Bitcoin, a stateless digital currency, continues to captivate global investors. While it has some similarities with gold, it has captured the imagination of investors like nothing we have experienced in years. Over the last several weeks, bitcoin has climbed from $7,000 to $8,000 and now has even eclipsed $19,000 per coin. It doubled in value since mid-October 2017 and doubled again over the last couple of weeks. Year to date 2017, its value has soared well above ~ 1,000%. It took 1,230 days for it to eclipse $1,000 and another 1,269 days to eclipse $2,000. It took 16 days to move from $7,000 to $8,000 and only 7 days to move past $9,000 for the first time. Now, it is moving well over $1,000 on a daily basis.
The value of all bitcoins in existence is steadily approaching $400 billion. To put that into perspective, all US currency in circulation is $1.6 trillion. As “Fin Tech” specialists, we are constantly asked about our opinion on bitcoin and various other cryptocurrencies. It is our opinion that blockchain is the real story and technology advancement. Instead of understanding the underlying benefits of this general ledger system and its vast uses, too many people are mistaking this wonderful advancement for a digital currency that runs on this new technology. We will address blockchain and its opportunities in a soon-to-be released research note, but for now, we will address the newsworthy bitcoin phenomenon.
Just like we do not provide any expert opinion on currency movements in the US dollar, Chinese yuan, British pound, euro, and others, we do not believe there is much to add on predicting fiat currency moves. In this note, we will detail why we have a hard time believing bitcoin is a viable currency. In addition, we will attempt to transparently discuss how we plan on “investing” in bitcoin. For those that are loyal readers of our research, you can probably guess that it will be boring, predictable, and based upon trying to eliminate the majority of the underlying risk.
Fear of Missing Out:
Roughly a decade ago, we remember visiting Las Vegas and hearing stories of waitresses owning multiple condos, all without putting any money down for their purchase. We remember the taxi driver in New York City bragging about growing a real estate “empire” all possible without the traditional 20% down payment. Today, more and more people are looking to get exposure to the crypto currencies, even if many are simply looking to profit from a quick trade. One cannot attend a holiday party without hearing chatter about how “I made a fortune on bitcoin… just last week!”
Many conservative investors have shunned digital currencies because they lack a clear authoritative central bank or fiat backer, as well as a lack of true regulatory oversight. There is no doubt that retail interest in digital currencies has caught fever. If one watches CNBC or Bloomberg, every other segment is focused on bitcoin and its meteoric rise. We honestly do not know whether bitcoin is the tulip mania of the 1600s or if is what Cameron Winklevoss claims is a multi-trillion opportunity about to rise 20-fold over the next few years.
If the digital currency becomes more widely usable currency, it will ultimately prove successful. If bitcoin is a dramatic upgrade to gold, it will prove successful. We simply have too many doubts at this time to feel comfortable with the underlying asset. One of our biggest issues is that the bitcoin market has been a one-way market. We have been concerned that bitcoin is simply dominated by buyers, not sellers. Without a valid market to short bitcoin, it is our opinion that huge retail demand has spurred this unprecedented rise in value. Until real, regulated, experienced exchanges get involved, bitcoin was bound to simply be a one-way trade. For us, there was too much risk for getting involved because there was no industry exchange or reliable mechanism for pricing. These unregulated, opaque marketplaces were simply not equipped to properly value an instrument nor were they properly vetting their customers.
The traditional derivative exchanges are launching bitcoin futures and options over the next week. The most logical bitcoin sellers will be algorithmic shops or market makers willing to take a contrarian viewpoint. While there will be some doubt about the proper, transparent pricing mechanism employed, at least these regulated entities will utilize proven collateral, margin and clearinghouse techniques to insure transactions. These venues can legitimize bitcoin and should begin to dampen the massive volatility recently experienced.
Saying that bitcoin is going to melt up or blow up is not terribly profound. It has been wildly volatile and will remain so until the exchanges can begin to properly value the asset. Bitcoin was designed as a virtual currency that could be traded by two users without any governmental or bank involvement. Instead of regulated exchanges that know their customers and end users, bitcoins are often traded on message boards or marketplaces. Today, the underlying value of bitcoin is determined by decentralized marketplace calculations. Without a definitive source to quote, the price can vary across mediums. By relying on small, independent online exchanges, the price is simply set by two global individuals willing to transact. Fundamentally, we are comfortable with the market setting the price of any asset. This is the basis of our democratic society. However, message board pricing worries us significantly, and this decentralized marketplace is bound to have growing pains (i.e. hacks, dislocations, failures, shutdowns, etc).
