January 3, 2018
What We’re Reading This Week
Bloomberg View columnist Justin Fox asks, “What’s the Value of Bitcoin?” At this point, it isn’t a novel question but one that I too, find myself asking again and again.
To answer the question, he starts with defining a bubble:
“If you follow the Investopedia definition that a bubble ‘is created by a surge in asset prices unwarranted by the fundamentals of the asset,’ there’s the unsettling reality that this particular asset has no fundamentals.”
Unsettling indeed. However, you also have to consider that neither gold nor the U.S. dollar has fundamentals. They are still valuable though, as a means of exchange. You can trade dollars (and gold!) for goods and services. Bitcoin enthusiasts will argue that you can also trade Bitcoin for goods and services, but the vast majority of Bitcoin transactions are just people buying and selling Bitcoins.
Many people have tried to value the cryptocurrency in the past and the article references Merrill Lynch’s David Woo:
“During an earlier Bitcoin bull market in 2013, Bank of America Merrill Lynch currency strategist David Woo tried to identify a fair value for the cryptocurrency by estimating its potential both as a means of exchange and as a store of value. He figured it would come to account for 20 percent of global ecommerce transaction volume, which he estimated would require $5 billion in Bitcoin market value, then added to that the average market cap of the three biggest money-transfer companies, $4.5 billion, to get a means-of-exchange value of $9.5 billion. That was still well short of Bitcoin’s $13 billion market cap at the time, so Woo speculated that Bitcoin had the potential to be a store of value on a scale similar to silver, and that all the U.S. silver eagle coins minted to date had a market value of $8 billion. Round that down to $5 billion, add in the $9.5 billion, and ‘we get a number that is somewhere around $15bn.’”
Yet, as of this writing, Bitcoin’s market value has risen to $315 billion. That doesn’t help the Bitcoin as currency argument. Fox references the first Bitcoin transaction in 2010, in which 10,000 Bitcoins purchased 2 Papa John’s pizzas. Today, that many Bitcoins buys more than 16 million Papa John’s pizzas.
So, what does that mean for investors? It means that historically, Bitcoin would make a terrible currency. However, there are only 21 million Bitcoins that can be created. Bitcoin may be worth more in the short term but I doubt there is real long-term value. Those looking for indicators on timing, putting something on the future’s exchange is usually the beginning of the end. Unless Bitcoin investors are right, in which, the top is much, much higher.
And More Bitcoin!
One way to make money off Bitcoin is to buy it. Another, less exciting way, is to tangentially associate yourself with Bitcoin. That’s the approach of Rungsted Seier Capital, a Danish hockey team. It’s not a terrible approach, even if it is silly. They are essentially garnering interest (and free promotion) by using the Bitcoin name. If Bitcoin continues to climb, they are visionaries, if Bitcoin value drops to $0 they can just tell people they were being ironic.
It’s a little harder to be Nikolaj Rosenthal. The first (only?) professional athlete to agree to be paid in Bitcoins. I don’t know how much Danish hockey players make and a quick Google search only yielded more articles on his decision to accept Bitcoin, so for argument’s sake let’s say $100,000 USD a year?
Today, $100,00 gets you 5.21 Bitcoins. So, his salary next year would be 5.21 Bitcoins and to keep things consistent, we’ll also say that’s 10,000 Papa John’s pizzas. If Bitcoin climbs 30% next year, he will make the equivalent of $130,035 USD or roughly, 13,000 Papa John’s pizzas. But what if Bitcoin reverts to the previously estimated market value of $15bn? Well, young Nikolaj will make the equivalent of $5,000 USD or, more disappointingly, only 500 Papa John’s pizzas. The team claims they will allow him to convert back to standard currency if there is a sharp decline in the price of Bitcoin but that sort of takes the fun out of it, right?
Recently, I’ve taken a break from writing about the fiduciary standard. Mostly, because I had said everything I wanted to say about it, but also because I haven’t seen many articles on it the past few months. Until last week.
One thing the new rule got right is reducing REIT (Real Estate Investment Trust) commissions. A few years ago, the SEC proposed greater transparency in the non-traded REIT space. This was good for investors but bad for companies that charged high commissions on REITs. Non-traded REITs are an investment product that typically pay incredibly high commissions to brokers for selling them (around 7%). All other factors being equal, a $100,000 investment in a non-traded REIT would be worth around $93,000. That’s assuming you don’t account for any of the other initial expenses in the investment (there are a lot). The problem lies in the fact that they aren’t traded. Because there is no market price (not traded) investment companies could report the value of the investment on a client’s statement as $100,000 even if the investor could only sell it for $80,000! Well, there is a lot of money (commissions and revenue) at stake and the SEC backed down from greater REIT transparency at the bequest of investment companies.
Enter the Department of Labor! REIT commissions have been slashed from around 7% to 3% and brokers have clearly lost their appetite for the product. Proponents have advocated investing in the REIT market as a non-correlated asset class. The environment for REITs hasn’t really changed, but sales have dropped to levels last seen in 2002. I guess to brokers, investing in real estate makes more sense when they receive a 7% commission. I have always said that there are inherent conflicts of interest in the broker-dealer sales model and the only way to receive unbiased advice is to work with a true fiduciary.
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