reason #5
bitcoin IS THE BEST INVESTment
So where are we today? Investment asset prices are inflated. We touch on asset bubbles in Reason #6. There is an old saying in the market that we know the price of everything but the value of nothing. The price of an asset is not necessarily the same as the value of an asset. So how can we get a better understanding of the value of assets? Let's start with the market that most people more or less understand - the equity or stock market. These markets are public in the sense that anyone can invest in them. The world's biggest public company is Apple which is valued at around $2 trillion. Most people do not understand big numbers so let me try and put that number into context. One million seconds equals 11 days. One billion seconds equals 3 decades. Two trillion seconds equals 634 centuries!
When you buy a share in Apple, you become a small owner of that company. There are 16 billion Apple shares in circulation. If you buy one (which cost around 140 dollars in December 2022), you own one sixteen billionths of a share in Apple. You would be entitled to vote in their annual general meeting, and receive any dividend paid....you are effectively a small owner in that company. Is $140 for an Apple share cheap or expensive? Tesla is priced $50 lower than Apple - does that mean it is $50 cheaper? Cheap or expensive is not a question of price - it is a question of value. One way to convert the price into a value is to compare profits. This sounds complicated but it is very simple. We are going to take the price per share of Apple and divide it by the earnings (or profit) per share. This gives us a nice ratio. It tells us how long we will need to wait to recover the price we paid for Apple from the profits it is generating. This is also known as the Price/Earnings ratio. Apple has a ratio of 23. Amazon has a ratio of 88. For Apple, you will need to wait 23 years to recover the price paid based on current earnings. On Amazon, you will need to wait a lifetime - 88 years. This means that Amazon is almost 4 times more expensive than Apple. Now we need to ask the question: is being expensive bad?
There is an old sales rule. You offer a client three things: quick, cheap, and good, and you tell him he can only have two. If he wants the good or service to be quick and cheap, it cannot be good. If he wants it to be good and cheap, it cannot be quick. If he wants it to be quick and good, it cannot be cheap. Expensive is not bad, as long as the price is in line with the value. Both Apple and Amazon are high quality but they are very expensive. The problem is that they are expensive for the wrong reasons. They have been pushed up by all this cheap money in the market. Amazon should not be at 88 times - that is ridiculous for a mature company. It should be closer to Apple. Global equities are at a PE ratio of 48. If a high-quality company like Amazon should be closer to 20, how is it possible that the average public company is valued at 48 times earnings? This is a massive overvaluation. Shares around the world are generally very expensive.
Now we need to go over to the monster in the room - the bond market. This is a little easier to value because you only need to focus on two metrics - the interest rate and the credit risk. In the beginning, we spoke about the quality of returns which is the relationship between risk and return. This is no different. A bond is a loan. You will remember that a share is an ownership stake in a company. A bond is a loan to a company or a government. Part of the reason why the bond market is so much bigger than the share or equity market is that governments play in the bond market. You can lend money to governments but you cannot buy an equity stake in them. Take a one-year government bond issued by the United States paying an interest rate of 4 percent. If you invest $1,000 in this bond, at the end of 12 months you will receive $1,000 plus $40 on interest. Every investment has a risk - what is the risk in this transaction? The interest rate on this bond is fixed, so your 4 percent is not at risk. The risk is that the US government does not pay you the loan back. That is unlikely to happen any time soon with a US bond because the United States is the biggest economy in the world and is unlikely to default on its debt obligations anytime soon. Your credit risk, however, would be higher if you bought a Venezuelan bond. There are factors that affect the interest rate on a bond - the maturity and the quality of the issuer. The interest rate tends to increase the longer the loan period. In some rare cases, this rule does not hold (known as an inverted yield curve) but it is more the norm.
Global inflation is around 7 percent as of the end of 2022. Attractively priced bonds would need to deliver a yield nicely above that. Fifty countries in the world - those with the best credit, yield below that 7 percent level! Therefore, if you want to beat inflation, you need to take on the credit risk of countries like Bangladesh, Pakistan, Colombia, Kenya, Ukraine, and Nigeria. From a risk-return point of view, that makes little sense.
I don't know much about gold other than it is difficult to value because it has no cash flows and the price of a financial asset is the present value of its cash flows. The research I have found indicates that gold may be a little overvalued on account of the surge in inflation. Gold is a traditional hedge against inflation and has responded accordingly as inflation is set higher on the back of higher energy prices thanks in part to the war in Ukraine.