A primary concern for bitcoin investors is the security of their assets. Hacking of digital currencies is a legitimate concern, as the industry has been the target of much fraud. Back in 2014, the largest bitcoin exchange – Mt. Gox in Japan – filed for bankruptcy, and investors lost more than $470 million. CoinDesk is often quoted as the main website for price discovery. Its index aggregates quotes across four other exchanges (Bitstamp, Coinbase, itBit and Bitfinex). We personally would not feel terribly comfortable that our assets were safely being guarded.
Back in the mid 1990s and early 2000s, the online brokerages (Fidelity, Charles Schwab, Ameritrade, E*Trade, and TD Waterhouse) were building out their infrastructure and online capabilities. When volumes surged, many experienced website outages preventing consumers from transacting online. On Wednesday November 29th, 2017, bitcoin prices whipsawed above $10,000, then $11,000 before falling to $9,500. Heavy trading of bitcoins, which hit a record level of more than 400,000 transactions, caused havoc on these newly created exchanges. At 10:32, Gemini, a NY based exchange, first began to report service disruptions and “degraded performance” on its website. At 11:07 am, San Francisco based Coinbase temporarily began to halt executing orders while it tried to stabilize its systems. Kraken, also based in San Francisco, reported “partially degraded service” while Bitstamp, an European bitcoin exchange, had its website inaccessible at 3:35 pm. It is quite apparent that these exchanges are not ready to handle the volume and are not prepared to be a valid marketplace of price discovery.
The Securities and Exchange Commission or SEC defines digital currencies and other digital assets as “a digital representation of value that can be digitally traded and functions as a medium of exchange, unit of account, or store of value.” From a legal standpoint, the status of cryptocurrencies has not been totally agreed upon. In the case SEC, vs. Trendon Shavers, a Texas magistrate judge ruled that, “bitcoin can be used as money… to purchase goods or services, and used to pay individual living expenses. Therefore, bitcoin is a currency or form of money.”
On the flip side of this legal argument, a Miami-Dade judge cited, in a money laundering case involving bitcoin, that the cryptocurrency “is not backed by anything… and is certainly not tangible wealth and cannot be hidden under a mattress like cash and gold bars.” As further legal cases and regulation are decided, the exact definition and legal standing of cryptocurrencies will become more established. In our opinion, it is too early to understand the ramifications of legal rulings on cryptocurrencies. Why is this important? Well, regulations need to be formally set and rules need to exist for this digital currency to be monitored.
The definition cited above is quite important for us, as the payment industry remains the single largest area of exposure in our concentrated portfolio. We have published various notes on the secular decline of cash (which can be read here). Other research has focused on which merchant processors and acquirers we prefer (seen here). We have published several notes on the dominant payment networks like Visa (NYSE:V) and MasterCard (NYSE:MA), which can be seen here. In September of 2016, we published a detailed note on PayPal (NASDAQ:PYPL). We spent nearly 20 pages discussing the opportunity in mobile wallets as well as the future of digital payments (seen here). The emerging payment business is a wonderful, secular growing industry. We prefer to own companies that win over time and every time, as opposed to being investors that need to be right on the underlying price movement of a particular asset.
Bitcoin And Currency:
In 2009, the pseudonymous creator of the cryptocurrency, Satoshi Nakamoto, designed bitcoin as a secure online alternative to cash. The number of bitcoins is limited to 21 million, and 16.7 million bitcoins exist today. According to data from Blockchain, Nakamoto is rumored to hold almost 4.7% of all the bitcoins that will ever exist. If current prices are a fair valuation, this would imply a net worth approaching $20 billion.
The intent was to make casual payments and lower transactions costs all without the involvement of traditional financial institutions. The goal was to bypass the bank-based fiat currency system and permit secure online transactions. Despite its intention, we feel like bitcoin fails to accomplish what its founder envisioned. Instead of permitting casual transactions at low costs, bitcoins are the preferred currency of libertarians and hoarders that fear central banks’ monetary policies which potentially could inflate away one’s savings.
The 1st Aspect of a Currency:
In our opinion, a currency becomes a valid currency when it has three main roles. First is does the currency act as a “medium of exchange”. Can we easily transact for goods and services utilizing the currency? If we walk into a store, we can transact in cash or various other mechanisms like credit or debit cards. If we purchase an item online, we are required to utilize cards or digital networks like PayPal.
