Bitcoin is one of the most important human innovations of the last hundred years. And while the mainstream headlines may focus primarily on the fluctuating price of a coin, the investment case is actually very strong. Particularly when considered in the context of portfolio diversification.
Alex Tapscott is an entrepreneur, author and seasoned capital markets professional focused on the impact of Bitcoin, blockchain and other digital assets on business and financial markets. Mr. Tapscott is the co-author of the critically acclaimed non-fiction best-seller, Blockchain Revolution, which has been translated into more than 15 languages and has sold more than 500,000 copies worldwide. Mr. Tapscott has delivered over 200 lectures and executive briefings at firms like Goldman Sachs (Talks at GS), Google, Allianz, IBM, Microsoft and Accenture. Mr. Tapscott has also written for The New York Times, Harvard Business Review, The Globe and Mail, National Post. In 2017, Mr. Tapscott co-founded the Blockchain Research Institute (BRI), a global think-tank investigating blockchain strategies.
Michael Hainsworth spent 18 years at Canada’s Business News Network as a Senior Anchor. He is the Executive Producer and Editor in Chief of Futurithmic, a documentary series and publication about the impact technology today will have on society in the future. He is also the co-host of one of Canada’s most popular podcasts, Geeks & Beats, with radio legend Alan Cross.MORE EPISODES
Episode Transcript: The Investment Case for Bitcoin
This is the Alt Thinking podcast by Ninepoint Partners.
Alex Tapscott (00:08):
Yeah, it’s true that Bitcoin has been more volatile than other assets, though that volatility has been in steady decline basically since Bitcoin began. And we think that with increased institutional ownership, long-term holders, that that volatility will continue to decline. But it’s important to note that volatility in and of itself is not a bad thing.
The Alt Thinking podcast from Ninepoint Partners begins now. Here is Michael Hainsworth.
Michael Hainsworth (00:41):
Alex Tapscott knows Bitcoin. It’s why he was brought on board at Ninepoint Partners in the first place. But what do we as investors and advisors know about the cryptocurrency, really? We know it can be volatile in the short term. We’ve seen the headlines. But long-term, is there a place for the digital dollar in Canadian portfolios? Bitcoin is one of the most important human innovations of the last 100 years. And while the mainstream headlines may focus primarily on the fluctuations, the investment case is actually very strong, particularly when considered in the context of portfolio diversification. But before we get into the investment case for Bitcoin, I asked Tapscott to reset the explanation of just what it is and how it works.
Alex Tapscott (01:32):
The internet, when it was initially devised, was designed as a peer to peer network for moving information, but not as a peer to peer network for moving value. So when you move something on the internet, you can send it to one person, you can send it to many people. And that’s really useful if it’s an email or a PDF, or if you’re tweeting something or you’re putting a entry into Wikipedia or what have you. But when it comes to things that have value like money and assets, being able to send copies is a very big problem because that means that the money and those assets become worthless. So what Bitcoin was designed to do is basically to create digital scarcity, to solve what’s called the double spend problem. How do you ensure that when you move something of value online, that you can’t send the same thing of value again to someone else?
Alex Tapscott (02:17):
And what was really remarkable about Bitcoin was that it worked. There had been other attempts at devising ways to do this online, but none of them could overcome this issue of the double spend problem. And as a result, the internet, which started as a peer to peer network, ended up becoming the domain of huge companies that captured most of the value and ended up becoming very large as a result. So Bitcoin promises to fulfill the promise of a decentralized web and to enable people to move assets peer-to-peer without these intermediaries. And it’s worked, as I said, it’s worked and it’s worked so well that it’s kind of set off a spark that’s caught on like wildfire and captured people’s imagination in the financial services industry who see the underlying technology that makes Bitcoin possible, which is called the blockchain, as a tool that could be used to move other kinds of assets online, like stocks and bonds and other financial assets.
