Follow Bernstein – Make Bitcoin (BTC) part of your survival plan

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Which brings us to investment legend Peter L Bernstein, the author of the seminal work on finance and risk Capital Ideas: The Improbable Origins of Modern Wall Street.

The book, published in 1991, is currently the subject of a series by John Authers, formerly of the Financial Times and now with Bloomberg and tells the story of how the ideas of the academe infiltrated and came to dominate on Wall Street.

Bernstein explains how the advent of tax-free pension investments began to transform the investment landscape in the US in the 50s and 60s and how by the early 70s risk management was rising up the agenda. These changes meant new techniques and strategies for managing wealth came to the fore, from the Black Scholes Model to efficient market hypothesis, the latter of which Bernstein was a key populariser and refiner.

For Bernstein the key was not to lose money, to stay safe, mitigate risk. Despite the advances Bernstein outlines, off-the-charts risk-taking has in fact been fuelled by the policies of central bankers spurred on, perversely, by worries about the risks facing the financial system.

Crypto critics such as economist Nouriel Roubini will be quick to jump in here to remind the reader that bitcoin is indicative of the extreme extent to which that risk-taking has gone, but this won’t concern us here, as this article can be read as a rebuttal of Dr Doom’s underlying thesis concerning bitcoin’s supposed irrelevance.

In an interview conducted before Lehman Brothers disappeared from the face of the Earth in September 2008 at the height of the financial crisis, Bernstein commented: “Understanding that we do not know the future is such a simple statement, but it’s so important… survival is the only road to riches”.

He went on: “You should try to maximise return only if losses would threaten your survival and if you have a compelling future need for the extra gains you might earn.”

That sounds like an argument for keeping well away from bitcoin but bear with me because what it does, by inference, reveal underneath the portfolio management advice the fragility of the current financial system.

In a second interview, also before the collapse of Lehman Brothers but after having seen enough to be able to pass judgement on a future that had not fully come into view, Bernstein’s observations are more explicit in regard to the general health of the system.

“It took a very long time to get the memory of the Depression out of business decisions. I think this is going to be the same. The Fed, too, is going to be less decisive and is going to feel that what it should do is less clear.

“One of the things that gave people a sense that they could afford to take risks  was the sense that the central bankers more or less know what they are doing. But I don’t think we are going to feel that way going forward…”

You betcha!

Follow Bernstein – Make Bitcoin (BTC) part of your survival plan

Arthur Hayes says bitcoin will go to $50,000.

That’s actually a fairly conservative target, as Hayes himself suggests, if he takes to the logical conclusion the arguments he employs to justify his bullish pronouncement.

At the root of BitMEX chief executive Hayes’s thinking is a much-noted investment super theme, found to be in use by many a mutual fund manager: demographics

For instance, from China to India, where the middle class is on the rise, a common investment theme – the growing middle class in emerging markets – sees savvy investors focus on companies producing those products and services that a growing middle class could be expected to make increasing use of, from eating more red meat to spending more on education or using brokerage services, to name just three.

When it comes to the future of crypto, the adoption story is similarly rooted in a demographic imperative, and Hayes is by no means the first to take notice. The millennials are coming!

Incidentally, China and India are the places where Hayes expects crypto digital money to take hold first.

Not enough of the right sort of money – Gresham’s Law, MMT and Bitcoin (BTC)

In an interview with Venture Coinist Hayes lays out the now familiar assumptions of many in the crypto world, which it might be said is basically a reworking of the Gresham’s Law maxim that bad money drives out good.

There are lots of issues that arise from Gresham’s law’s application to crypto vis a vis fiat money, chief among them being that the money Gresham had in mind was the commodity form, where the one with the lower metallic value but same nominal face value of another, would drive the latter out of circulation and into hoardes.

Of course, fiat isn’t commodity money and some would say crypto isn’t either, so the theory should break down. But, for crypto believers it does not.

In such a view, the circulating paper money issued at the whim (fiat) of governments has no intrinsic value. In truth though it does if we think more imaginatively. Ultimately paper money (and coins containing less metallic value than their face value) is backed by the tax base and assets (land, state-owned industries and services) of the nation state that issues it.