On a daily basis, we continue to hear of online merchants that either plan or have decided to transact at the point-of-sale in bitcoin (examples include Overstock.com, certain select Subway locations, as well as potentially Square). So, do these merchants accepting bitcoin allow bitcoin to meet our definition of a currency? Before we state a definitive answer to this, we would like to know how many transactions are occurring on Overstock.com in bitcoin. Let’s walk through an example on why bitcoin, we believe, it will not be accepted at big box retailers for quite some time.
If you purchased a TV for at Best Buy for $1,000 a month ago using bitcoin, that TV transaction would equate to a $7,000 purchase. From the customers’ perspective, it would have been an awful use of their precious bitcoin. The customer would feel slighted because he or she could have purchased a much better TV for the equivalent bitcoin value. If you purchased a sub sandwich for $5 at a Subway a month ago, I sure hope it was the greatest sandwich you ever ate, as the equivalent cost would have easily gotten you a filet minion and wonderful Bordeaux at Capital Grille. Not only is bitcoin not widely accepted, we do not envision this will be the case for quite some time.
In addition, bitcoin fails to act as a good medium of exchange from the merchant perspective. First, merchants will need their merchant acquirer and processor to allow for bitcoin transactions to occur. This will not be simple and requires software to be rewritten. It has taken PayPal years to get a foot into physical stores, and it still struggles to get accepted anywhere but online. Bitcoin becoming a viable medium of exchange at the physical point of sale will be a herculean accomplishment. Even if a merchant wants to accept bitcoin, the fees associated with acceptance, called the MDR (or merchant discount rate), will likely be significantly higher than current costs of ~ 2.25%. Lastly, even if merchants were magically able to accept bitcoin payments and handle these two issues, we do not believe they would be willing to accept the volatility risk.
What do we mean? In the earlier example of a TV transactions at Best Buy (NYSE:BBY), the merchant probably has a 3-5% margin on the product. With Amazon slicing retailers margins in real-time, that might be too aggressive of an assumption. If Best Buy is selling that TV for $1,000, assuming a 5% margin, implies a cost to acquire of $950 (from Sony (NYSE:SNE) or Samsung (OTC:SSNLF) or Vizio (Pending:VZIO)). This example ignores Best Buy’s retail costs, like rent, employees, electricity, etc. If bitcoin is the currency involved in the TV transaction and it has a 10% move down overnight, Best Buy now has $900 of value in the bank. This would crush Best Buys economics and one would seriously question why Best Buy decided to accept transactions in bitcoin in the first place. A currency with that kind of volatility would require a merchant to be able to price and re-price its inventory in real time. If it were to accept bitcoin, this merchant would have to have a tremendous, but costly, hedging program.
We are not burying our head in the sand and defending the moat that traditional currencies have. We strongly feel that a currency is a valid medium of exchange when we can transact in it as an exchange of goods and services. Bitcoin is a poor medium of exchange for many reasons, but also because it has high fees associated with mining its transactions. We have the same problem classifying gold as a payment form. One obviously cannot easily walk into a store and pay with gold. Can you imagine walking into a Walgreens and slicing off a sliver of your gold bullion to pay for shampoo?
The 2nd Aspect of a Currency:
The second aspect of currency is for it to have the ability to act as a “store of value”. One needs to be fairly confident of what it might be worth in the future, especially from day to day. For example, the value of a US dollar freely floats and does get modestly eroded by the impact of inflation. However, consumers, merchants, and investors feel confident it can be a proper and stable store of value. One might question the Federal Reserve and whether or not they are properly monitoring inflation, but dollar volatility is modest. On the other hand, bitcoin has had five-day periods where it was up 44% or down 25% against the US dollar.
This volatility detracts from bitcoin as a “store of value” even before one understands the ability to store it. The storing of bitcoin is difficult. Bitcoin funds look to digital safes, where investors can store sheets of paper on which cryptographic keys are printed. To keep bitcoin safe from hackers, the costs to store the asset has eclipsed gold vaults.
Some investors consider bitcoin a safe haven that’s comparable to gold. These individuals believe that bitcoin is a modern-day version of gold equating it to Gold 2.0. With gold experiencing its tightest trading range since October 2005, many believe that cryptocurrencies are stealing market share from the precious metal. Like gold, bitcoin is not tied to one specific country or central bank. When there is an economic crisis or political uprising (i.e.: Venezuela, Syria, etc), a specific national currency can nosedive. Gold has multiple uses and its global nature can help to insulate its value from volatile problems. While gold benefits from crises and uncertainty and many perceive it as an the ultimate “store of value”, it does have issues. Gold fails the test as a viable medium for transacting. In our opinion, gold is a commodity, not a currency. While one can argue bitcoin’s applicability to act a currency based on the above two definitions, we believe it fails on both accounts. The volatility of bitcoin is way too high for individuals to safely store and we do not believe it will act as a medium of exchange for the foreseeable future.
