An argument for Bitcoin as a store of value

As you have seen us do in the past, from time to time, we invite selected experts in areas relevant to our clients and readers to pen guest posts. We are pleased to have a close friend of the firm, Mr. Trevor Mottl, who has deep expertise in Financial Markets, Derivatives, "Alt Data" in Investment Management and Cryptocurrencies, provide his thoughts on one way to consider Bitcoin as a store of value.

Trevor has held leadership roles at the top of Finance and Investment management that include the uber successful hedge fund Balyasny and the leading investment banks Goldman Sachs and Susquehanna, to name a few.

Bitcoin has advantages over gold, and actual currencies as a store of value. If you believe that society will spend a growing percentage of capital on "digital goods/assets" vs physical goods in the future, here is a rationale.

When one considers that the cost of putting 1MB of information onto the Bitcoin blockchain is somewhere between $7,000 and $8,000 , it sounds like an expensive way to store information. It would be many orders of magnitude cheaper to store information in a database on a local server or one in the cloud, but that misses the purpose of the Bitcoin blockchain. The Bitcoin blockchain exists as a facilitator of trust, specifically peer-to-peer trust, eliminating the need for a trusted intermediary in transactions.

To provide some addition detail, within that 1MB, the average number of transactions stored per block is about 1,400, so the current average transaction fee is about $5 per transaction. As of February 10, 2018, the size of the bitcoin blockchain was only 184.97GB

For $5 today you’re able to store some amount of data, on each active node, currently 11,524 , in a protected way (secure so far), in public, on the Bitcoin network, forever. This level of redundancy and distribution is very extreme and affords a level of permanence that otherwise would have a very significant cost. It’s comparable to a database stored on a geographically distributed RAID 1 array of 11,524 of drives, where each create, and update are timestamped and publicly recorded (deletes are not permissible, and the network is public, so read events don’t need to be recorded in the blockchain). From this perspective, it can be argued that the Bitcoin network is providing you with a lot of value. The size and distributed nature of the network arguably provides the best digital storage solution available today and it has no obvious single point of risk such as flood, fire, conflict, theft, etc. Your transaction data is retrievable at any time, provided that one node is standing. Interestingly, the real risks currently lie with the users of the network and are related to the care they place in storing their digital assets (the way they choose to protect their private keys).

There have been many articles with complaints that bitcoin doesn’t satisfy the requirements of a currency (store of value, unit of account, and medium of exchange) because you cannot use it to buy coffee or make small purchases. From the basic summary above storing petty transactions is likely overkill. Do you need to have 11k computers verify your coffee purchase and store it in a database indefinitely? Probably not. Broadly speaking as an effective medium of exchange for personal transactions, bitcoin doesn’t do so well yet. It is slow (blocks are confirmed approximately every 10 minutes), the transaction costs are high relative to the price of small items, and its volatility creates uncertainty between merchants and consumers. Said differently, the price of your cup of coffee moves around a lot, so you don’t know what fraction of a bitcoin you’ll be paying in the morning and the merchant’s revenues from bitcoin transactions would be variable in fiat terms.

As a unit of account, bitcoin doesn’t satisfy the requirements of a currency. In the simplest terms, governments don’t accept bitcoin for the payment of taxes, hence disqualifying bitcoin as a unit of account. Furthermore, the volatility of BTC/USD, or any BTC/Fiat pair would also create challenges for individuals or institutions intending on using bitcoin as a unit of account. Unless the entirety of their balance sheet could be denominated in bitcoin, they would face FX translation issues, exposing them to volatility that would make the asset and liability management aspects of running the business challenging.

As a store of value however, there is currently a very strong case to be made for bitcoin. Starting from the basics, bitcoin has extremely low storage costs compared to other traditional stores of value like gold. The cost per annum of gold storage is on the order of 0.72% p.a. of the value of the gold stored, so $72 p.a. per $10,000 worth of gold stored. On the Bitcoin blockchain, you pay these “storage” costs upfront; it costs the same ~$5 amount to store bitcoin for 1 day as it does for 10 years.

Probably the most compelling argument to strengthen the case for storing value in bitcoin, even with the current volatility, is that bitcoin may be a good way to participate in the possible proliferation of digital assets. If we see large-scale digital asset proliferation, something that we see as likely in the coming two to five years, bitcoin may serve to get digital asset inflation protected exposure to this emerging asset class. The "Sharing economy", Autonomy, AI, AR/VR, electronic payment platforms and more are already pointing at this future. If cryptoassets become the primary way of accessing digital assets, like distributed storage (filecoin, storj), distributed compute (golem), predictions (augur), etc. and we start utilizing these digital assets directly or indirectly through some array of interface programs (similar to the way that we utilize the services available on the internet via a browser), holding bitcoin could be a good way to have broad exposure to the expected future costs of these services.

Chris Berniske and Jack Tater do an excellent job of describing the fundamental valuation process for bitcoin as store of value asset in their book Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond. Using a velocity of money approach, they work through a fair value for the portion of bitcoin that would serve the “store of value” function in the place of gold if bitcoin takes some portion (they use 10% as a guess) of the of the $2.4Tn global financial gold market.

As the use case for digital assets evolves beyond store of value applications, to include medium of exchange applications and more likely access to digital assets or applications, there will be a need for improved valuation models. One would expect increased interest in cryptoassets as an asset class along with a better understanding of the drivers of valuation to lead to reduced price volatility for bitcoin and other broadly accepted cryptoassets, strengthening the case to hold bitcoin as a store of value.

As Bitcoin evolves, the capabilities are sure to facilitate faster transaction speeds and more timely settlements among other features. These should improve the use cases for Bitcoin and other Blockchain derived protocols. But, Bitcoin is proving to have one important asset feature developed, that is as a store of value.

(Bio):Trevor Mottl has over 18 years of experience in Investing and Financial Services. Most recently as Global Head of Long/Short Risk at Balyasny Asset Management. Formerly, he was on the management team of GLG Partners European Equity Fund, the Head of Macro and Derivative Strategy at Susquehanna International Group, and a Vice President at Goldman Sachs where he focused on exotic derivatives. He is currently an Strategy Advisor to EMMAAI, an autonomous AI that uses CNN, LSTM and Bayesian methods based networks with supervised and unsupervised learning. He is a Founding Advisor to Auxesia Orion, an integrated health care company startup, focused on orphan drug development and an associated care infrastructure. He is also an Advisor to theHintBox, an AI based financial advisory application. Trevor earned a Bachelor of Science in Biochemistry from Brown University. He has published several research pieces in the fields of artificial organs and biomaterials; focusing primarily on work related to the adhesive properties of polymer based drug delivery systems and magnetic polymer microspheres.

Please note the opinions of the authors provided are not necessarily those of Intellectus Partners. The experts are not employed by Intellectus Partners and their views and opinions are subject to change at any time based on market and other conditions.