So what happens when the government starts issuing money willy-nilly, out of all proportion to the commerce it is required to set in motion and the ability of its tax base to sustain?

A debate is raging in economics (and politics) about so-called Modern Monetary Theory (MMT) which has is that a government with a monopoly over its currency – which in the US case means a monopoly over the world’s reserve currency – does not need to overly worry about money issuance, except to make sure there’s enough of it for the economy’s needs and not too much (reduced by fiscal measures such as increasing taxes) that it stunts growth and creates unemployment.

The implications of this theory for crypto haven’t been fully explored and its post-Keynesian roots seem to borrow from those who see monetary policy as the crucial economic lever. But MMT or not, the perceived weaknesses or otherwise of the financial system is crypto’s l’overture – for crypto people there is not enough money of the right type.

It’s obviously where bitcoin comes in. But before it does, the breakdown of the existing money system begins or, more correctly, continues and deepens.

Central bank policy of inflating the money supply to protect and arguably inflate the value of assets continues apace, despite fears last year of a sharp turn in policy.

This is most clearly seen in the policy U-turn of the US Federal Reserve. Weaning off the morphine had begun but as weak global growth pressed in on policymakers’ room for manoeuvre in the US and elsewhere, the tap of cheap money was left running.

This is what Hayes derides as the “silliness” of central bank policy.

He believes it will keep the equities party going a little longer, which he sees as evident in tech companies such as Lyft and Uber grabbing their last chance to go public and the VCs of getting their fat exits. That will stall the price appreciation of bitcoin but not for long he claims.

Returning to Gresham’s law, if the good money is withdrawn from circulation what does that mean for bitcoin as digital cash?

Well it implies it is set to increasingly become a store of value that is not used very much in the realm of circulation. That’s not necessarily a bad thing as it leaves intact its putative role as the digital gold of the 21st century.

And for those that doubt that, it is the proof-of-work consensus that makes bitcoin akin to a commodity form of money, with its value derived from the computing power devoted to is network.

In this scenario, a crypto(s) other than bitcoin can still circulate as an everyday means of payment, state-issued and private.

Millennials are at the heart of the digital money investment theme

This bring us to the second part of Hayes’s musings that’s worthy of dwelling on: demographics, which, for our purposes, can be boiled down to its constituent parts as a mixture of behavioural and thematic investing.

Hayes hitches bitcoin’s prospects to the future, the millennials – those reaching adulthood at the beginning of the the 21st century.

Certainly, the baby-boomers who drove the post-war economic boom still find it difficult to get their head round money made from code, but for the millennials used to music and films that ultimately are stored and downloaded as code, nothing could be more obvious.

Besides, as Hayes points out, the baby boomers are running down their assets, or handing them down, while the millennials are just starting to build there’s up.

Here’s Hayes take on the digital natives:

“Now that we’ve come to this time period where the baby booming generation and the older Gen Xers are entering the years when they are disposing of assets, their tastes and preferences are less relevant than the younger generation, Millennials, who are entering their prime asset earning years. And so what do we know about Millennials?”

Hayes tell us what we know: “Some of them, on the younger end of the spectrum, are digital natives, mobile first. They’ve had a screen in their hand since they were a young child. They’re very comfortable using a service which has very little human interaction.”

And it might be added at this juncture that millennials are also presumably happy (or ignorant of) with the enormous computing power that goes into making artificial intelligence possible, and will continue to do so at an exponential rate.

Hayes continues: “So, if you take this sort of change in how we deal with services, and we bring it to the financial services ecosystem, you can see that analogue ways of dealing with money and trading are not going to be successful in the next 10 to 20 years. It’s going to be mobile-first platforms. It’s going to be platforms that deal only on the internet.”

And with cash being squeezed out of the system or otherwise falling into abeyance, with digital payments taking its place, cryptographically secured digital cash comes into play.