Alex Tapscott (03:12):
It’s captured the imagination of technologists who see this as a new era of the internet, an internet of value that could unlock all sorts of new business models and new opportunities. It certainly captured the imagination of regulators and policy makers who see it as something that is both exciting in that it could help to spur economic development, but also as something that could be a potential threat to the existing monetary order and to their monopoly on money-making. So there’s all sorts of different components to this. And today, Bitcoin, as I said, it’s worked and it’s worked so well that today it’s worth a little over a half a trillion dollars, and is used by many individuals, but increasingly a lot of large companies who see it as foundational to the future of their business. Companies like PayPal, Visa, MasterCard, Square, and just recently Tesla, Fidelity and others. So, this is something that has unlocked a lot of value and I think gotten people’s imaginations running in some exciting ways.
Michael Hainsworth (04:10):
Let’s talk about how we unlock that value. Currency trading itself relies on the basis of supply and demand to determine value. What gives Bitcoin its value?
Alex Tapscott (04:21):
It’s a really important question because it gets down to the heart of what is money? Money is one of humanity’s greatest and most enduring inventions. And the story of money is the true story of a made up thing, which is the name of a book that I would encourage people to check out because it is just a made up thing. It’s a concept, it’s a way in which we sort of represent values and enable economic trade to occur. And money has been represented by various things over time. It’s been represented as certain scarce commodities like shells, and then later as precious metals. And then later as bank notes backed by precious metals. And then later as bank balances backed by nation states. And now we’re in this sort of next stage where money is taking another great leap forward and it’s becoming digital. Money for many years was backed by physical commodities like gold and silver.
Alex Tapscott (05:14):
And that was a system that worked pretty well through the 19th century, but it was fairly limited in that it was constrained by how much gold you could actually pull out of the ground. And it meant that policy makers had a really hard time being flexible when crises came along if they had to do everything with a money that was backed by gold. So a new system was developed, a Fiat system, where basically money wasn’t backed or pegged to any particular asset. It was backed by the taxation power, military power, economic might of the individual country that was issuing it. And so the US dollar became the dominant reserve currency for the 20th century. What backs Bitcoin is something that is somewhat a blend of both what backs gold and in a way, what sort of backs Fiat currency.
Alex Tapscott (06:02):
So the thing that backs Fiat currency is a belief system. A system of belief that the underlying economic utility of this thing is valuable. And with Bitcoin, there’s a huge, robust and global decentralized network of users, of merchants, of savers, of investors, of company builders that are using this asset every single day and that gives it its utility. But it’s probably more analogous to gold than it is to Fiat currencies because of its limited supply. So, gold is limited on this planet at least, to whatever gold exists in the earth, right? And there could be gold on other interstellar objects and we won’t go down that path. With Bitcoin, Bitcoin is limited in terms of the number of Bitcoin that will ever exist. There will only ever be 21 million Bitcoin in circulation. Today there are about 18.5 million Bitcoin in circulation.
Alex Tapscott (06:57):
And so this constrained supply and supply growth of Bitcoin has attracted a lot of people who see quite rightly the similarities between Bitcoin and gold. There’s a difference though between Bitcoin and gold, which is that gold, if the price of gold goes up, the rate of growth of new supply goes up. And the reason for that is that if the price of gold goes from 2000 to 10,000 dollars, the value of gold in the earth becomes more valuable. And so it’s therefore economically justifiable to spend the money to dig it out, right? So gold that was maybe not economical at 2000 all of a sudden becomes economical at 10,000. The same is not true for Bitcoin. If the price of Bitcoin were to go from roughly 30,000, where it is today, to 300,000, the rate of new Bitcoin growth wouldn’t change at all. So in many respects, the supply curve on Bitcoin is even more constrained than it is for gold.
Michael Hainsworth (07:48):
But there is a new supply of Bitcoin that does come onto the market on a regular interval basis. So there is an increase in that supply that’ll get us from the 18 million or so to the 21 million eventually. What fascinates me is that every time they release more Bitcoin into the wild, it’s less Bitcoin than they did the last time around and that drives a remarkable increase in the value of Bitcoin just in and to itself. You would think it would be the opposite. The more you add onto the market, the less value it would have.
Alex Tapscott (08:21):
Certain people have done some good analysis on this. And basically the way that the Bitcoin network works is that transactions are constantly happening. Bitcoin is being moved between individuals. Every so often those transactions are batched together into a thing called a block, which gets broadcast to the network. There are certain nodes on the network that are called miners that use large computing power to ensure that the transactions in that block were valid.
