethe-premium-1mSource: Ycharts

I'm fighting to get your head around whether ether (ETH) could be a better investment than Bitcoin (BTC)and if not, why not? This explainer could help.

S&P Dow Jones Indices plans to work with cryptocurrency provider Lukka to launch a customizable cryptocurrency indexing service in 2021. BRING AWAY: This could suggest that more crypto-related products are coming from financial companies in the short term.

New York Digital Investments Group (NYDIG) raised $ 150 million for two new funds to invest in cryptocurrencies. BRING AWAY: This confirms more than the growing institutional interest in crypto markets. It also shows the scope of some commitments: NYDIG's Digital Assets Fund I, which invests exclusively in Bitcoin, received $ 50 million from two unnamed investors, while NYDIG Digital Assets Fund II received $ 100 million from just one investor collected.

Private German bank Hauck & Aufhauser launched a cryptocurrency fund in January 2021. The fund is called HAIC Digital Asset Fund, holds a range of cryptocurrencies and is aimed at institutional investors. BRING AWAY: Here we have a bank that offers a crypto fund. One of the first, by no means the last.

My colleague Michael Casey points this out aptly Bitcoin beats gold on most of the established benefits, except perhaps for attraction and beauty – and they are cultural constructs. BRING AWAY: Yes, this means that Bitcoin's attraction may also be a cultural construct, and it may not be permanent. That's not a bad thing – it implies progress. And the arc of history is long. (See THE BRIEFING above.)

Almost 20% of PayPal According to a report published this week by Mizuho Securities, users have already traded Bitcoin using the PayPal app. BRING AWAY: This figure comes from a sample survey and therefore cannot be used at face value. But even if remotely correct, and even if the quantities are small, this result implies that around 25 million new users have bought BTC.

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