To understand and decide whether bitcoin is a good store of value, consider first: real estate, commodities and other asset classes.
The real estate market.
About twenty years ago, I remember hearing folks talk about property being a store of value, something that has that ability to stand the test of time. In some ways that is true - real estate has not only been a good store of value but an instrument that has proven ability to deliver steady returns through capital appreciation and the accumulation of rental income.
Within Asia, the real estate market has not only demonstrated resilience through the ups and downs, but also a beneficiary of strong and steady economic growth, buoyed from the prosperity of its regional titans: China, Japan, Korea, as well as Southeast Asia. A rising tide lifts all boats.
Today, that thesis still holds to a certain extent. The returns are not as attractive but property is still pretty much the go-to choice for investors in search of a relatively safe-haven, even during a recessionary phase.
Property - especially in the residential segment - is an asset class that survives relatively well during times of turbulence and economic downturn. Rain or shine, the brick and mortar asset stands. People continue to 'trade' and invest in real estate because fundamentally, they know that a roof over the head is a basic foundation of life (at least based on Maslow's hierarchy of needs).
It is also a good proxy to the overall global economic cycle i.e. the more resilient the economy, the higher the value of the property.
Although the initial investment outlay can be high, real estate is a relatively liquid asset in a manner of speaking. And liquidity is an attribute in valuation that tends to be severely overlooked. In layman terms, this loosely translates to how easy it is for an asset to change hands. You can list your second-hand car for a million dollars on Carousell but at the end of the day, it's still worth nothing if it can't be sold. The price of a company's share is only as accurate and realistic as what it trades for, not the bid-ask price. Liquidity, furthermore is also driven by the concentration of buyers and sellers in the market and also shaped the perception of the asset by the broader market.
Lab grown diamonds.
Consider for a moment:
A diamond is valuable only because people say it is, not because of its clarity or cut.
Jewelers and advertising companies around the world have done an extremely successful job in positioning the diamond at the apex of all precious stones. But the raw material for diamond is carbon - one of the most commonly available elements found on earth, ranked many times above gold, silver and platinum. Yet despite being available in relatively large quantities, consumers continue to pay absurd amounts of money for a small rock mounted on a ring or co-joined in a necklace.
To add to the paradox, lab-grown diamonds are significantly cheaper than their natural counterparts, even though they share the exact same properties and make. In fact, according to this website:
"If you buy a lab-created diamond, you’d have a beautiful stone, yet no jeweler will buy it back."
Bitcoin as a store of value.
There's much talk lately about bitcoin being a store of value. I know very little about the world of bitcoin and cryptocurrencies - only limited to the banter that I read on Twitter and the news.
Is bitcoin a good store of value? Only time will tell.
Just like property, gold and other precious stones, it is considered a safe haven only as much as others see it. In this case, the devaluation (or eventual demise) of the dollar is one of the key catalysts in the appreciation in value of bitcoin i.e. investors are buying bitcoin and other cryptocurrencies largely because they have lost faith in fiat currency. And to take it to a certain extreme, they believe that the guy over the McDonald's counter will take only a bitcoin-equivalent and reject cash as you know it today.
While this may not mean much to most people, for a billionaire or any large institutional investor sitting on heaps of cash - a commodity that the US government has committed to producing even more over the next few years - this implies an erosion of their financially advantageous position.
Cash is no longer king.
I think that crypto-exchanges were created largely because of this phenomenon. These platforms are only viable and commercial if there is a sizeable market i.e. a significantly large pool of investors willing to seed the initiative and make the market. This is similar to early stock exchanges. They serve to provide an avenue for companies to raise capital, but also functions as an alternative route for investors looking to 'diversify' or park their money somewhere where they can (at some point of time in the future) re-allocate them to other asset classes. Everyone else in the 0.001% of the liquidity makes the market — smaller funds, family offices, retail investors, sheep, etc.
If you have written code before, you'll understand how painful and tedious is it to do software development.
There's a reason why successive versions of Microsoft Windows in its early days were so slow and buggy. One can of course attribute it to processor speed and memory space (software blaming hardware), but the reality is that it's simply too lengthy and costly to eliminate the bugs by re-writing and building an entire operating system from scratch. Why demolish and re-build something when customers are willing to settle for a product with some occasional bugs and flaws? Far easier it is to patch the errors than to re-invent the wheel.
So our financial system is not perfect: Benchmarking (or rigging) interest rates, opaque currency controls, money laundering, fraud, etc. But the undeniable truth is that paper currency (since its inception a thousand years ago) still works as a medium for the exchange of goods and services. To revamp today's highly complex financial system with bitcoin would take several generations of change and reforms; or a "grand reset" involving the total collapse of fiat currency (and breach of trust on a global scale), sending us all back to the barter trade economy.