Hayes again: “And that’s where I see the value proposition of Bitcoin finally clicking in everyone’s head, when they realize, ‘Oh shit. I used to be able to take out a $10 bill and go buy a dime bag of weed. But I can’t do that anymore. There’s no more cash. I have to use this app’…”

By the way, we return to marijuana a little later, but so as not to be distracted let’s take note here that Hayes is outlining what may probably turn out to be one of the greatest investment opportunities of the millennium.

The world into which bitcoin was born – from Gillette and Tampax to crypto

We quote Bernstein at length because he puts into a nutshell where the economy is at today with stunning prescience. There will be no more V-shaped recovery. L-shaped is more likely or a flat U, says Bernstein.

This is the world into which bitcoin was borne. Indeed, it is why it was born. It is not just an economic reaction but a profound social one.

Paradoxically however, the world in which risks are successfully, for now, mitigated by central bankers may be coming to an end if a global recession appears on the horizon in a year or so. Then we might find those masters of the universe at the Fed and elsewhere have empty medicine bags and nothing to treat the patient.

Authers returns to Capital Ideas for some advice on what a worried investor should do.

There was a time, in the early 1960s, when two brands were bringing in cash but were nevertheless out-of-favour with investors. They were Gillette and Tampax, companies long since consumed by the Proctor & Gamble.

If you had been a contrarian investor who eschewed following the crowd, you would have done well in the 1960s by investing in those two companies.

That’s what Bernstein-Macaulay did for its clients when Peter Bernstein was working for the family firm in 1961.

These undervalued companies were shunned for two reasons. One, they didn’t pay a dividend and two, being consumer staples they were just not very sexy. In the case of Tampax the stock was just downright embarrassing to talk about because of the ridiculous taboo that was/is menstruation.

Investment managers didn’t want to have a conversation with clients about tampons. And razors, although not the arena of taboos, was not exactly sexy either, added to which no one in 1961 thought buying the disposal variant would catch on in the way that it did.

Bernstein explained his demographic theme investing strategy thus: “We called it ‘investing in the puberty boom’. We bought heavy positions in Gillette and Tampax (then a highly controversial stock to own, and awkward even to suggest to a client of either sex).”

Incidentally, as Authers reminds us, things have improved in terms of talking about menstruation (there are ads that actually mention the subject at hand) but not as much as we might like to think (it’s the patriarchy).

However, the important point was that the prevalence of such attitudes and the coincident rise of the baby boomers meant that Tampax (and Gillette, because the baby boomers took to disposable razors in their millions) was undervalued.

“If you can find something that makes people today as squeamish as Tampax apparently did in 1961 (I hate to suggest it, but maybe marijuana?) that could be a good idea,” Authers advises.

Ok, so crypto doesn’t make the mainstream squeamish and for Authers probably has other features that keep if off his buy list. But actually, its mere mention is likely to be heart attack-inducing, as opposed to merely bring on nausea, because of its supposed valuelessness and proven ability to attract speculators and charlatans.

Notwithstanding any of that though, if bitcoin is in some way part of the answer as far digital money goes – although perhaps not most of the 2,000 other crypto, then we should definitely place it among Authers’s bracketed undervalued plays alongside marijuana.

Having said that, bitcoin’s  economic and social impact may be much greater than that of the weed whose family name Authers is somewhat shame-faced to mention.

If we are not at the bottom of the crypto bear market it looks like we are pretty near. That could make today a good time to start investing in bitcoin.

But timing the market is not a great look as it is extremely difficult to do successfully.

A far better approach, one with which Bernstein would no doubt have agreed (he died on 2009), is to do the bottom-up research to find undervalued stocks, or an instrument in another asset class and then drip-feed into the market. But to be fair he would probably have put crypto in the way too risky bag although may not have been quite as quick to dismiss it out of hand.

As for BitMEX’s Hayes, he says bitcoin at $10,000 is easily achievable before year’s end, and sees it even higher over the next few years.

“In terms of a price target, I don’t know, say $50,000 in the next two to five years. But it could go materially higher if the world plays out the way I think it’s going to play out.”

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