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Posted November 29, 2020
Friends and family,
Dispensation of unsolicited financial advice is a tricky thing. It’s not something I’m prone to naturally, and it’s a good way to look foolish.
That said, here I am.
I’ve weighed the risk of seeming uncouth against a desire to see the people I care about share in a major success. The prospect of a great return on an investment is a nice thing, but to see such a return along with many of the people you care about is wholly better.
I’ve personally benefited from keeping an eye on Bitcoin since 2014. I wrote some of you a similar letter in 2017, back when a coin cost $3,582 (as I write now it’s $17,810). The depth of my belief led me to make Bitcoin my full-time job in 2018.
But what’s more important – and the cause for this email – is that I have good reason to think that a big price movement is coming in the next year.
From Nasdaq. I don’t think this is a hyperbole.
I have two takeaways:
- There is a high likelihood that the Bitcoin price will approach or surpass $100,000 per coin within the next year.
- You should own some Bitcoin not just for the mid-term price appreciation, but to safeguard against the enormous economic changes that are set to unfold over the next five years.
In brief, Bitcoin is poised to rise in value because we are in uncharted territory. A countermeasure against currency devaluation is becoming more important than ever as the Fed (and every other central bank around the world) creates record amounts of new money to keep the economy on life support. Historically gold has been the go-to defense for this scenario, but Bitcoin is quickly replacing it as a much more practical alternative.
Hedge funds and money managers are quickly realizing this.
It should go without saying that my conviction carries through to my portfolio. I am over 90% in Bitcoin and continue to buy regularly.
In this mail I’ll briefly talk about the backdrop for Bitcoin’s rise, and why we’re at a critical inflection point in our money system. I’ll talk about how I value Bitcoin, and the reason next year is going to be so crazy.
As you may know, our country’s federal debt has been steadily accumulating over the past few decades to levels that will make repayment impossible. COVID-19 has kicked this expansion of debt into hyperdrive.
The nation’s debt has exploded to 140% of GDP as the government has been faced with the impossible dilemma of both fighting the virus and preventing the country from suffering permanent economic harm. The government’s answer so far, in brief, has been to turn on the printing presses while keeping everyone at home. I’m not here to make moral assessments of this solution, it is what it is.
Since untethering the US dollar from gold in 1971 (yep, production of dollars used to be limited by a physical commodity) the government has been able to produce currency at unlimited rates. Most people don’t realize that this is a 50 year old experiment involving money whose supply is not limited by anything.
There’s much more to say on the macroeconomic backdrop of Bitcoin’s rise, but it’s too in-the-weeds for many and so I won’t include it here. If you want more information, you can read my article Bitcoin for Safety.
Nearly all of Wall St. realizes that the government has no option but to print big and keep at it indefinitely. Most have decided to shove capital into the stock market to protect their money, which explains the bizarre rise of stocks in light of the country being in a dystopic pandemic-driven lockdown.
Large businesses are increasingly coming to a similar conclusion. You may have heard recently about a tech company that invested the majority of its cash treasury ($500 million) into Bitcoin.
Michael Saylor, MIT grad and founder/CEO of MicroStrategy, realized that the purchasing power of his company’s cash reserves was eroding at a rapid clip. In recent weeks he has spoken at length about the importance of Bitcoin and its uniqueness over any existing asset class.
Payments processing company Square has also adopted this rationale and has started to put some of their cash into Bitcoin.
This will become increasingly common among businesses concerned about the effect of rapid inflation on their cash balances. Because Bitcoin’s supply is limited and discovery of new Bitcoins is becoming less and less frequent over time, this heightened demand will do things to the price of Bitcoin that seem unthinkable now.
Bitcoin is the only asset ever to have a truly fixed supply. Even great works of art can be fabricated. It’s difficult to think through the implications of a truly fixed supply since we’re used to companies issuing more shares or governments printing more dollars. This can’t happen with Bitcoin, which is what causes the price to do outrageous things.
Money managers are beginning to realize this. Some of the biggest names in finance have come out in the past weeks expressing support or positive curiosity over Bitcoin.
Raoul Pal, noted investor and founder of Real Vision (“the Netflix of finance”), calls Bitcoin “the only trade” right now. He is “irresponsibly long.”
I’ve linked to a video Raoul did about his thoughts on Bitcoin at the end of the email.
Paul Tudor Jones, one of the most successful hedge fund managers alive, has recently come out in strong support of Bitcoin. He has 2% of his assets invested.
“Back in March and April, it became really apparent, given the monetary policy that was being pursued by the Fed, the incredible quantitative easing they were doing and other central banks were doing, that we were in an unprecedented time,” he explained. Noting additional problems brought about by the Covid-19 pandemic, he said, “one had to begin to think about how you defend yourself against inflation.”
“I came to the conclusion that bitcoin was going to be the best of inflation trades, the defensive trades that you would take.”
Examining the overall market caps and characteristics of all inflation trades, he said that bitcoin has “a very small coterie of people investing in it, it was portable, it was liquid, had a variety of characteristics that made it a great inflation hedge.” While Jones pointed out that “The one thing it [bitcoin] didn’t have is it didn’t have integrity and long-term staying power,” he emphasized that “every day that goes by, of course, it gains on that. It gains on credibility and integrity.”
Stan Druckenmiller, another Wall St. luminary, has revealed he’s buying Bitcoin recently. Stan’s fund, per wikipedia has “post[ed] an average annual return of 30 percent without any money-losing year” for 30 years.