Just like how asset values move in cycle with the economy, bitcoin will probably follow the same trajectory. However little we think about the value of cash, there are many commodities and asset classes out there which serve as good alternatives to what we define as a "store of value" and Bitcoin is only one of them.
“Rome wasn’t built in a day but they were laying bricks every hour.”
"The problem is that it can be really easy to overestimate the importance of building your Roman empire and underestimate the importance of laying another brick. It’s just another brick. Why worry about it? Much better to think about the dream of Rome. Right?
Actually Rome is just the result, the bricks are the system. The system is greater than the goal. Focusing on your habits is more important than worrying about your outcomes. Of course, there’s nothing necessarily impressive about laying a brick. It’s not a fantastic amount of work. It’s not a grand feat of strength or stamina or intelligence. Nobody is going to applaud you for it.
But laying a brick every day, year after year? That’s how you build an empire."
[Excerpt from James Clear]
I've seen too many people attempt to be "heroes" in their organisations. They seek the recognition, adulation, whatever you call it. But a five-minute fame is short-lived. At the end of the day, it is about whether you and the company can bring home the bacon. That's all that matters.
In a fast moving and digital world that seeks instant gratification, patience and foresight, are two highly underrated attributes amongst the young and inexperienced.
Three "epic fails" nearly wiped me clean this year. Here are five things I’d learned from these painful lessons:
1) Despair and greed (both) drive people to do irrational things.
Financial distress usually forces your hands. But “sudden-wealth syndrome” is also a real thing. It results in misplaced optimism, arrogance, and impairs one’s ability to make sound decisions, leading back to distress. It is true that ‘success is the greatest imposter’.
2) Learn to block out noise and opinions.
Investing is a very personal thing. Most people I meet so far tend to be prescriptive about what they invest in. They believe what they expound is the ‘holy grail’ and want to tell you what they know best. Sometimes, this is a manifestation of their experience and background. Other times this is just pure ego talking. I have learned that disagreeing doesn’t work well. 99% of the time, it just pays more to nod and agree.
I think sometimes people forget that:
What applies to you does not apply to me. Ipso facto, what works for you does not necessarily work for me.
At the end of the day, it’s your money. Use your own judgement to act and execute.
3) Diversification is not about putting money across 50 different stocks.
Diversification is not about beating the probability curve and putting capital to work across 50 different businesses. It is about setting aside an appropriate amount of cash, and with the deployed capital, to selectively invest only in the businesses which you understand.
The quality of an investment portfolio - whether it comprises tradable stocks or shareholdings in private businesses - should never be judged purely on their ‘rockstars’. Media has a tendency to over-hype on successes than failure (cos' who wants to be associated with a cynic?). Be realistic and accepting that a portfolio will inevitably have winners and losers. In my opinion, people like to judge their “stock-picking” capabilities on the winners, and undermine too much the missteps they make on their losers.
Collective performance of the portfolio is ultimately most important. Diversification is about risk management. And risk management is not about eliminating the bad eggs, it is about reducing the number of bad decisions, over time.
4) Make data-driven decisions.
Information is a privilege especially in a digital age today. Anyone providing you with privileged information is either trying to show off, or has something to gain from doing so. Constantly keeping this in mind will enable you to make more data-driven evaluations and eventually the right decisions.
The worst thing is ever do when it comes to investing is to blindly follow the lead of someone else.
5) Money is made in the sitting.
Humans are gamblers at heart. There is money to be made from gambling but we are also excited by its thrill - the thrill of knowing that loads of money can be made overnight in a few minutes. Somehow, we seek that thrill and the world today has also grown so used to instant gratification. The reality is that no one grows rich overnight. You are a winner if you had been able to leave the gambling table sober with a pocket of slightly more cash than when you came in.
Reality is: Stock markets exist to create avenues and platforms for companies to raise capital, not for investors to grow rich overnight.
And lastly, "you are only as free as your last trade":
I recall once a threatening trader abusing a terrified accountant with impunity, telling him things such as 'I am busying earning money to pay your salary' (insinuating that accounting didn't add to the bottom line of the firm). But no problem, the people you meet when riding high are also the those you meet when riding low, and I saw the fellow getting some (more subtle) abuse from the same accountant before he got fired, as he eventually ran out of luck. You are free - but only as free as your last trade.
- excerpt from the book "Skin in the Game", by Nassim Taleb