I’ve always said, if you want to make money in cryptocurrency, follow the suits, not the hoodies. And one really smart suit, Peter Thiel Bitcoin bull, made some useful comments last Thursday, March 15th, at the Economic Club of New York about why he invested millions of dollars in Bitcoin.

In case the name doesn’t ring a bell, Peter Thiel is a former co-founder of PayPal and current Partner of Founders Fund, which has more than $3 billion in assets under management and owns early stakes in companies that include Facebook, Airbnb, SpaceX and Lyft. The fund also recently made, a $15 to $20 million dollar investment in Bitcoin.

I will probably never get Peter Thiel on my podcast, so this is the next best thing … Listen and then let’s unpack his comments related to cryptocurrency and Bitcoin a little at a time.

Peter Thiel Bitcoin interview, on March 15, 2018, Economic Club of New York
(Excerpt from: https://www.youtube.com/watch?v=sxWpvgTH9oI)

So first thing, related to Bitcoin specifically, the bet is that Bitcoin will, in whole or in part, supplant gold, as the world’s default store of value.

And the reason this is a reasonable bet is Bitcoin is a better gold than gold. Among other things, it’s more portable, divisible, verifiable, scarce and censorship resistant than gold.

Any time you hear someone saying that Bitcoin can’t scale and is too slow, that’s a canard.

While the inventor, Satoshi Nakamoto, may have envisioned a new form of digital cash in the original white paper, what has become clear, as Bitcoin has evolved, is that its best use case is digital gold, not digital cash.

And, this is where the optimists get these wacky valuation numbers from…

In a paper that made the rounds of the Internet and many Wall Street trading desksJohn Pfeffer wrote, “If Bitcoin were to succeed at displacing gold, to even a modest degree, as a monetary store of value, it could be worth between $260,000–$800,000 per Bitcoin.”

Currently, Bitcoin is the front runner for this base use case of store of value. It was the original cryptocurrency. It has the largest market cap, at 43% of the total crypto asset market. Therefore, also the deepest liquidity, although that’s not saying much in this market.

It has a head start in terms of network effect and the number of developers working on it. So, to some degree, there is a bit of a moat.

While Thiel didn’t specifically cite his reasons for being skeptical of other assets in the class…

I believe there are a number of reasons to be very skeptical, beyond Bitcoin:

First is regulatory overhang. Almost all of these other assets were released as ICOs.

In testimony before the Senate Banking Committee, SEC Chairman Jay Clayton said he has not seen a single ICO that was not a security. So, until there is clarity on whether the SEC and/or CFTC will take action retroactively, there is an additional layer of regulatory risk that Bitcoin doesn’t have.

Second, the Bitcoin forks and others that are trying to solve for the digital cash problem, rather than serving as store value, have a velocity problem.

Meaning, if you apply the equation of exchange, MV = PQ, to the extent any of these become successful, thus driving velocity up, the less valuable they become as an investment.

For example, you may have a cash component to your retirement portfolio. But you have no expectation that it will rise in value.

In fact, it loses value at whatever the rate of inflation is. Digital cash will, presumably, work the exact same way.

Third, going back to the ICOs for a moment, a recent report published on Bitcoin.com found that of 902 ICOs tracked by TokenData, 142 failed before raising funding and another 276 failed after fundraising.

Bitcoin.com found another 113 projects that it calls “semi-failed,” because their teams have gone off the radar or their community has shriveled up and blown away.

That’s 59% of 2017 ICOs and $233 million in funding that has gone up in smoke.

An article in Fortune, says, “That’s a lot of wasted money, though the failure rate might not seem outrageous for those familiar with startups. As many as 75% of all startups backed by traditional venture funding fail, and 30 to 40% of those take all of investors’ capital with them. Out of all new companies started in the U.S., a little over 20% fail in their first year.

The ICO numbers obviously beat that percentage soundly, which again, might not seem surprising in such a nascent sector. But the findings are especially disturbing for at least two other reasons.

First of all, since 2017’s ICO mania didn’t fully take hold until the second half of the year, a disproportionate number of ICO failures have unfolded in a matter of months. And second, not all of the shuttered projects are actual ‘failures’ — many produced no product at all, and a good number probably never intended to. Some were simply “exit scams” whose founders disappeared with the money they raised — while others, in Bitcoin.com’s words, ‘slowly faded into obscurity,’ but with the same nefarious intent.”

