A Top Personal Finance Expert Is Super Bullish on Bitcoin. What If He is Wrong?
June 12, 2023
Our hypothetical SEC employee started their journey on June 1. Third week into the job, the crypto research continues…
Your research on Michael Saylor left you a little frustrated. You still can’t believe how a seemingly smart guy like him (he has dual degrees from MIT) can, with a straight face, recommend to people that they basically drop everything they are doing, sell everything they have, mortgage their house and use all those resources to buy more Bitcoin. This strikes you as extremely irresponsible. When the interviewer tried to soften Saylor’s stance just a little bit, by invoking the 80-20 rule (also known as the Pareto Principle), perhaps hoping Saylor would at least say something like, “keep 20% in something else,” Saylor actually doubled down and effectively said, “Nope. All in on Bitcoin.”
You start seeing the problem within the problem. The root cause of all this, of course, is definitional: Bitcoin is not investing, but is being advertised as such. Sellers of speculation are already incentivized to sell it as investing, but what about buyers? Why do they want this? Don’t they really care about safety? In fact, if they don’t, why not just admit you are speculating?
The likely reason why others won’t admit to being a speculator is because they view speculation and gambling one and the same. While that is not true, that’s the perception. Thus, people are not willing to admit they are speculating, the more convenient and better looking perception is that they are investing; they fancy themselves as investors. Therefore, they seek the voices they feel they can trust.
Dear Reader,
Is this you? Are you unwilling to admit that you are speculating and you need
others' opinions to cover for your unwillingness?
You realize Michael Saylor and people like him can potentially cause a lot of harm. They are smart, charismatic, have the pedigree and are able to make the crowds follow them. Obviously, people like Saylor are entitled to their opinions, which is why establishing consensus on definitions of important terms like investing is one of the best things that regulators can do.
You know where you want to take your research next; a focus on other people that are smart and have gained society’s trust. You turn your attention to personal finance experts. Surely, some of them must have formulated some opinions on Bitcoin, and more generally crypto. One of the biggest names in the industry is Ric Edelman, and yes, he does have some opinions on crypto...
Ric Edelman has quite the resume:
#1 New York Times bestselling author
12 books on personal finance.
Ranked #1 Independent Financial Advisor by Barron’s three times
Inducted into Research Magazine’s and Barron’s Financial Advisor Halls of Fame
He also has rather strong opinions on Bitcoin. We recommend that you watch the whole thing (11 mins and change)
What are some of his key messages? Let’s see:
[Referring to Bitcoin] This is a transformative technology that’s going to change the way commerce is conducted on a global scale and that is both very very disruptive, it’s also very very opportunistic. This is a once-in-a-generation chance to engage in something totally new and different that has amazing investment potential. (emphasis added)
Once-in-a-generation chance? Amazing investment potential? The problem is deeper than you think.
The first new asset class in 150 years.
Damodaran obviously disagrees.
You find that really scary. In one corner, you have Aswath Damodaran, who teaches corporate finance and valuation at the Stern School of Business at NYU. He wrote 11 books, mostly on valuation and investment. In the other corner, you have Ric Edelman, who has written 12 personal finance books and has won quite a few awards.
Yet, on the issue of Bitcoin, Damodaran and Edelman have a fundamental,
and irreconcilable difference.
“If Damodaran and Edelman, people at the very top of literally the same profession - finance - can’t agree, how can we expect the public to do the right thing?” you wonder. “How can we protect them?” Of course, you are well aware that your employer currently doesn’t agree with Damodaran on this either.
Nothing in common with stocks, bonds, gold, real estate, commodities, oil…
You agree with Edelman that Bitcoin doesn’t have anything in common with stocks, bonds or real estate, all cash-flow generating assets. But gold? Whether or not it will hold up remains to be seen, but many people in the industry actually tell the narrative of “Bitcoin is digital gold.” This strikes you as an area where Edelman actually diverges from a majority of other Bitcoin supporters.
So most advisors are just dismissive, it’s a fad or it’s a fraud. It’s a tulip bulb or beanie baby. Stay away.
Well…What is the difference between a tulip bulb and Bitcoin? Edelman’s explanation:
That argument… It might have worked five or eight years ago. Today you look silly saying that.
You now understand the problem better. When it comes to whether or not something is an asset, people like Buffett, Munger, Damodaran and Dimon are not concerned with timing at all. The question is fully resolved by evaluating the design of the thing - and the threshold question is cash flows. Of course, unless you change the design - if an “asset” that doesn't generate cash flows (or has cash flow generation potential in the future like stocks) on day 1, it will not have it in 5, 10, or 5,000 years.
