Health, Wealth, and Happiness

February 10, 2023

“A 10% decline in the market is fairly common. It happens about once a year. Investors who realize this are less likely to sell in a panic and more likely to remain invested, benefitting from the wealth-building power of stocks.”

- Christopher Davis

"Same for crypto, but make that 50%."

- Bitcoin Market Journal

In today's issue:Bitcoin Market Journal publisher John Hargrave isn't a money manager, but he has bought bitcoin on behalf of family members.

In today's newsletter, he provides a state of the union on bitcoin and the wider crypto market.

This "annual letter" is not just for his family; it's for the wider crypto fam. Read on.

Must Read

Today's most important story for crypto investors.

DeFi Staking Players Soar (The Defiant)

First, the bad news. The SEC fined Kraken $30 million for offering staking services to its customers.

Now, the good news. The price of liquid staking tokens (including our preferred pick LDO) shot skyward on the news.

In plain English, the SEC is cracking down on any centralized company offering staking-as-a-service.

In a new video by SEC chief Gary Gensler, he explains why (watch it here).

This won't do anything to quell the demand for staking services as investors want to earn interest on their crypto.

This means investors will instead migrate to decentralized staking options like Lido as they migrated to decentralized exchanges like Uniswap after the implosion of centralized exchange FTX.

Investor takeaway: It's good news for those of you who bought LDO when we issued our "buy alert." It's probably bad news for Gary Gensler's career as a standup comic.

Family Bitcoin Update 2023

by John Hargrave

Dear Family:

If you’re receiving this letter, it’s because you asked me to buy bitcoin for you back in 2014.

First, the good news. That $1,000 in BTC is now worth $26,803. It’s one of the greatest investments you’ve made. A 2,500% increase in less than ten years!

Compare that with the overall stock market, which has only increased 113% in the same period.

I’m writing to give you an update on your investment like Warren Buffett does with his Annual Shareholder Letters, but just for you… and 50,000 of my close, personal friends.

Why Did Bitcoin Go Up?

All the bitcoin in the world is worth about $420 billion today. Why?

I don't know.

In the beginning, bitcoin was intended as a kind of digital money (that’s where we get the word “cryptocurrency”).

That has clearly not worked out. Though a few weirdos use it to pay for things, bitcoin has not caught on in the same way as, say, Venmo.

Next, we all believed bitcoin was a kind of “digital gold.” Since bitcoin, by design, will only have 21 million ever “mined,” with the last one mined around 2140, it will become more valuable as it becomes scarcer.

Well, maybe...

We won't be alive to see that day unless our heads can be frozen and attached to robot bodies. We could possibly pay for that procedure with our bitcoin, but again, the cryo labs probably won't accept it as payment.

Another theory is that bitcoin is non-state-controlled money, which is useful in countries where the national currencies became worthless due to government overspending or corruption (the recent debate about our debt ceiling leads some to question whether the U.S. dollar might suffer the same fate).

Again, however, bitcoin is not useful as an alternative currency when the price can swing 50% over the course of a few months. That’s just as bad as the government money you’re trying to replace.

So, why does the price of bitcoin go up? The short answer... No one knows.

I've concluded that BTC is more like a technology stock than anything else. Here's a comparison of technology stocks versus the price of bitcoin over the last five years:

They're not identical, but you can see similar peaks of investor excitement. Bitcoin is a technology, and investors think about it like a technology company.

“Hold on,” you say. “Bitcoin is not a company. There’s no revenue! No employees! It’s not like buying Apple or Tesla stock. These companies have real buildings with real people trapped inside.”

True, but there are “revenues” (the transaction fees paid to the miners who run the bitcoin network) and “employees” (the team that develops and maintains the bitcoin network). These are both earnings and expenses.

“Sure,” you respond (I’m putting a lot of words in your mouth). “But State Farm sells insurance. ExxonMobil sells gasoline. Toyota sells cars. What does bitcoin actually sell?”

Um… a dream?

The Dream of Bitcoin

Today, there are thousands of digital assets besides bitcoin (these are also called "cryptos" or "crypto assets," and I will use the terms interchangeably).

All these crypto assets are created on the same premise: transferring units of value over the internet. Together, these assets are currently worth a lot of value: over $1 trillion.

Bitcoin remains the OG, the granddaddy of this thriving ecosystem. It’s the original dream that’s now becoming a financial reality.

Even if these crypto assets are not replacing money, they’re certainly supplementing money. The regular economy and the digital economy are becoming more intertwined.

So bitcoin’s dream (a financial system not controlled by any single government) is coming true... Just not with bitcoin.

This is common in technology revolutions. Early believers think it will go one way, but it turns into something else entirely (Amazon, after all, used to be a bookstore).

Hardline “bitcoiners” believed there was room for one, and only one, digital currency. Bitcoin, they thought, would take over the world.

Of course, the world can operate with many different types of money. Dollars, Euros, pesos, etc., not to mention many types of “stored money” like frequent flyer miles, Visa gift cards, and gold.

In the crypto economy, everyone is replicating these types of value online and creating new ones as well.

We’re extending the existing financial system onto these new digital technologies.

Read that sentence again... We’re not replacing the economy like the bitcoiners thought; we’re extending it.

The hardcore bitcoiners are wrong. This is obvious: no one is seriously using bitcoin for payments.

However, the hardcore crypto skeptics are also wrong. This is also obvious: when the government is discussing how to regulate digital assets, they’re here to stay.

The dream of bitcoin is coming true, just not in the way anyone originally thought. It’s not bitcoin; it’s everything that bitcoin has inspired.

So, back to the original question. Why does bitcoin continue to have value? For this, we’ll need to go back about 400 years.

The earliest trading floor. (Courtesy Wikipedia)

The Dutch East India Company

The first joint-stock corporation was started in the Netherlands in the early 1600s when the Dutch East India Company received a government-sanctioned monopoly on the growing spice trade between Europe and Asia. This sweet deal got even sweeter... Ordinary investors could buy shares in the company.

The Dutch East India Company was wildly profitable for many years to come and greatly enriched its shareholders, but it was the idea of a publicly-traded stock that was the real innovation.

Companies owned by the people!

By the 1700s, the market for these public stocks was so great that a stock exchange was set up in New York and the rest is history.

Similarly, it may be that the idea of bitcoin – i.e., the new digital financial system it represents – will be bitcoin’s lasting legacy more than bitcoin itself.

Cryptos are also owned by the people.

In summary, bitcoin has not fulfilled its promise of digital money. The idea of bitcoin (digital money and digital finance owned by the people) has become more important than bitcoin itself.

So, should you sell your bitcoin?

It's yours to do with as you please. I can make no claims about the future price of bitcoin (and please ignore those who do).

Still, I’m holding onto mine for now as there's still hope that bitcoin may become more useful in other ways, which could fuel the next wave of growth.

Also, bitcoin is still the way most people get involved with crypto in the first place. It’s the most widely recognized, it’s got the most support, and it has a first-mover advantage.

However, if you’re looking for new investment opportunities, there may be better options than bitcoin.

The New Crypto “Companies”

Just as the Dutch East India Company spawned a wave of new public companies that changed the financial system forever, these new crypto “companies” are evolving our current financial system:

Ethereum (ETH) is the most exciting project. It not only allows for new financial applications to be built on top of it. It's led by a strong team of developers who are constantly upgrading and improving it. I expect the total value of Ethereum to eventually surpass that of bitcoin (as that date gets closer, I’ll be gradually flipping my holdings).

Uniswap (UNI) is another terrific “company” as it solves a real-world problem. It lets investors trade one crypto asset for another like exchanging currencies. The design is elegant, the team is constantly innovating, and the product works.

Binance Chain (BNB) is the digital asset started by Binance, the largest digital exchange in the world. Since Binance is not publicly traded, owning BNB is a bit like owning stock in the company. Like Ethereum, however, it can be used as a platform to build new financial applications. As with Binance, BNB seems well-managed with a potentially dazzling future.

OpenSea is the largest NFT platform. Think of it like an early eBay for digital goods. Sadly, OpenSea is not a publicly-traded company, though you can buy shares through secondary markets if you meet certain criteria. I’m sure there will be some kind of public offering; this company is going to be a powerhouse.

Finally, Coinbase (COIN) is the largest U.S. digital exchange. It's the gold standard for a new kind of “bitcoin bank.” It’s fully-regulated, meaning it’s the rare crypto company that works within the U.S. banking system. This also means its stock is publicly traded (no crypto needed).

I'm a big believer in the long-term growth prospects of these companies and cryptos... with one important caveat.

Crypto is Still Risky

I’m not a financial adviser, just an investor who writes and speaks about these technologies to global audiences, but your financial adviser and I probably agree on one thing: crypto is still highly risky. Thus, you should invest only a small amount (no more than 10% of your overall portfolio). No more than you're willing to lose...

To me, the biggest risk to crypto investments is the possibility that the government might shut them down. It seems unlikely they'll be made illegal, but the government could restrict them through excessive taxation or cutting off access to their banking services.

However, the genie is out of the bottle, and it’s unlikely he’s going back in.

Bitcoin invented a new way of doing money. While BTC hasn't become world-changing money, it has changed the financial system. We’re still in the early days of that change (the Dutch East India Company lasted for over 150 years, after all).

Crypto is an extension of our existing financial system. Money is going from paper to digital like email, contracts, and just about everything else.

This presents enormous opportunities for those willing to put their money where their mouths are and invest for the long term in these new digital assets.

I’m holding... Are you?

Health, wealth, and happiness,

John Hargrave

Publisher

Bitcoin Market Journal

ICYMI