Raoul Pal remarked that “the significance of the world’s greatest and most respected money manager - Stan Druckenmiller - saying just now that he is long bitcoin can not be overstated. That has removed every obstacle for any hedge fund or endowment to invest.”
The point is, this narrative is spreading quickly through the finance community. Bitcoin is in the early days of being accepted as the successor to gold at a time when the role of gold is increasingly critical for protecting wealth.
If you take gold’s (conservative) market cap of $7 trillion and divide that over Bitcoin’s 21 million fixed supply, you get a price of $333,333 per coin. Even assuming Bitcoin takes just 10% of gold’s market cap, that’s $33,333 per coin.
Gold is venerable but outdated - I’ve bought and sold a lot of it in the past year, and obtaining physical gold and then selling it was an absolute pain. Bitcoin is way more practical.
And replacing gold is just the start. Bitcoin isn’t just a better gold; because of its programmability, it’s a platform that will host the future of money. It will disintermediate many core functions in finance.
You might have questions like “if Bitcoin is digital, how can there only ever be 21 million? Can’t anyone just copy the source code and make their own Bitcoin?”
I’m happy to do a follow-up on why Bitcoin is scarce, but I don’t want to belabor details here that most might be uninterested in. As a relative expert in computers, I can say that Bitcoin is a genuine technological breakthrough and it is indeed scarce. There will only ever be 21 million.
So why is Bitcoin on the rise in the next year? Why are you sending me this email now?
The “new” narrative about Bitcoin circulating among finance professionals isn’t the only thing at work here. There is an inherent property of Bitcoin that creates a recurring cycle of demand called the “halving.”
Every four years, the rate at which new Bitcoin is discovered halves. Since 2009, this has created a roughly four year cycle that results in a wild price run-up about a year after the halving (which most recently happened a few months ago).
The effect of the halving is that there is less Bitcoin to be sold as demand is held constant or increases. That causes the price to shoot up. Which causes demand to shoot up. Which causes price to shoot up. Which …
We are on the orange line right now. Note that this is a log-scale chart and if Bitcoin follows previous trends, we’re looking at a coin price in the $200k-$300k range.
We are on course for some wild price appreciation in the next year, and I wanted to make sure to send out this warning before the fireworks start in earnest. Bitcoin might reach upwards of $120k per coin during this cycle. Some speculate that because of acceptance from the traditional finance crowd, this may be the last such cycle and the price just won’t come back, as it has in previous seasons.
Bitcoin as diversification
It took me a while to understand that this moon math is credible, so I get it if you don’t take it seriously. (You’ll see over the next year.) If not, you can simply think of Bitcoin as an excellent portfolio diversifier.
Bitcoin is one of the few financial assets you can buy that has been shown to be uncorrelated to other asset classes.
Easy for you to say all this - you bought Bitcoin when it was $200.
When I first bought Bitcoin, I bought the top. The year was 2014 and I bought Bitcoin for around $1,000 a coin. Then it “crashed” to $200 and stayed in that range for years. I looked like an idiot. But I kept buying, because I understood many of the mechanics I outlined above.
In 2016 and 2017, I piled into Bitcoin as the price broke all-time highs of $1,200 and shot up to $20,000 over the course of the year. It crashed down to $3,000 and while I did some ill-advised trading and lost some Bitcoin, I kept buying.
When the price was at $19,000 last week, I was buying. I’ve sold other assets to pile into Bitcoin at these prices. They may seem high, but in a year they’ll look like a bargain. People will be talking about how you could once buy $20,000 Bitcoin in the same way that I just mentioned that there was a day when I was buying $200 Bitcoin.
I regret every sale of Bitcoin I’ve made so far.
What are some other good resources?
- (3 minutes) Finance bro Anthony Pompliano explaining new demand for Bitcoin on CNBC https://www.youtube.com/watch?v=i5wv6i71Its
- (8 minutes) Michael Saylor of MicroStrategy on CNBC on why the company put $500M in Bitcoin https://www.youtube.com/watch?v=CxnNoqbSLGo
- (30 minutes) Raoul Pal on “The Bitcoin Life Raft” https://www.youtube.com/watch?v=qL2LfVRl3J0
- (1 hour) a longer discussion with Michael Saylor: https://www.youtube.com/watch?v=t_nVYtoiShg
- “Misconceptions about Bitcoin” by investment advisor Lyn Alden, published a few days ago https://www.lynalden.com/misconceptions-about-bitcoin/
- My article, Bitcoin for Safety: https://jameso.be/2019/08/24/bitcoin-is-for-this.html
Okay, how can I buy a little?
I recommend allocating anywhere from 1-5% of your portfolio to Bitcoin. This is low enough that you can ride out any price swings and hang on for the long-term, but high enough that you’ll be exposed to any massive upside.
I personally recommend River.com. If they aren’t available in your state, Coinbase.com is a fine choice. Or you can use Square’s Cash app for small-ish purchases. I haven’t tried SwanBitcoin.com yet but it seems good.
If you are going to be buying and holding a sizable chunk of Bitcoin (say over $10,000) you should really consider custodying it yourself with what’s called a “hardware wallet.” I’m happy to help any of you with this, just send me an email.
My advice is not to wait. There were many people who thought the price was just a little too high at $200, $1,200, or $12,000 and decided to wait for a pullback that never came.
I’m relieved to be finishing and finally distributing this email. I don’t particularly like giving sales pitches, but it has weighed on me that I haven’t sent out an email like this earlier. I want to encourage participation in what is not only the emergence of a new financial asset class that I think will perform tremendously, but a defense against some very strange times to come.
If I can answer any questions, let me know.