Whenever new technology emerges, “old school” incumbents fear change. It happened during the Dot Com era, where the internet emerged as a widely popular new medium. While we were not there for its introduction, we imagine the same doubters voiced concern with the automobile, radio, newspaper, TV, etc.
We have heard people claim that big banks are the most at risk with the rise of bitcoin. JPMorgan’s Jaime Dimon has called it a “fraud” that will eventually “blow up”. BlackRock (NYSE:BLK) manages $6 trillion dollars of assets, and its management team has been quoted calling bitcoin an “index for money laundering”. Saudi billionaire investor Prince Alwaleed bin Talal said he expects bitcoin to “implode” shortly and compared it to an “Enron in the making.” Other financial luminaries, like Warren Buffett and Seth Klarman, have also expressed skepticism on bitcoin.
To summarize these naysayers, they argue that bitcoin is bad at being PayPal, MasterCard, or Visa as a payment form. On this aspect, we total agree (see above). Bitcoin and other cryptocurrencies are not terrible good at being a mechanism of payment. These traditional franchises view bitcoin as a threat, but probably more as a potential new competitor. Instead of acting as a payment mechanism or replacement currency, what if bitcoin could bypass traditional financial institutions, act as an online, offshore banking system and allow customers to easily transact without the watchful eye of the government? This is rightfully their worry.
There is no doubt that bitcoin, with its ability to escape the eye of the law, has become the preferred avenue for aiding illegal commence. The creator of the underground online drug bazaar Silk Road, Ross Ulbricht, had his stash of bitcoins seized once he received his life sentence for drug trafficking, conspiracy to launder money and various other crimes. We are reminded daily of stories of hackers asking for and receiving payment in bitcoins for extortion plots (ex: Uber three weeks ago). Bitcoin bulls will argue that its reputation for being the currency of criminals is unjust, as many dishonest people have conducted illegal transactions in US dollars, euros, and other various currencies. The difference, at least in our opinion, is that these other fiat currencies are not based on an infrastructure that does not and will not allow any regulatory supervision.
Governments attempt to control their currency, monetary policy, and their printing press, but market forces ultimately determine value. The threat of cryptocurrencies worries governments because they would lose control of their currency, which in turn would mean they lose control of their economy and could potentially lead to chaos. Governments around the world will simply not allow this to occur.
Without regulation to stabilize this highly temperamental, mysterious “financial vehicle”, it is hard to formulate an effective investment strategy involving bitcoin. In our modern society, with its laws and rules, a currency must adhere to financial regulations. Banks must insure and KYC or “know their customers”. This allows governmental agencies to verify transactions and prevent money laundering. In addition, governments must be able to uphold the law and importantly take and earn taxes. Bitcoin believers are claiming that these old school CEOs simply do not understand the way the world is going and that they are “dinosaurs”. We could not disagree more and feel it misses the overriding point. US financial institutions are the most regulated entities in the world, and they are quite aware of the risks involved in moving money. In our opinion, Bitcoin skirts these rules and will eventually be banned by governments. Back in September, the Chinese government cracked down on bitcoin traders and its value plummeted by 10% to 15%. Up until a few months ago, data suggested that 60% of trading was occurring in Japanese yen. Once the Japanese government begins to ask and attempt to understand who is transacting in the digital currency, volatility will spike.
Here in the US, regulators are beginning to ask questions. Recognizing that bitcoin is largely an unregulated market with high price volatility, US regulators are intrigued. Are they looking to protect the average, retail customer? Are they looking for information regarding taxable transactions? Are they looking into criminal actions? We would have to believe the answer to all of these questions is yes. This is only natural, as regulators are supposed to provide the rules and framework for orderly markets. They are relied upon to insure adequate guardrails and consumer protections for investors. J. Christopher Giancarlo, chairman of the CFTC, said “Bitcoin, a virtual currency, is a commodity unlike any the commission has dealt with in the past,” and “as a result, we have had extensive discussions with the exchanges regarding the proposed contracts.” CME, CBOE and Cantor have agreed to significant enhancements to help protect customers and maintain an orderly market”.
