WHAT CONCERNS INVESTORS ABOUT BITCOIN?
What Concerns Investors About Bitcoin?
In newsletter Vol 3, No. 2 we asked you to share your concerns about Bitcoin in a single question survey which is still open for your responses. For those of you who are not a current holder of Bitcoin, we asked what scares you most about it? For those who are already holders of Bitcoin, we asked you what stops you from buying more? Thank you to all of you who responded. In this newsletter we go through the initial results and also provide some answers to your concerns - in effect we hope to demystify Bitcoin for you.
Top Line Findings
This newsletter goes twice a month to over 10,000 people who are accredited investors. It also goes to a large number of institutional investors and even more family offices. For this survey we received back a statistically significant number of responses. We have not found significant differences in how various types of investors responded, and we saw little geographic variation.
What stands out for us is that a lot of concerns that we included in the survey received votes including a couple that were trojan horses to see if people understand what Bitcoin really is. We added them because we wanted to see if the fear, uncertainty and doubt (FUD) that others are spreading about Bitcoin might be hitting home. Some of it clearly is.
The other top line finding is simply the breadth of concerns getting votes. This can be read in several ways. Firstly, there may be a lot of legitimate concerns. Secondly, different investors may be concerned about different things. Thirdly, Bitcoin may simply be a confusing asset class with lots of chatter and lots of FUD - much of it being spread by people on the short side of the trade. We have demonstrated in years gone by, that uncertainty chills investment. Other research, such as the very good Bitwise study on US CFA's and Registered Investment Advisors show that more than 90% of those important players in the US investment scene have yet to place a first Bitcoin trade for themselves or their clients. When Bitcoin is performing as the world's highest performing asset, that looks like FUD to us. Said the other way, it does not look like an economically rational outcome.
So let's go through the top 7 concerns one by one (We will hold a future webinar to go through all of the concerns in greater detail than we can do in this newsletter).
Concern 1: Bitcoin keys are not safe to own - my Bitcoin will get hacked (33.4%)
This is appropriately at the top of the list, and in years gone by it is true that the only way to own bitcoin was to enter the ecosystem and take on self-custody including holding your Bitcoin keys yourself. Of course, the world has been worrying about this issue of safety for a few years now. Today, you don't need to self-custody your Bitcoin, and you don't need to take on any custodial risk directly. Institutional custody solutions are now in place including from institutional grade providers like SFOX (the leading independent crypto prime broker) where Matthew is Vice Chairman. If you fear for their security, you can also get Bitcoin exposure by investing in paper based instruments. Foremost among these are the offerings from Greyscale (i.e. GBTC) and Bitwise (i.e. BITW) - Blockchain Coinvestors is an investor in both. These can be invested in at no premium through their respective primary issuances, or you can invest in them in the secondary market including through your favorite brokerage account. There is no risk that you will be hacked. And you don't need to own any keys. You should do your own due diligence on their custody platforms - just as you would if you left your gold bars in your private bank lockbox. Not all providers are equally capable in the custody dimension - and incredibly to our way of thinking, some of the largest New York on ramps for Bitcoin access are outsourcing their custody and security to third parties.
Overall, we don't think this concern is valid unless you want to directly own Bitcoin and hold your own keys in which case you do need to ensure leading edge cybersecurity for your assets.
Concern 2: Bitcoin is too expensive now (31.3%)
This is a perennial fear for investors. No one wants to buy the last tulip bulb, at the highest ever price paid for a Liliaceae. It is why most people did not buy Amazon in any of the years during which its share price was going through a power curve. Each period, an investor would look at the last year's appreciation and argue themselves out of investing. "Amazon just went up xx%, it surely won't do that again. I can't justify this price based upon the intrinsic value." It is a common refrain, and there is some truth to the notion that nothing compounds geometrically for ever. Perhaps Bitcoin is already at its peak value?
It is a truism that beauty is in the eye of the beholder. For us, when we look at this chart of Bitcoin's annual appreciation, we can't help but see a beautiful pattern. When the world's fiat currencies are being printed in the trillions, they must be going down in value. In that context, scarce assets can only be relatively more valuable. So while we fear that Bitcoin will stop appreciating at these historical rates, we still greatly value its scarcity in a world where most monies are not. It seems to us that a small allocation (2 to 5%) might make sense since while you can lose 100% of 2 to 5% you might also see that 2 to 5% appreciate at rates like those in this chart. The asymmetry of returns is spectacular. What is your view?
