The true measure of Bitcoin’s success is Bitcoin’s price, not its intrinsic value

Market efficiency, the hypothesis that asset prices reflect all available information, has divided the advisory community.

Most advisors say the market is efficient and you should just own the market. As a result, they suggest investing in diversified portfolios or passive index funds rather than trying to pick individual stocks. They believe that the price of an asset reflects its value, and therefore the price is true.

Others say the market is inefficient. They tend to think that all employer retirement accounts have participants boxed in with no choice but some mix of stocks and bonds. They point to a number of areas in the market that have been inefficient – take energy in 2022 as a good example, because it currently makes up so little of the massive indices. And they argue that the price of assets often does not reflect their value and that prices can be inaccurate.

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However, the prevailing consensus tends to be that while the market is not perfectly efficient, it gets closer every year.

So why do so many financial advisors struggle to see bitcoin through the same market efficiency lens? They often cite it as a scam, bubble or tulip mania, but the market value of bitcoin has steadily increased since 2009 and has been the best performing asset for years.

It’s time for advisors to look in the mirror and ask why it is…

Financial advisors who preach the efficient market hypothesis while calling bitcoin a scam are contradicting themselves.

If the efficient market hypothesis states that a stock’s price is a good indicator of value, then the same standard should apply to bitcoin.

Price is truth if you believe in market efficiency. The longer the value of an asset is held or grows, the more it proves that there is value there, regardless of whether some or all market participants agree.

Bitcoin’s price reflects the demand for solid, global, free money. The market is open 24/7, 365 days a year and all market participants have the same information about how bitcoin operates. You can look at the mining hashrate hitting all-time highs, the number of daily active addresses, or the 24-hour settlement volume on the chain. All these charts have a clear pattern – an increase going up and to the right over the last 14 years.

Can bitcoin fluctuate wildly over shorter periods? Yes, but the price has drastically from an ROI and CAGR perspective dominated the other asset advisors available. It’s not an all-bitcoin or no-bitcoin decision.

Over time, if something is deemed worthless by the market, it will be sent to the agreed value or arbitrage away. The cryptocurrency market is full of these – recent examples are FTT and LUNA. And let’s not forget that pets.com and others have written their names in the history of big losers.

Many financial advisors also make the mistake of claiming that there is not enough history surrounding bitcoin to prove that the price is capable of sustaining itself over time.

However, by the end of 2022, the Bitcoin blockchain had traded and been active for more hours than the S&P 500. Bitcoin has traded for approximately 110,224 hours; S&P 500, 107,217. Now, critics may say that the S&P 500 has been around since 1959 and that history is important. But I’d say most of it is pre-internet history, and the world has changed since then. Bitcoin is also a more robust, unrestricted market – without reliance on a third party or the use of circuit breakers when information breaks or participants look for the exits.

I will tell you one thing bitcoin’s price does not reflect and that is intrinsic value. Many CFAs and industry professionals trot out this line about bitcoin.

My question is, what is intrinsic value? There is no such thing – value has and always will be subjective based on an individual’s needs at the time. Demand drives everything and always has.

The idea of ​​intrinsic value is a fool’s errand. The question of whether a Rolls Royce is worth more than a bottle of water is subjective based on where you are and what you need. The demand for water in the desert is certainly going to be higher than that of a Rolls Royce. I’m exaggerating to make my point, but demand drives value. It is unchanged over time.

The second reason to disregard intrinsic value arguments is that bitcoin is base money – it is not backed by anything, and that is because it is purely a monetary asset. An asset must only be “supported” by something else if it lacks the qualities people value most.

In her “3 Reasons I Invest in Bitcoin,” Lyn Alden says it best, “Although it has no industrial use, [bitcoin] is scarce, durable, portable, divisible, verifiable, storable, fungible, salable and recognized across national borders, and therefore has the characteristics of money. Like all ‘potential’ money, however, it needs sustained demand to have value.”

Bootstrapping from $0 to global money is one of the most important achievements of any technology. Bitcoin’s price reflects demand and adoption – nothing more, nothing less. We are living through the monetization of bitcoin and the ride will be bumpy and anything but linear.

Vijay Boyapati, in his book “The Bullish Case for Bitcoin,” sums it up this way: “No one alive has seen real-time monetization of a commodity (as happens with bitcoin), so there is precious little experience regarding the path this monetization will take.”

Most advisors still don’t see the need for bitcoin in their clients’ portfolios; they cannot see the forest for the trees.

The US will probably be the last place to need better money. We have had the “exorbitant privilege”, as French President General Charles de Gaulle said in 1965, of being the world’s reserve currency, so that we can be less affected by bad money. And I will not claim in this piece that the US dollar will fail (history tells us it will).

For most clients of advisors, however, bitcoin is the asymmetric allocation that, if wrong, doesn’t hurt them – but if right, is a lifeboat to preserve their lifestyle. The proper allocation for that preservation is how you make money as an advisor over the next decade.

The egos of too many financiers will prevent them from making a bitcoin recommendation until full consensus has been reached. Then the asymmetry will be gone – although it will never be bad to own bitcoin. The only error assignment in 2023 is zero.

So what does bitcoin’s price tell you today? It’s time to do your homework before the next halving and six-figure bitcoin price has everyone in a frenzy again.