A tweet from Clay Collins, Founder of Nomics, mused, “For centuries, liquidity events came AFTER businesses provided massive value to the market. With ICOs, liquidity occurs prior to value delivery. What could go wrong?”

I have gone on the record as saying I believe as much as 99% of these cryptocurrencies will ultimately fail. The Internet Boom and subsequent bust, gives us a good roadmap. 84% of the Internet IPOs, back in the day, were gone 10 years later.

I believe, because the requirements to launch an ICO are far less costly and rigorous, that number will be much, much higher this time around.

And just like it was impossible, back then, to predict the Enrons, or the Worldcoms or the Pets.com … the Internet darlings who were mismanaged, scams, or just too early for the First Wave … and pick the one Amazon or Netflix … It is equally impossible to know who will not only survive this bubble, but ultimately go on to reward token holders.

Remember, if you held Microsoft or Cisco from the top of the Internet Bubble in March 2000, you still haven’t gotten back to break even. A lot of people don’t realize that.

Peter Thiel Bitcoin Bet

CSCO Chart (Google Finance)

Here’s Peter Thiel’s response when he was asked if he would buy more Bitcoin now that it has fallen from the highs …

Peter Thiel Bitcoin interview, on March 15, 2018, Economic Club of New York
(Excerpt from: https://www.youtube.com/watch?v=sxWpvgTH9oI)

Annie Duke, decision strategist, professional poker player and author of the best selling book, Thinking In Bets, says “There’s a quick and easy way to test whether an activity involves skill: ask whether you can lose on purpose.”

A couple key points right there … One is only amateurs would try to time the market.

If you can’t know what the market will do today, tomorrow, next week, or next year, the right answer is to just buy it now and break the rearview mirror.

Second, whether it’s 80/20 or 50/50 bet, no one knows. No one. Everyone is guessing.

This is what Dr. Ben Hunt, of Epsilon Theory and Salient Partners, calls basis uncertainty, where you’re not even sure that any basis exists at all.

Under such circumstances, traditional investment paradigms aren’t really appropriate. Is this a technology bubble or is it money? Will it go to zero or to $1million. You CAN’T know. The more you think you know the more I know you don’t.

In this sort of investment paradigm, the answer is not investment theory but game theory.

And, I think the game theory that applies, as I discussed at length, in The Case for Bitcoin in Your Retirement Portfolio, is Pascal’s Wager. The 16th century mathematician, suggested that people bet with their lives on whether God exists.

He said, “Belief is a wise wager. Granted that faith cannot be proved, what harm will come to you if you gamble on its truth and it proves false? If you gain, you gain all; if you lose, you lose nothing. Wager then, without hesitation, that He exists.”

I can’t know the thinking behind the $15 — $20 million that Thiel was said to have purchased, in his fund, of Bitcoin. I wish I could ask him. But I wouldn’t be surprised if it was along the same lines.

That is to say, in order to create Pascal’s Wager, you have to minimize the potential loss to risk capital only. Never more. (a.k.a Minimax Regret)

My rule of thumb is no more than 2% of your total investable assets. Could be less. Depending on individual circumstances. But never more.

The idea being, if you lose the bet, it’s not enough that it will have a significant impact on your future standard of living. That’s, by definition, risk capital. But, if you win, the potential upside is so great, it can have a significant impact, even when wagering a small amount.

In the case of Founders Fund, $20 million is less than 1% of the total assets of Founders Fund, at over $3 billion. But another year like we had in 2017 would turn that $20 million… into $250 million!

Again, if you lose, you lose nothing. If you win, you win all. That’s Sane Crypto investing.

So to summarize:

  1. The bet is that Bitcoin will, in whole or in part, supplant gold as the world’s default store of value
  2. History, both recent and past, tells us to be very skeptical of other projects
  3. The way to invest in an asset that may implode tomorrow is the application of game theory, not investment theory.

I believe the most applicable construct, at least to my way of thinking, is Pascal’s Wager, which says, “The rational choice is to believe. Or at least act as if you believe.”

If you’re wrong and God doesn’t exist …Bitcoin goes to zero, you lose nothing; but if God does exist … Bitcoin goes to million, you gain all.

Something to consider. I hope you found it helpful …

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If you’d like to learn more about investing in cryptocurrency for retirement, I would encourage you to register for my free online training, How A Little, Little Bit of Bitcoin Can Make Your Retirement Savings Go A Lot, Lot Further.

If you have any questions at all, about this topic, or anything else, just email me at askkim@sanecrypto.com. I read and answer every email personally. Or leave it in the comments below.

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