Concern 3: Bitcoin is too volatile (25.0%)
Yes, Bitcoin is volatile. You can see the history by clicking here. It is declining over time as Bitcoin becomes more widely owned and traded, but it is still significant.
While traders care a great deal about volatility (and many of them need it for their trading strategies), we lean towards the view that short term volatility is not very relevant to long term investors who have the resources to avoid needing to dump assets in downturns. Which means most family offices for example. If you are going to buy some Bitcoin and HODL it for the long term, why does short term volatility matter at all? Multigenerational wealth is not impacted by daily or weekly volatility in speculative markets. However, this one is clearly a real and legitimate concern for those of you who worry more about the risk than the return (Bitcoin clearly far outperforms most other asset classes on a risk adjusted basis).
Concern 4: Bitcoin is not issued by a government, so it is not trustworthy (21.9%)
Implicit in the question is some faulty logic. Assets issued by governments are not always trustworthy either and many governments are not trustworthy when it comes to monetary policy. Ask the 4 billion or more people around the world who live in countries where their fiat currencies are hyperinflating, subject to expropriation, and are generally so untrustworthy that their citizens live in fear of waking up on a Monday to find out that their Friday night wealth has vanished over the weekend. While most of our readers are not citizens of countries like Argentina, Sudan, Venezuela and Zimbabwe we still think this observation is important in the context of Bitcoin. The value of Bitcoin is going to be driven by it's utility including to those 4 billion people. They need a sovereignless, distributed, portable money that can secure their family wealth in a world of untrustworthy governance. The VAST majority of those people have not yet discovered Bitcoin but they are going to.
For those of us in the EU, Japan, Switzerland, UK, US, and so on, we trust our governments much more and may feel that a money that is not backed by a central bank is untrustworthy. However, we have never before experienced the printing of fiat money on the scale of the last few months. Given the trillions of units of currency being printed, and the close to zero interest rates on cash (or negative at some banks i.e. in Switzerland) the jury is out on whether our trust is well placed. Perhaps a straddle on both sides of this debate might be a sound strategy.
Concern 5: Bitcoin is owned by a few people and this is a way for them to get rich (18.8%)
This is an interesting one. In the case of Bitcoin, there is a lot of false information that circulates on this issue of the concentration of ownership. Foremost among them is a bad analysis in which people take a look at the addresses owning Bitcoin and do simple concentration analyses on them such as in the chart that follows. Ten years ago, that was a fair way to assess Bitcoin ownership concentration. Today it is not. Binance, Coinbase, Greyscale, Huobi, Microstrategy, PayPal, Tesla and so on consolidate large Bitcoin holdings, and sometimes millions of investors or shareholders into one or a small number of addresses on the Bitcoin blockchain so the concentration analyses no longer hold water. Click here to see a list of Bitcoin treasuries and you will appreciate that addresses are no longer a good way to analyze Bitcoin ownership.
Meanwhile, we should also ask whether concentrated ownership makes an asset less attractive to an investor? Blackrock (BGI) where Alison was CFO is the world's largest asset manager and represents double digit ownership of most public equities. Furthermore, the world's most attractive public equities of the last few decades have been technology stocks and their ownership has been quite concentrated too. It is the reason why Elon Musk, Jeff Bezos, Bill Gates, Larry Ellison, Larry Page, Jack Ma, Sergey Brin, Mark Zuckerberg, and so on are today the world's wealthiest people. Do we run away from those assets because of this ownership concentration? Let's not even begin to consider gold, rare earths or diamonds where a few players control the world's mines, refineries and inventory. We think concentration does not mean unattractive per se.
It is true that a few cypherpunks, including Satoshi Nakamoto, own a great deal of Bitcoin. Why is that of concern to us? They invented it, just like our technology titans invented the world's most valuable companies. We think if you checked this box, you should look again. Is it the green monster (envy) that makes you unhappy that a few whales own lots of Bitcoin? It doesn't seem to be an issue that holds back most investors in most other asset classes.
Concern 6: Bitcoin is being taken over by Wall Street greed (18.8%)
We are interested why people checked this issue? Is it that you don't like Wall Street? Or perhaps you believe Bitcoin represents a worthwhile investment because of its decentralized and sovereignless design and you fear that those benefits are going to be lost? Or maybe you think that you don't have a trading edge and that once Wall Street gets into the game, you will be the roadkill? Perhaps there are other reasons why you might have checked this concern as fully one in five of you did. For us, we respect the world's financial centers and believe that they bring great expertise, capital, liquidity and trading acumen to asset classes and that this makes those asset classes MORE not LESS investable. As we watch institution after institution, from Blackrock to BNY Mellon and from Deutsche Bank to Mass Mutual declare that they are now investing into Bitcoin, we see that as good news and reason to be a holder - not a reason to dump Bitcoin. Are we missing something here?