These are the proper actions of a regulator and we are pleased some discipline has been brought to this “wild west” marketplace. Regulators are forcing exchanges to monitor trading, track risk indicators and insure proper market and margin requirements. The goal is to mute volatility in bitcoin and ultimately make it more viable as a payment instrument
With tax reform coming to the US, how long will it take for our government to begin to question bitcoin. Some individuals or entities have significant gains on its rapid rise in value. Shouldn’t these trades be subject to the same currency transaction taxation laws other traders deal with? We believe that the SEC will conclude that bitcoin is an unregulated market because it does not have the proper surveillance in place to monitor its transactions. Maybe FINRA (Financial Industry Regulatory Authority) or the CFTC (Commodities Futures Trading Commission) will comment on bitcoin. Either way, there does not seem to be a way to properly monitor and track the transactions.
The IRS, presumably eager to collect taxes on profits, has issued a Notice called 2014-21. It designates that virtual currencies can and should be treated as property for U.S. federal tax purposes. This is important as this means that general rules for property transactions should apply. While the IRS has not issued any guidance on token exchanges, many tax professionals agree that such an exchange would probably not qualify for §1031 treatment. This would have provided for deferral of gains or losses arising from a bitcoin transaction. We anxiously wait for rules that will require traders in the digital asset space to be forced to use a mark-to-market 475 election. This would force investment gains and losses to be recognized in the current period and trigger the occurrence of a taxable event.
If any customer opens up a traditional brokerage account, regulations force financial institutions to follow a stringent set of rules. While cumbersome to enforce, banks adhere and follow these rules. Coinbase, the leading broker of bitcoin, obviously feels that it is not subject to the same set of regulations.
Nearly a year ago, the IRS asked Coinbase to provide all its customer information, like names, birth dates, addresses, tax IDs, transaction logs, and account invoices. Coinbase argued that this was an “invasion of privacy” and ignored the IRS’s request. Then, in March of 2017, the IRS filed a petition to enforce its summons. On Wednesday, November 29th, 2017, the courts ordered Coinbase to hand over information on its users that made transactions over $20,000 from 2013 through 2015. Coinbase cheered the decision, as it will only have to release 3% of its information that the IRS originally requested. The ruling will give the IRS information on 14,355 Coinbase customers that made 8.9 million bitcoin transactions.
In our opinion, this presents two interesting points. The 1st is that bitcoin was originally conceived to be entirely devoid of regulation and oversight. If bitcoin becomes a legitimate asset class or currency, it will have to begin to adopt traditional “know your customer” rules. The 2nd interesting aspect revolves around customer protections. If the average US brokerage customer wants the safety and soundness of a properly functioning marketplace, with client protections and clearing mechanisms, he or she must be willing to accept the government’s oversight. Coinbase cannot have it both ways. It cannot be the marketplace where consumers transact, but fail to play by the same exact rules as other banks, brokerages or financial institutions have to play by.
Where could we be wrong?
When legendary Interactive Brokers founder Thomas Peterffy discusses market issues, one would be very wise to listen. As one of the world’s most successful derivatives traders, Peterffy understands volatility and where problems can lie. He worries that bitcoin derivatives, launched by CME or CBOE, will introduce additional volatility into the markets. If the exchanges are not properly prepared, he is worried it might lead to an uncontrollable event. Specifically, Peterffy is concerned that low margin rates will encourage excessive speculation, and then endanger both trading firms and their significantly important clearinghouses.
Futures margin rates typically range from 2% to 8%. When an investor’s losses exceed this range, brokers can immediately cover the decline and pursue any differences with the client. If bitcoin were to drop by 15% to 20% intraday, brokers would not be equipped to cover losses. What really worries Peterffy is that he foresees smaller and smaller trading firms offering lower and lower margin rates to attract business. This would bring more activity to the weakest link and to brokers least capable of handling a dramatic fall. If more bitcoin volume “accumulates on the books of weaker clearing members who will all fail in a large move”, Peterffy is “extremely scared”. The danger to the financial system is real, so regulations and rules are needed.
Enter The Exchanges:
Our version of financials are not traditional banks and brokers, with opaque balance sheets requiring hours for analysts to decipher earnings releases. We prefer to own the exchanges, with their transparent, transaction based business models. In May of 2016, we wrote a detailed note (which can be re-read here) on the value we foresaw in CME Group.