Edelman’s view is clearly different. He looks at adoption, and if enough buyers stick around after a few years (unclear where that crossing point is for him), now the tool is elevated to the “asset” category. That it doesn’t produce any cash flows (and never will) is not a concern for him. It’s widely adopted, and that’s all he needs. You wonder: “Is it safe to consider something a new asset class based solely on an adoption level? If so, how would we determine that level?”
What’s the investment thesis?
Well, there is none.
There is so much of a demand for education and knowledge. There is nowhere to get it.
That, you agree with him on.
[Referring to DAFCP - Digital Assets Council of Financial Professionals] We are now the official education partner for the CFP Board, The Financial Planning Association, The Money Management Association, The Investment Advisor Association, XY Planning, NAPFA, IRRfc, The list goes on an on and on because these organizations all realize their members need this content, they don’t have the knowledge in-house, they are turning to us as the official education partner for crypto.
Your head is spinning. All these associations! You wonder how many members they have. They are all getting their crypto education from Edelman’s firm? What if he’s wrong? And, at this point, you are fairly convinced that he is wrong.
Major companies… Fidelity signed a strategic alliance with us. We are teaching everybody at Fidelity about crypto.
The same Fidelity that decided to put crypto in retirement accounts and got a letter from Elizabeth Warren and Tina Smith when they first announced their intent? Ahh, that whole thing makes more sense now.
Crypto is the most popular session at conferences like this. My room is standing room only as we talk about crypto. Because it’s the one subject nobody knows anything about and everybody is curious about it.
“Good for him,” you say to yourself. “The problem is there is a good chance that he doesn't know much about it, either, in the sense that he formed a strong opinion on the most critical issue - whether or not one can invest in crypto - and that seems to be the wrong conclusion.”
A random memory momentarily fills your mind. It’s the last fight of Creed 2, where Drago has absolutely nothing in the tank anymore and gets pounded by Creed, and the announcer utters. “This is becoming hard to watch.” You feel like it’s the American investing public that is getting pounded because the thought leaders, regulators, Congress and all other stakeholders can’t seem to agree on a seemingly simple question: What is Investing?
What I find myself fascinated with is that we talk about people adding a one or two percent allocation to the portfolio in crypto. That’s it, one, two percent. We don’t have to talk about it fifty percent of the time.
Well… There is a fundamental issue as to whether or not a portfolio should include fully speculative positions. Assuming the answer is yes, this doesn’t sound that offensive. That said, you know from your research that this is not happening. Mr. Wonderful has 20% in crypto/blockchain (not clear how much of that is crypto tokens vs. blockchain companies). Bill Miller had 50% and Michael Saylor, of course, was recommending that people mortgage their house and allocate 100% of the proceeds to Bitcoin. Once the cat is out of the bag, and we start with the wrong definition, the animal spirits train accelerates and it becomes harder and harder to slow it down.
We all missed the opportunity to invest in Google, Amazon, Apple, back in the 1990s. We wished we had. Well, this is that next opportunity and we don’t want to miss this one.
A central theme is emerging; combined with what appears to be a textbook case of FOMO, it is what you call the “perceived equivalence” of stocks and crypto. You remember Kevin O’Leary saying this in congressional hearings (“We should apply the same regulatory structure that we apply to existing trading of stocks and bonds, and exchanges tied to broker dealers.”). “The whole point,” you remind yourself, “is that they are not equal. We have to solve that perception issue first. We have to break that perceived equivalence in the public’s mind.”
You know that will be an uphill battle.
In the afternoon, you run to the local bookstore and get a copy of Ric Edelman’s latest book: The Truth About Crypto: A Practical, Easy-to-Understand Guide to Bitcoin, Blockchain, NFTs, and Other Digital Assets. You’re going read the entire book later, but decide to read the foreword to get an initial feel. The foreword was written by Jack Otter, Global Head of Wealth & Asset Management at Barron’s, who appeared to have not been fully sold and hedged himself when he said:
While I haven’t ruled out the possibility that we are witnessing the greater-fool theory on steroids…
Not exactly a vote of confidence, is it? You reflect back on something Edelman said in the video above:
All the crypto field did was invent new terms for old stuff to confuse everybody.
“Very true,” you shout. “I get it, they created some cool technology and there are some real use cases. That said, the use cases have clearly been overshadowed, at least so far, by financial motives. That may or may not have been the intention but that’s primarily where we ended up. From that perspective, one can indeed argue that all the crypto field did was invent new terms that end up obscuring the good old Greater Fool Theory.”