If you look at the universe of investable assets - stocks, bonds, property, gold, and other precious metals, you are looking at a market value of 500 trillion dollars. The big question is that if you have 1 million in investments, how sure are you that this investment will be able to buy the same things in 100 years? In other words, what would the buying power of that money be after 100 years? For example, if you buy a city block in Manhattan you could say with more or less certainty that the value of that city block will go up in 100 years as more and more people move into New York. The negative is that this block is going to be taxed by the mayor of Manhattan, there is going to be zoning regulation, it is going to be taxed by the state of New York, and there is also the risk that politicians want to turn that block into a park and they may take it from you and pay you below market rates. So property as an investment is great but you will need to fight to maintain the value of that property over 100 years, and your children's children will have to fight. If you hold that 1 million dollars in cash, you need to be aware of the dilutive power of the Federal Reserve. They are increasing the money supply by 7 percent per year which means that over 100 years, those cash notes will lose 99 percent of their value. If you put 1 million dollars of gold in a box and bury it in your garden, you have to worry about the government seizing the gold. The problem with gold is that we are increasing the supply by 2 percent every year as new gold is mined and this means the half-life of gold is 35 years - over that period of time it will lose half of its value. The economic energy that is being stored in that box of gold is dissipating at approximately 2 percent per year - better than cash notes but not optimal. Over 100 years you will only be left with 12.5 percent of its value. Gold is more portable than an office block in Los Angeles, but you are not going to be able to move 1 million dollars worth of gold through an airport anytime soon.
Another investment is buying all the shares of a football team. There is a cultural risk here - what happens if there is a massive shift in culture in 100 years and people lose interest in football and prefer to watch flying cars racing around the city skyscrapers? You could own 1,000 acres of land, but what happens if your biggest enemy becomes governor of your state and sets the tax so high on your land that it is taxed away from you? There is an old saying that they lost the family farm because they were unable to pay the property taxes. If you are a rich family in New York, the reason you maintain your wealth is by renting it out, paying the taxes, maintenance and maintaining favour with the powers that be. Historically the families that do this best are the sovereigns - think about the Windsors in the United Kingdom. The Crown Estate owns 3 percent of the property in the UK. It is the third largest property owner in the UK with almost 700,000 acres.
The great thing about Bitcoin is that it meets the needs of 8 billion people. Most people are not able to buy 1 percent of a hotel in Miami or 0.23 percent of a Picasso. Bitcoin offers property rights at any scale and you don't need to worry about whether Picasso will still be in vogue in 20 years or will people still visit Miami in 50 years.
Are you too late to get into Bitcoin? Not at all. People thought it was too late to get into Google when it was listed. Google is now more powerful than many nation-states.
Bitcoin represents a massive paradigm shift. It is the digital transformation of money, property, and energy. It is transforming the world and many people are not aware of what is happening under their noses because they are so fixated on their paradigms.
We live in a globalized economy. We are 8 billion people but it is difficult to trade with each other. A company in Bolivia wants to do business with a country in Ghana. Bolivia uses the Boliviano and Ghana uses the Cedi. Neither is the dollar and neither company is allowed to have a dollar account. Assume the Ghanaian company wants to pay the Bolivian company. They need to convert Cedi to US dollars using their central bank and a corresponding bank in the US registered with the Federal Reserve. A swift instruction is sent by a bank employee that does not speak good English to the US bank who then needs to convert the dollars into Bolivianos and communicate with a bank employee in La Paz who only speaks Spanish. This could take days if not weeks to complete. By this time, let's assume the goods exported from Bolivia to Ghana are perishable. They are sitting in a warehouse waiting to be transported but losing value every day. This is a far from ideal situation. There is a simple solution and that is crypto in general and Bitcoin specifically.
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Bitcoin gives you all the benefits of a commodity in addition to it being immutable, indestructible, and scarce. You would rather have one million dollars of Bitcoin than any other commodity. It is also the best security because it has no CEO, no board of directors, no product to ship, no ability to dilute shareholders, and no fancy headquarters to maintain. Bitcoin cannot take on debt and therefore can never be rendered insolvent. It is by far the best investment.