CME, the world’s leading and most diverse derivatives marketplace, has announced how it intends to list its bitcoin futures contract. Futures allow two parties to exchange an asset at a specified price at an agreed upon date in the future. It will launch on Monday, December 18, 2017, and has received the pseudo blessing from the CFTC (its regulator). Working with market participants on its design, bitcoin investors will have significantly more transparency, price discover and risk transfer capabilities. Considering that bitcoin is highly volatile and somewhat of a developing story, the CME intends to evolve its process. At launch, the bitcoin contract will be subject to a significant amount of risk management tools, including an initial margin of 35%. Positions will be marked intraday, with stringent price limits. In addition, there will be a number of additional risk and credit controls that CME enforces to ensure proper safeguards. The future contract will be cash-settled, which will help to dampen volatility. Some futures contracts are settled in the underlying assets (i.e.: settling with a barrel of oil), so cash settling should lower the need and access of the underlying. Pricing will be determined once-a-day using CME’s Bitcoin Reference Rate (or BRR) which has been designed around industry standard IOSCO Principles for Financial Benchmarks. There will be a price limit of 20% above or below the prior settlement price. Each contract will be composed of 5 bitcoins or $25 per contract and the spot position limit will be 1,000 contracts.
CBOE announced on December 1st, 2017, that it has filed a product certification with the CFTC to offer bitcoin futures trading and it is now under regulatory review. The bitcoin futures battle is just beginning and Nasdaq will likely join the party in the 1st or 2nd quarter of 2018. We were surprised that Intercontinental Exchange, owner of the New York Stock Exchange, decided to take a wait-and-see approach to bitcoin. Even as its largest two competitors are rolling out cryptocurrency options and futures contracts, ICE’s Chairman and CEO Jeff Sprecher is taking a pause. Whether or not this proves wise will be determined in the next quarter or two. For exchanges, liquidity begets liquidity and volumes beget volumes. The exchange that creates a product that the general public likes to trade will ultimately win out. It does not need to be a “winner take all”, but there likely will not be more than 2 or 3 exchange winners.
How We Will “Play” Bitcoin:
Our regular readers understand, know, and appreciate our long-term approach to investing. We will continue to “stick to our knitting” and invest in wonderful, growing, Fin Tech franchises. Investing in bitcoins would be akin to us investing in foreign currencies. It simply is not in our DNA. However, we will profit from the impending explosion of volumes underlying bitcoin trading. How? Well, we own the publicly traded exchanges. Whether CME or CBOE ultimately wins the bitcoin futures or options battle, we will benefit. Whether traditional bank CEOs want it to happen or not, digital currencies as an asset class are not going away. We do foresee a much tighter regulatory environment with heightened governmental oversight.
Whether bitcoin goes from $19,000 to $1,000 or rockets higher to $50,000, our exchanges will benefit. Exchanges make money on volatility and are less concerned with underlying prices. Exchanges are primarily concerned with providing a venue for orderly price discovery. With bitcoin being the world’s most volatile trading product, exchanges are quite excited to profit on this investor craving. Just like we do not estimate and then bet on the price of oil, commodities or currencies, we choose to invest and then benefit from volatility. We prefer to invest in secular growth businesses and not make speculative bets on an assets future price swings.
In the California Gold Rush, thousands went West seeking gold and a fortune. Some hit it big, while others failed to even reach those “streams filled with gold”. We liken this example to the bitcoin frenzy occurring today. Some might become digital currency millionaires. Some might lose a small fortune on bitcoin. Either way, we will not participate in the traditional sense of betting on a digital or traditional currency. This is no different than our perspective on any currency, commodity or asset class. We do not bet on price swings. We invest in growing companies trading at a discount to their intrinsic value. As we have said many times, we prefer to invest in secular growing businesses, that have predictable ways of generating free cash flow and profits.
During the Gold Rush, Levi Strauss made a small fortune, not searching for gold in those crowded steams. He opened a store, selling pans, shovels, bedding and clothing. Those seeking their fortune needed a merchant to supply them with their necessary dry goods. We believe the exchanges are the modern-day bitcoin merchant.
Until the exchanges, acting as middlemen and insuring proper marks emerged, we were unable to participate in this marketplace. Now that the experienced exchanges and their trusted clearinghouses are involved, we are happy to participate with the impending volatility, activity, and volumes. We cannot wait for millions of retail consumers to make a bet on bitcoin. We cannot wait for institutions, hedge funds or entities to make a bet on either side of the equation. In our perspective, we simply want volumes to rise. Good luck to all of you seeking your fortune betting on bitcoin’s rapid rise or those that cannot wait to profit on its demise. We will gladly own the exchanges, generating pennies per transaction, but hopefully on millions of transactions.
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Disclosure: I am/we are long CME, CBOE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.