Alex Tapscott (08:46):
Once those transactions have been proven correct, they’re added to the blockchain, the chain of blocks going all the way back to the beginning of time. The reason that those miners do all that work is they’re incentivized with new Bitcoin. And that’s the process of how Bitcoin gets added into the market. And it’s this really ingenious monetary system where basically the people who are connected to the network have an economic self-interest to ensure its integrity.
Alex Tapscott (09:11):
And that is how Bitcoin remains secure and resilient and has throughout history. However, the growth rate, as you described, is not, it exists, but it is not constant. Every few years, the rate of growth gets cut in half. And this in the industry is called the halving. And basically what it means is that in the early days of Bitcoin, the inflation growth rate was quite high, but as time has gone on that inflation growth has declined. So the curve is sort of like this in terms of the new supply and then it starts to flatten out at a decelerating rate. What that means in effect is that Bitcoin is becoming for all intents and purposes, more scarce in that so long as growth and interest on the demand side remains fixed, supply goes down then obviously you create an imbalance. And there are various metrics you can use to look at this. In the gold mining space, they use a metric called the stock to flow ratio.
Alex Tapscott (10:05):
And basically that is how many years at the current rate of production would it take to replace the current stock? So, how many years of flow to replace the current stock? And with gold, it’s usually between 30 and 50 or so, depending on the price of gold. Bitcoin recently surpassed gold in its stock to flow ratio. And so now the stock to flow ratio for Bitcoin is actually higher than it is for gold. And so this is a flipping that has occurred, so to speak, that has really gotten people’s attention, especially in the precious metal space who see so many similarities between Bitcoin and gold.
Michael Hainsworth (10:44):
So the, for the investment case for Bitcoin, with the cost of interbank borrowing at 0% and money cheap for the foreseeable future, what role does Bitcoin play as a hedge against inflation and quantitative easing in a portfolio?
Alex Tapscott (10:59):
The first point you made is a really important one, which is that right now there’s very little opportunity costs to owning Bitcoin and gold and other assets that don’t have any cashflow. And that’s because the traditional cash flowing assets are basically yielding negative real rates. There’s over $18 trillion of sovereign debt that has a negative real rate of return. And so as a result, all asset prices have done well, and Bitcoin is no exception. But the real key to the investment thesis is what, if anything, does record government borrowing and record fiscal intervention in the economy mean for inflation and the value of money? And frankly, there’s been no evidence that there’s any inflation in basic goods, but there’s a lot of asset inflation that’s going on.
Alex Tapscott (11:48):
But these are the kinds of things that can pop up relatively quickly and so you want to be prepared. And Bitcoin has many properties that make it quite similar to gold. It has a finite supply. It takes time and energy to produce new Bitcoin, just like it takes time and energy to produce gold. And increasingly investors see it as a store of gold. And that belief is very important. But there’s certain things about Bitcoin that make it superior to gold. It is much more easy to transport. One of its benefits is that it’s digital assets. So it can be moved between parties on opposite ends of the earth for relatively little in transaction costs, sometimes zero transaction costs. It can be stored much more easily. It doesn’t cost money to have a vault with armed guards and so forth. Now, obviously there’s security and protocols you want to put in place to ensure that it’s safe, but it’s not the same cost as gold.
Alex Tapscott (12:40):
And importantly, it’s impossible to forge Bitcoin, whereas regrettably with gold and other precious metals, there’ve been numerous scandals with gold bars that are filled with tungsten and other metals rather than gold. And that’s been an issue with trust in the precious metals space. That does not exist with Bitcoin. A Bitcoin can only exist in one place in the same time, and there’s no way to forge a single Bitcoin. So in many respects, I view Bitcoin as a superior store of value to gold over the long run because of all of these properties that make it better than gold. Its fungibility, its ability to be stored more easily, moved more easily and its inability to be forged, set it apart from gold in some really important ways. And you know, there’s a huge demographic tailwind to all of this. Over the next 10 to 20 years, there’s going to be this massive transfer of wealth from baby boomers to their millennial and gen Z children.
