Bankers and financial professionals try to measure risk and returns using all kinds of academic and empirical bases - NPVs, IRRs, weighted average cost of capital, etc.
I introduce to you a new way of looking at risk: How much are you willing to lose?
Say you pay $10 to flip a coin. Heads: you get double the amount ($20), Tails: you walk away empty-handed. Now consider that it'll now cost you $1,000,000 to do this. Would you still take the chance?
Mathematical models involving the calculation of risk unfortunately omits the element of human emotion. For many investment decisions in Asia and other emerging markets, emotion is often a huge part of what drives the deal. This is probably the single biggest reason why your complex DCF and bullet-proof-calculated discount rates don't weigh very much in this part of the world.
Mispriced deals exist all the time because the stakeholders can't accept what they possibly could stand to lose.
Consider a scenario in which a business owner will never relinquish a partial stake in the company to an incoming buyer who has plans to break up the assets and change its corporate direction. Or a seller signing off on an under-valued transaction just to close the deal because he/she can't live with the possibility that there might not be another better offer on the table.
All risk models break down when you have everything (or nothing) to lose. Managing it gets easier when you are more diversified and don't go to the negotiating table with an all-or-nothing mentality.
The next time you are presented with an opportunity that offers a certain rate of return, think: what are you prepared to lose?
If I had learned anything at all over the last decade of my professional life and investing, it is that banking is a transaction-based business. Year-end performance appraisals are evaluated almost entirely based on the number of deals closed, number of trades made, etc. Not that is not obvious but we subconsciously ignore this when it comes to investing.
Much like brokerage firms, media works pretty much in the same way. Money is made on trades, and indirectly from viewership. The company who provides you with news and updates stays in business not because your knowledge is enriched, but because they are hoping that you will act on that piece of news - making that stock trade, sharing it with someone else who might act on it, and make money from the commissions. Bluntly speaking, these companies profit from the influence they have over their customers, and that has commercial value.
Once you come to understand this, stuff that you read online, you take with a pinch of salt, you analyze and approach it with a healthy sense of criticism (and sometimes skepticism). It will help you make better and well-informed decisions rather than acting on impulse.
"Money is made in the sitting."
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.