Market efficiency, the hypothesis that states asset prices reflect all available information, has split the advisor community.
Most advisors say the market is efficient and that you should just own the market. As a result, they suggest investing in diversified portfolios or passive index funds rather than attempting to pick individual stocks. They believe the price of an asset reflects its value and, therefore, the price is true.
Others say the market is inefficient. They tend to think all employer retirement accounts have participants pigeonholed without any choice other than some mixtures of stocks and bonds. They point to a variety of areas in the market that have been inefficient – take energy in 2022 as a great example, because it currently makes up so little of the massive indexes. And they argue the price of assets often don’t reflect their value and that prices can be inaccurate.
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However, the dominant consensus tends to be that while the market is not perfectly efficient, it’s getting closer each year.
So why, then, do so many financial advisors struggle to view bitcoin through the same market efficient lens? They often cite it as a scam, bubble or tulip mania, yet the market value of bitcoin has steadily increased since 2009 and has been the best-performing asset for years.
It’s time for advisors to look themselves in the mirror and ask why that is…
The TLDR is price = truth
Financial advisors who preach the efficient market hypothesis and simultaneously call bitcoin a scam are contradicting themselves.
If the efficient market hypothesis says that a stock’s price is a good indicator of value, then the same standard should apply to bitcoin.
Price is truth if you believe in market efficiency. The longer the value of an asset is held or growing, the more it proves there is value there, regardless of whether some or all market participants agree.
Bitcoin’s price reflects the demand for sound, global, free money. The market is open 24/7, 365 days a year and all market participants have the same information on how bitcoin operates. You can look at the mining hashrate hitting all-time highs, the number of daily active addresses or the 24-hour settlement volume on the chain. All these charts have a clear pattern – an increase going up and to the right over the last 14 years.
Can bitcoin swing wildly over shorter periods? Yes, but the price has drastically from a ROI and CAGR perspective dominated the other assets advisors have at their disposal. It is not an all bitcoin or no bitcoin type of decision.
Over time, if something is deemed worthless by the market it will be sent to its agreed-upon value or arbitrage away. The cryptocurrency market is rife with these – examples recently being FTT and LUNA. And let’s not forget that pets.com and others have inked their names in the history of big losers.
Many financial advisors also make the mistake of arguing there’s not enough history around bitcoin to prove its price is capable of holding up over time.
However, as of the close of 2022, the Bitcoin blockchain had traded and been active for more hours than the S&P 500. Bitcoin has traded for about 110,224 hours; the S&P 500, 107,217. Now, critics might say the S&P 500 has existed since 1959 and that history is essential. But I’d counter most of that is pre-internet history, and the world’s changed since then. Also, Bitcoin is a more robust, unrestricted market – without reliance on a third party or use of circuit breakers when information breaks or participants look for the exits.
Throwing out the intrinsic value argument
I will tell you one thing bitcoin’s price doesn’t reflect, and that is intrinsic value. Many CFAs and industry professionals trot out this line about bitcoin.
My question is, what is intrinsic value? There is no such thing – value has and will always be subjective based on an individual’s need at the time. Demand drives everything and always has.
The idea of intrinsic value is a fool’s errand. The question of whether a Rolls Royce is worth more than a bottle of water is subjective based on where you are and what you need. The demand for water in the desert is certainly going to be higher than that of a Rolls Royce. I exaggerate to make my point, but demand drives value. That’s unchanging over time.
The other reason to disregard intrinsic value arguments is that bitcoin is base money – it’s not backed by anything, and that’s because it’s purely a monetary asset. An asset must only be “backed” by something else if it is missing the properties people value most.
In her ”3 Reasons I’m Investing in Bitcoin,” Lyn Alden puts it best, “Although it has no industrial use, [bitcoin] is scarce, durable, portable, divisible, verifiable, storable, fungible, salable and recognized across borders, and therefore has the properties of money. Like all ‘potential’ money, though, it needs sustained demand to have value.”
Bootstrapping from $0 to global money is one of the most significant accomplishments of any technology. Bitcoin’s price reflects demand and adoption – nothing more and nothing less. We are living through the monetization of bitcoin, and the ride will be bumpy and anything but linear.
Vijay Boyapati, in his book “The Bullish Case for Bitcoin,” summarizes it like this: “No one alive has seen the real-time monetization of a good (as is taking place with bitcoin), so there is precious little experience regarding the path this monetization will take.”
The advisor takeaway
Most advisors still don’t see the need for bitcoin in their clients’ portfolios; they cannot see the forest for the trees.
The United States will probably be the last place to need better money. We’ve had the “exorbitant privilege,” as French President General Charles de Gaulle said in 1965, of being the world’s reserve currency, allowing us to be less impacted by bad money. And I won’t claim in this piece that the U.S. dollar will fail (history tells us it will).
However, for most clients of advisors, bitcoin is the asymmetric allocation that, if wrong, doesn’t hurt them – but if correct, it’s a lifeboat to preserve their lifestyle. The proper allocation for that preservation is how you earn your keep as an advisor over the next decade.
The ego of too many financial professionals will prevent them from making a bitcoin recommendation until it’s reached full consensus. By then the asymmetry will be gone – although owning bitcoin will never be bad. The only wrong allocation in 2023 is zero.
So what is bitcoin’s price telling you today? It’s time to do your homework before the next halving and six-figure bitcoin price has everyone in a mania again.