Alex Tapscott (13:33):
And increasingly you’re starting to see what millennial and gen Z investors can do to markets. Just look at how they were able to basically disenfranchise, well I shouldn’t say that, bankrupt a couple of big hedge funds through this Game Stop trade and are now starting to throw their muscle around. So just imagine when there’s tens of trillions of dollars of assets that have to be allocated to stores of value and the choice between Bitcoin and gold becomes one that divides along generational lines. So you can start to see how that can increase the value significantly.
Michael Hainsworth (14:04):
Your point that Bitcoin on a longterm basis has a growth trajectory to it, on a short-term basis it has a remarkable amount of volatility that you don’t get with gold. If I buy Bitcoin, am I getting a free pack of antacid with it?
Alex Tapscott (14:20):
Maybe they should market that as a bundle deal. It’s true that Bitcoin has been more volatile than other assets, though that volatility has been in steady decline basically since Bitcoin began. And we think that with increased institutional ownership, long-term holders, that that volatility will continue to decline. But it’s important to note that volatility in and of itself is not a bad thing. If you were to look at the volatility measure for gold, for example, during the period after the US closed the gold window in the 1970s.
Richard Nixon (14:55):
The third indispensable element in building the new prosperity is closely related to creating new jobs and [inaudible 00:15:01]. We must protect the position of the American dollar as a pillar of monetary stability around the world. In the past seven years, there’s been an average of one new international monetary crisis every year. Now who gains from these crises? Not the working man.
Alex Tapscott (15:20):
So officially he ended the tether between dollars and gold. The price of gold over that period of time was extremely volatile as there was this process of price discovery. All of a sudden gold wasn’t pegged to a certain value, it was a free trading asset, like all others. And so the measure of volatility was way higher than it was for equities or bonds during that period. So you would have been holding a volatile asset. You would have also been holding one of the best performing assets during that period of time. And if you look at Bitcoin over the long run, it’s been one of the best performing financial investments over almost any time horizon more than a couple of years. And our view is that if you’re going to own this thing, you’re not owning it so that you can sell it tomorrow at a 5% gain or something like that. You’re owning it in the long run as a currency hedge, as a portfolio diversifier, as part of your stored value basket and something that you want to hold for the long term.
Michael Hainsworth (16:12):
You mentioned increased institutional ownership. What does it tell you that the public pensions in the United States are now exposed to Bitcoin via their fund managers?
Alex Tapscott (16:21):
Yeah, it’s fascinating. It started a couple of years ago when endowments and other funds started to make investments into VC funds that were investing in this space. And that was the sort of first foray into getting comfortable with actually directly owning or getting direct exposure to digital assets like Bitcoin. And now what you’re seeing is really the flood gates open up and this spreading from those family offices, private institutions, endowments, and then eventually into mutual fund managers, pension fund managers, and other more traditional large asset allocators. I mean the reason that they’re investing is fairly straight forward. Just look at the data. The data says that owning Bitcoin over a medium term time horizon has proven to be an excellent investment. Not just on raw returns, but actually on risk adjusted returns.
Alex Tapscott (17:09):
Because Bitcoin has a low correlation to other assets., it actually improves your risk adjusted returns over basically any time interval that was measured. And it does so in a very significant way. So in a very counter-intuitive way, owning Bitcoin, an asset which is more volatile than other assets, actually reduces portfolio volatility and portfolio risk because it is an uncorrelated asset. So that’s one of the reasons that they’re interested in it. Another reason is they may not be hardcore Bitcoin bulls, but they acknowledge the fact that they have to have 5% maybe up to 10% allocated to store value type investments. Gold has been the traditional investment that’s made in that bucket. And they’re looking at all the information that we’re looking at. The demographic changes, the change of sentiment, the growth of the Bitcoin network, and they see that they ought to maybe put, I don’t know, 10, 20% of that 10% into Bitcoin.
Alex Tapscott (18:05):
Now, if you have a trillion dollars and you’ve got 2%, all of a sudden you’re talking many billions of dollars of assets allocated. We’re not at that point where a trillion dollar fund manager is putting 20 billion into Bitcoin, but I don’t think we’re that far from it. If you look at examples over the past little while, MicroStrategy, a large company, Ruffer, Mass Mutual, AllianceBernstein, Guggenheim Partners, Fidelity, all of these firms, which are some of the biggest, most sophisticated and most well-known companies in the asset management space, see Bitcoin as a key component to a well-diversified portfolio. And really once you get that first group, getting the next, the first 10, getting the next 100 and the next thousand after that, it’s much, much easier. It’s overcoming that initial hump and we’ve done that. So for us, we look at the future and we think that it looks very exciting.
