Zack Morris's avatar
$4.8m follower assets
BTC Bullet Point Thesis

  • The value assigned to gold serves as proof of demand for a non-sovereign monetary store-of-value asset.
  • Gold has merely been the best technology discovered/invented to fill that role, historically. Bitcoin is better technology than gold.
  • I believe one cryptocurrency will be adopted as the dominant, global, digital, censorship-resistant, non-sovereign, monetary store-of-value asset, and that BTC currently has the highest probability of "winning" due to its immutable monetary policy, adoption, and security via decentralization and proof-of-work.
  • IF you believe, like I do, that one (and only one) cryptocurrency will emerge as a dominant global store-of-value asset, then it becomes a question of assigning a value to that.
  • H/t John Pfeffer @jlppfeffer for the valuation framework below ('s+Take+on+Cryptoassets+v6.pdf)
  • Total current USD market cap of global above-ground gold stocks held as private investment and officially by central banks (i.e. excluding jewelry and industrial use cases) is $4.57 trillion.
  • Because BTC is dramatically more accessible, portable, divisible and storable than gold bullion, and thus potentially more useful to private global citizens, assume a range of 1-3x the value of gold held by private citizens ultimately accruing to BTC.
  • Assume a range of 0.25-1x the value of gold held by central banks accruing to BTC.
  • Given these assumptions BTC market cap of ~$3-10 trillion from gold displacement.
  • Fully diluted supply of 21m BTC minus permanently lost supply of 2.8m BTC = 18.2M BTC
  • Base case (gold displacement): fully diluted BTC price target range = $169k-[$534k](/asset/534k_:equity)
  • