Dear Valued Clients and Friends,
I don’t even know how long I have had it on my list to write a Dividend Cafe about this topic. The introduction of Bitcoin to the world of finance, a bit over a decade ago, has certainly generated a lot of conversation, and out of that conversation, it has generated a lot of hype, a lot of strong feelings, and, yes, a lot of activity.
We are not owners of Bitcoin at The Bahnsen Group. We are not investors in any aspect of this world – not Bitcoin, not crypto, not NFTs, not any of it. That is different than saying, “we believe it will all go to zero.” One of the points I will make today is that, as much as no one has any real basis for arguing for higher prices of any of this, no one has any real basis for arguing for lower prices, either. Our view has everything to do with the inadequacy (and in many cases, outright contradictions) of the arguments that the most fervent proponents make. Today’s Dividend Cafe will reiterate our investment philosophy, analyze Bitcoin in light of that philosophy, and allow readers to decide for themselves the best course of action in the context of a risk-reward trade-off.
I am excited to have this piece done, and even more excited for next week’s Dividend Cafe. But in the meantime, let’s look at The Bahnsen Group and Bitcoin, in this week’s Dividend Cafe …
| Subscribe on |
With Stability Like This, Who Needs an Ocean
Two months ago today, on October 5, Bitcoin was at $122,549. As I type, it is at $88,145, a 28% drop in two months. Where it goes from here is anyone’s guess. If it goes to $70,000, I wouldn’t be saying, “I told you so,” and if it goes to $170,000, I wouldn’t be saying, “darn, I missed it.” And this is going to be the point of today’s commentary – that the underlying price of Bitcoin is, always and forever, pure speculation. And that is not investment.
Now, some will say, “No, it is a medium of exchange,” and that represents a different argument and case entirely. It also undermines the first argument, that its price should be permanently escalating. A medium of exchange and an investment asset are two different things that carry different expectations. But I would argue that the “medium of exchange” point of view is problematic, too. And we have already started with one of the reasons why …
A -28% drawdown in stocks can (and has) happened. It is rare for it to happen within two months, but it has happened in extreme left-tail risk events (COVID, the financial crisis, the 1987 crash, etc.). The fundamental difference, of course, is that stocks are supposed to be risk assets that represent volatile units of ownership in volatile claims on volatile profits from volatile companies in a volatile economy. That is not exactly “medium of exchange” stuff. Stocks deliver a premium return (as an asset class) because their risk premium commands a volatility profile that is unnerving. If one believes the value proposition is “their underlying anti-fragility” or their “substitution of the U.S. dollar as a medium of exchange,” they have a real problem with their premises, even if they get to a good conclusion.
Bitcoin is a new “thing” in the grand scheme of things, and I would say that the -94% drawdown it experienced in 2011, following concerns about hacks and Mt. Gox drama, can be discarded. After all, the prices involved were $32 and $2, so it does feel like ancient history. The 2014 meltdown (another -87% drawdown) can also be discounted if you want. Again, the numbers were $1,163 to $152, and a -87% drop is an -87% drop, but Bitcoin enthusiasts would [rightly] point out that that was then and this is now, and that the regulatory concerns around that drop are not material today. The -84% drawdown that happened in 2017/18 was pretty bad (do you like that sentence?), but concerns about Korea or Japan banning it are no longer on the table, and many of the hacks that were taking place back then have perhaps been resolved? I am not even including the -50% drop in December 2013 when China briefly banned it, or the -56% drop in August 2012 when a big Ponzi scheme around it was uncovered.
And in all fairness to whatever Bitcoin is, the 99%, 56%, 83%, 50%, and 84% drops we saw in the decade of 2011-2010 are all pretty rearview-mirror things at this point, given that the price is now over $80,000. If you believe you would have held on during those five drawdowns, then hey, here you are. But I think it is fairer to the point I am making to just look at the last five years to evaluate the stability/medium thesis.
In March of 2020, the world shut down due to the COVID-19 pandemic. Stocks dropped 34% in 36 days. It was pretty bad. How did Bitcoin respond? It dropped over -50%. This began a process of uncovering some correlations in the reality of Bitcoin pricing, which represents an unnerving reality around its speculative nature … More to come.
In May of 2021, it would drop -53% in a single month, amid environmental concerns about Bitcoin mining (power usage) and regulatory fears in China. But it would rally again and end the year at $65,000. At $89,000, now that means over the last four years, it is up 7.9% per year in that time period from that peak to today’s trough, not exactly what people would think, but not a loss, either.
Well, maybe not a loss. From there, it would drop -77%, going from $69,000 to $15,500 at its November 2022 collapse. As we saw during COVID, this directional loss was in line with other risk assets as 2022 saw a -20% drop in the S&P 500 and a -30% drop in the Nasdaq. But Bitcoin saw massively higher declines as the leverage underneath it was unwound, as multiple exchanges that traded it were blown to smithereens, and as some of the most significant players in the space were imprisoned for various allegations of fraud and other grift-duggery. Not super anti-fragile.
When one gets past the 2011-2019 dramas, they barely show up on the chart now. And even the huge drawdowns in 2020 and 2021 don’t stand out the way you might expect next to the 2022 collapse. But then the 2023-2024 recovery after the FTX collapse and various unwinding of shenanigans becomes graphically impressive. And one can see the roller-coaster of up-down movements since the election last year …
A Bitcoin enthusiast could look at all this and say, “See, despite all the drama, challenges, and difficulties of the last five years [or longer], it is still higher than it was in those periods …. This shows resilience.”
And a Bitcoin skeptic could say, “This story seems to indicate a highly speculative, uncertain, leveraged, unstable situation that makes it very hard to form a solid confidence for the future.”
I don’t think this becomes a mere Rorschach test. I think the latter is right, and the former is wrong. I think the “resilience” of the price (massive volatility with huge swings up and down, yet still higher than it was prior to 2024) is a by-product of hope, leverage, and speculation. And those things can last for minutes, months, or years, but they are not the foundation of our investment decisions. And I think the empirical uncertainty, instability, and drama are the fundamental characteristics that are not going to go away.
A Rule of Thumb
I have never seen an investment, ever, work out when its primary adherents were screaming for people to understand how good an investment it was. Good investments either (a) don’t need anger to make the case, or (b) prefer to stay on the down-low. When investments “need promoting” to capture value, it is only because they lack value. Their owners need to say, “You are so dumb to not realize how good this is,” because if the listener does not realize how good it is, it becomes not good. A claim on profits does not work that way. I do not need other people to agree that a dividend from the profits of a good company is a good thing; I just need the dividend to be received in my account. It is what we refer to as an internal rate of return – it exists no matter what. Now, things like a coupon from a bond or a dividend from a stock or profits from a company can still see their returns enhanced by public sentiment (valuation, etc.), but even that I am often critical of … The earnings stream of a company drives its returns, or cash flow of a piece of property or a loan, or whatever, and we price our investments around such fundamentals. Public sentiment can detract from return (for right or for wrong), and can boost it. And we prefer public sentiment be as little of the return we are after as possible … for obvious reasons.
But some investments are entirely dependent on public sentiment … and they seem to draw the people who are most emotional about making their case. I would suggest that their emotion and hysteria are not so much about an evangelistic zeal for everyone to share in the miracle of what they have discovered, but rather because there is an underlying flaw in the ownership thesis: Its only value is in the promoters’ convincing people of the value.
I am not saying this only about Bitcoin. The more people zealously plead their case about something, and the more emotionally unhinged they become in advocacy, the less sensible the investment tends to be. I actually have never seen an exception to it. The old expression, “those who know don’t tell, and those who tell don’t know” rings true here … If one was so sure that something like a cryptocurrency embedded in the blockchain would see its unit value scream higher in price it escapes me as to why they would want others to believe the same thing when all that belief would do is drive the price higher, limiting their own return as they try to accumulate more.
One Thing is Resilient, All Right
The popularity of sports betting in America, of prop bets, of poker, of casinos, of Draft Kings, of Fantasy Football, of meme stocks, of Robinhood, of all sorts of cultural artifacts, all adjacent to the same thing, provides a very useful explanation for crypto enthusiasm and “resilience.” People love entertainment (all of us do), and people love gambling. Some people mix the two together. Some people have bad entertainment habits. Some people have good ones. For some, “gambling” is a harmless recreational activity (fantasy football, a few hands of blackjack with your friends). But for some, the “entertainment” of “gambling” becomes very confused with something else far more serious. And I think this has become a systemic reality in our society.
Matt Levine of Bloomberg said something a while back that stuck with me:
“Well, everyone is pretending. (Except the literal online sports betting sites, who are, refreshingly, not.) That’s what’s so weird about all of this. If you are a meme-stock executive or a crypto venture capitalist or Robinhood, you can’t just go on TV and say ‘yes gambling is fun and legal and we are probabilistically charging people a market-clearing price for entertainment.’ You have to talk about how your meme stock is the future of free speech or how crypto is the future of ownership or how retail options trading is the future of retirement savings. ‘This is all legitimate economic activity,’ you have to say, because people are still not entirely used to the idea that gambling is legitimate economic activity.”
I am very open to the idea that this level of activity will be here for a long time, and even that it has some legitimate place (just not for me and my house). But I think we need to be careful to understand the sociological compartments that are really at play, and not mistakenly label something as something it isn’t.
But the Blockchain?
Many confuse arguments about the price of Bitcoin with arguments around the efficacy of distributed ledgers. One can be a blockchain bull and a Bitcoin bear without being in contradiction. I remain open to certain utility for blockchain technology where trust and transparency are enhanced. I confess that I thought, as many others now admit, that it should be much further along by now than it is in widespread adaptation, and that the cost, complexity, and governance of such decentralization have proved far more cumbersome than many promised. I believe there are more limitations than initially understood, and the technology’s scalability is limited. That said, I am all for the idea of using blockchain technology in various business processes where appropriate … I just do not believe that has anything to do with the price of a Bitcoin.
An Old Argument
I used to argue that if Bitcoin ever became a real threat to governments, central banks, and the conventional financial system, regulators would just crush it like a bug. In other words, my argument was once, “it either is no threat to the financial system, in which case its ownership thesis is highly questionable,” or “it is a threat to the financial system, in which case its ownership thesis is even more highly questionable.”
I no longer believe the regulators will crush it. I think many governments and regulators are in on the deal and enjoying the ride, or they simply do not believe it warrants such concern. Years and years later, they say it’s an ineffectual medium of exchange; they see the primary actors using it for exchange (criminality); they see the primary actors using it as an investment (speculators); and they don’t see it as needing intervention.
I more or less agree that there is nothing about the Bitcoin or crypto worlds that I believe warrants any special government treatment than anything else. As long as risk-takers keep the profits of their decisions and suffer the losses, I have no opinion about their existence in the financial system. I don’t believe it should receive special treatment (a waiver from tax treatment or disclosure requirements), nor should it be especially scrutinized. Let it ride. But when bad things happen, let them happen to those with skin in the game. Rinse and repeat.
The Lay of the Land
The reality in the underlying crypto world is that there is an unfathomable amount of leverage, speculation, and opaque activity that serves as the market’s fundamental backdrop. Some argue that they can ignore it all and just “hold on.” Fair enough. I do not believe most people can. But the percentage of people who merely have bought some “digital coins” (fully paid for in cash) that they are holding on to, believing they will see them appreciate in the future, or that they will use it as a stable store of value, or that they will conduct transactions with it, is a bare minimum percentage of the ownership base. That makes that percentage of the ownership base highly susceptible to the activities of the far, far larger ownership base. A critic of my critique could point out, “the public equity world has plenty of fast hands, high frequency traders, and leveraged players, too” – and that is true. But those investments also have intrinsic value, always and forever. The nature of the ownership base matters a lot more when such a thing is lacking.
In early 2025, we saw Bitcoin going higher because the new administration signaled a more regulation-friendly environment for the space. That price advantage did not hold even as the regulatory environment has relaxed exponentially. Why? Because the ease and convenience and access and portability and permission structure of borrowing and all other regulatory matters are not substantive to the underlying value. They are the bars around an asset, but they don’t speak to the asset itself. The current environment has made it more friendly to speculate; it has invited more activity, and it may even pardon more people convicted of crimes in the space, and all things being equal, I understand why that marginally helps. But it cannot be a substitute for an ownership thesis.
I think back to the hype around a “strategic Bitcoin reserve” earlier in the year. The idea that the government would be borrowing a bunch of money to hold some Bitcoin on the taxpayer’s balance sheet was supposed to be an argument for owning it, or for value creation itself. I wrote plenty at the time as to why it made no sense for our government to be doing such a thing (“the government should have protection against a breakdown of a system that they run”), but I didn’t say enough as to why a reserve fund (for all its nonsense) was certainly no argument for investors.
And this leads me to the point I am making – the heavy use of non-arguments that sound like arguments. It is not an argument for something to say the government will buy it. It may supplement an argument. It may be marginally better than the alternative. But it is not an actual argument. Saying “the government will let things go here” is also not an argument, in and of itself. These things have been made into arguments instead of what they really are: anecdotes in a bigger story that its adherents have not adequately explored.
In All Thy Getting, Get Productivity
If you look at any investment we own, any investment we want to own, any investment we believe in, any investment we ever will believe in, you will see goods and services connected to it that, if they didn’t exist, represent a less productive world – that represent a decline in the quality of life for those who use the goods and services. You can use Google, Apple, or Microsoft as examples of companies that are hard to imagine your lives without, but really most people would say the same about diapers, paper towels, electricity, medicine, routers, Tylenol, gasoline, cereal, pet food, ATM cards, cosmetics, oncology, credit cards, water, coffee, restaurants, hotels, natural gas pipelines, wireless service, and streaming. The profits of our investments come from their usefulness, and our investment thesis comes from their profits (and the sharing of those profits with us in the form of dividends).
I cannot think of anyone whose life would be affected if crypto disappeared tomorrow. I understand those who trade it or make a market in it would have a different career, but I mean societally, it is hard to find a way in which our collective well-being would be worse off. I cannot think of something that we want to be invested in that, if it went away entirely, would be a non-event. And that is our view here.
The Essential Argument
Ultimately, one has to believe that Bitcoin will become a unit of account in which goods or services are priced to believe it has this medium of exchange functionality and future that its most zealous advocates believe in. And I not only don’t believe that it will be, but I also find it laughable to think that it is remotely headed that way. The fundamental volatility of Bitcoin is a feature, not a bug, for traders and speculators. And if that is the argument for investing in it, no problem – have at it. But it is not what we do at The Bahnsen Group. But the same fundamental volatility that makes it conducive to trading and speculating is the very antithesis of a medium of exchange. Merchants and vendors can not accept payment in something that moves in such a volatile way.
As a stable medium for settling transactions – it is anything but.
As an anti-fragile alternative to risk assets and financial instability – it has proven to be anything but (more volatile than other risk assets, and highly [super] correlated with tech stocks and leveraged beta.
As a speculative trading vehicle – it has been good for some – really good. And bad for others. But it is zero-sum.
And we don’t do zero-sum at The Bahnsen Group. To that end, we do not work.
I wish to conclude by stating from the bottom of my heart that I have studied this issue far, far, far more than I wish I had. I have seen people I respect go from believers to unbelievers, or from unbelievers to believers, or from unbelievers to believers to unbelievers again. I have diligently studied to see what I may be missing. I have genuinely tried.
I will not be remotely regretful if one day “Bitcoin” is trading at $200,000. I will not be doing any victory laps if Bitcoin revisits $20,000. I believe it has a significant opportunity for traders and speculators, but that is not us. I believe the chances of it ever being a viable currency substitute or a genuine store of value are near zero. I don’t know what cyber hackery and other logistical risks will materialize, but if they prove to be nothing, I will be happy (I also will be shocked). But at the end of the day, this is not an asset class that solves the problems its adherents say it does, and it is an investment category that invites substantial risks we do not wish to add to a client portfolio.
And I believe that our investment philosophy is properly centered around productive assets.
Chart of the Week
I have shown this before, but the correlation is worth repeating.
Quote of the Week
“Never engage in detailed over-explanations of why something is important: one debases a principle by endlessly justifying it.”
~ Nassim Taleb
* * *
I am looking forward to speaking at a conference in San Francisco this weekend, and to being in the Newport office next week before heading back to New York for the week after that. Reach out with questions, and enjoy your weekends immensely. It is a wonderful time of the year.
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