Concern 7: Bitcoin is not scarce - you can subdivide it endlessly (15.6%)
Bitcoin is designed to be a scarce asset with a maximum of 21 million Bitcoins that can ever be minted. The monetary policy is hardwired and there is no chance of additional units being minted. It is true that bitcoin is in turn subdivided into small fractions called Satoshi's - there are 100 million Satoshi in 1 Bitcoin. But to keep it simple, you can subdivide a pizza as many times as you want, but there is still only one pizza.
To be fair, there is one concern that might have been a reason for checking this box. That is not the issue of subdivision, but rather the issue of forking. Bitcoin is open source software, and anyone can take the code, fork it, and potentially improve upon it. This is essentially what Bitcoin Cash or Bitcoin SV were all about. Should that concern you? Yes potentially. Just like when we were investors in Inktomi - the world's best search platform driving Ask Jeeves, Alta Vista, Yahoo Search etc. - only to wake up one day to find out that Google had made our technology obsolescent. So, conceivably, a new Bitcoin fork could appear that might make the current Bitcoin much less attractive. Assuming the hundreds of millions of Bitcoin holders all decided to throw in the towel and embrace the new protocol, this could lead to the demise of today's Bitcoin. However, that's like asking all the gold bugs to agree that platinum is the better precious metal (which of course it is - it is stronger, denser, rarer and has more utility of use cases) and dump the former to buy the latter.
We could keep going. However, we hope this has gone some way to demystify Bitcoin for you.
There are more concerns that you voted onto the list. We will schedule a webinar to go into more detail, so watch for that.
Thank you for reading.
Alison Davis
Matthew C. Le Merle
Fund Performance & Access
We are holding the final closing of Blockchain Coinvestors at the end of March. We are limited to 99 investors and currently have over 70 with another 15 in process. We may have to turn people away so please email us at your earliest convenience at ir@fifthera.com if you are interested. Existing investors may increase their commitment if they would like to by sending an email to the same address - we will provide an increase in commitment letter in return.
Blockchain Coinvestors Funds are continuing to generate strong returns. To date, over 80% of the funds we are invested in are performing as top quartile funds against the Cambridge Associates benchmark. This remarkable performance results from powerful tailwinds driving the world towards a future in which digital monies and digital assets are ubiquitous and the businesses and projects providing blockchain and crypto products, services, and infrastructure benefit disproportionately.
Blockchain Coinvestors funds are open to Accredited Investors and can take investments via IRAs. We support several providers, including Millennium Trust Company and Pacific Premier Trust Company (Pensco).
Our coinvestment program provides opportunities to invest into the follow-on rounds of the most promising of our combined portfolio of 250 and more blockchain companies.
Blockchain Coinvestors AngelList - Our syndicate on AngelList providing access to rounds that we are investing in. Blockchain, Crypto and Fintech. Click here to go to our Syndicate page on AngelList.
Please visit the Blockchain Coinvestors website to learn more about our offerings. You can also reach our Investor Relations team directly at ir@fifthera.com.
Register Now For Our Upcoming Webinars
Blockchain Coinvestors has a simple goal - provide the broadest coverage of the fastest growing blockchain companies and emerging unicorns. This webinar presents our investment strategy.
Blockchain Coinvestors Investment Thesis - March 1st, 7:00am PST
Blockchain Coinvestors Investment Thesis - March 1st, 12:00pm PST
Do you know the primary Blockchain VCs? Let us educate you about the VCs that are most closely connected to the blockchain ecosystem.
Meet the Blockchain VCs - March 15th, 7:00am PST
Meet the Blockchain VCs - March 15th, 12:00pm PST
Our webinar library can now be found at www.fifthera.com/webinars .
Appearances in 2020
We had the honor of presenting at multiple online conferences this year. A selection follows. Click links to listen to any you may have missed:
Inspired Insider: Early-stage investing hack and emerging opportunities
Digital Future: Why Digital Monies Change Everything for Business on VoiceAmerica podcast.
On The Brink: How to make sense of Digital Monies and Assets
We thank you once again for your support, and we hope that in this challenging time you and your family and loved ones are staying safe and healthy.
Best wishes,
Alison Davis
Matthew C. Le Merle