The Trade Of The Decade: Betting On Bitcoin

Story by: Katina Stefanova

Despite this year’s bloodbath in the crypto-asset space, the industry will likely still generate considerable investor surplus in the long-run. In fact, an investment in a basket of the top crypto-assets (largely Bitcoin) has the best chance to deliver the most attractive risk-adjusted returns over the next 10-years, compared to less controversial favorites such as Amazon stock, 10-year U.S. Treasuries, an apartment in Manhattan, or other “consensus longs”. While the bull thesis for crypto-assets is far more nuanced than can be covered in a short article, we outline four of the most salient themes below.

Bitcoin price action (01/01/2017 – 11/27/2018)MARTO CAPITAL RESEARCH

Bitcoin as a Macroeconomic Hedge and “Holy Grail” Portfolio Asset

Bitcoin is a rare, unlevered asset in a levered world. Global debt has reached $250 trillion ($70 trillion higher than in 2008); the U.S. runs a trillion-dollar deficit, pension funds are underfunded amidst retiring populations, and student debt has snowballed to $1.5+ trillion in the U.S. (with 9/10 borrowers struggling to make payments). All of this puts pressure on central banks to print excessively into the foreseeable future, diluting the value of fiat currency. Smart money (and increasingly, just more money), will flock to unlevered assets that have limited supply – gold, bitcoin, or other alternative assets that aren’t part of the mainstream investment world. Traditional assets such as equities, government / corporate bonds and real estate are all highly levered.

Further, from a portfolio theory perspective, bitcoin is an asset that is non-correlated (volatile yes, but volatility that is unrelated to fiat investments) and therefore a true method of diversificationthat boosts the overall portfolio’s risk-reward (e.g. Sharpe, Sortino), and with plenty of upside that is premised on secular and defensible trends.

Blockchain is Built on the Premise of Social Scalability

The story of humans is a story of networks - where throughout thousands of years of history, we’ve organized ourselves into networks which we use to get things done. Cooperation across boundaries has produced nations, businesses and other crucial institutions. But cooperation requires a protocol that sets the rules of cooperation, and that traditionally requires some gatekeeping entity to be in charge - because someone always cheats. That entity historically would be a king, an elite, a corporation, or a crowd. The problem is, if you put a king in charge, you pave the way for a tyrant; if you put an elite in charge, you create an unfair aristocracy; and if you put a corporation in charge, you get a rent-seeking monopoly. If you put a central bank in charge, it will manage money supply to optimize the health of its own currency and balance sheet, not to the benefit of the individual saver or investor. A misaligned central bank may be incentivized to protect itself by devaluing your savings.

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