Michael Hainsworth (18:58):
We keep comparing Bitcoin to gold. So am I, as an average investor, just going to take that 5% that’s gold in my portfolio, swap that out for Bitcoin. How do we include this into a model portfolio?
Alex Tapscott (19:17):
Yeah. So I’m not going to provide investment advice on what exact allocation you ought to have to Bitcoin. But what I can tell you is that it’s not that people are replacing a hundred percent of their gold allocation with Bitcoin. It’s more that they see that this is something that they should consider seriously owning in a portfolio. And then for them it’s a decision of what percentage of that percentage they want to put in, right? And it may be that they put in 1% of, I should say a 10th of that allocation or a quarter of that allocation, for them it’s really a decision that they have to make. Our view is that this is going to increasingly become a staple of a portfolio. So it’s important to look at it sooner rather than later. It’s always better to be, you’re not going to be the first mover, you’re going to be a fast follower. Better to be a fast follower than to be late to the game.
Michael Hainsworth (20:08):
But many investors are going to say they’re already late to the game. You look at the historical price increase we’ve seen in Bitcoin, many might say they missed their chance.
Alex Tapscott (20:17):
It’s true that Bitcoin is valuable. I mean, it’s worth 500, 600 billion dollars, which is more than the value of JP Morgan and Goldman Sachs combined. But it’s also just a quarter of the size of the largest single company that trades in the New York Stock Exchange, Apple. And it is a tiny infinitesimal fraction relative to real asset classes. If you were to compare Bitcoin to say equities or bonds, you can see why in our view, we’re still the bottom of the first inning for this. Just look at the value of gold. The value of gold is $7 trillion roughly. I mean, it’s hard to know exactly. This is gold that’s invested through investment funds and products and also that is held by central banks and individual investors. The value of Bitcoin is I don’t know, 600 billion. So a 12th of the size.
Alex Tapscott (21:05):
So our view is that Bitcoin will capture a lot of the asset allocation that investors make to gold. And as a result is going to capture a big chunk of that $7 trillion. That’s only market opportunity number one, as far as we see for what Bitcoin could ultimately become. It’s also possible that Bitcoin could become a version of money that is widely used by people who don’t have access to financial services, who don’t want to use Fiat currencies, who prefer digital gold. And that’s an opportunity that as much or many more orders of magnitude larger than that. So, it’s been around for a while. It’s been de-risked. Every day that Bitcoins exists is a data point in favor of its continual existence. And I think that now’s the time when I think a lot of investors have finally gotten comfortable. But it’s by no means the late stages of this, we think that we’re still in the early stages.
Michael Hainsworth (22:03):
It seems remarkably complicated though. Do I just get a Bitcoin wallet, dumps some change into it, or does my financial advisor play a role in this?
Alex Tapscott (22:13):
There are various ways to get exposure. There are certain risks and limitations to owning Bitcoin directly and investing in it directly. First and foremost that a lot of people aren’t particularly comfortable trading and custodying and holding onto their own financial assets. And if they were to speak to their investment advisor, their investment advisor would give them some other suggestions on how to get exposure to that. Certainly NinePoint has an offering that they should ask their investment advisor about. I can’t speak to it in greater detail, but obviously I work for NinePoint. We have a real commitment to the digital asset space. And our objective is to give investors choice in this area.
Michael Hainsworth (22:56):
You describe Bitcoin as being in the bottom of the first inning. What do you say we pick up this conversation in the next episode with a look at what Bitcoin would look like by the time we hit the seventh inning stretch.
Alex Tapscott (23:08):
Sure. Sounds great.
Michael Hainsworth (23:09):
Thank you so much for your time and insight.
Alex Tapscott (23:10):
My pleasure. Thanks for having me.
Michael Hainsworth (23:12):
Alex Tapscott is the Managing Director of the Digital Asset Group at NinePoint Partners. I’m Michael Hainsworth. Thanks for listening.
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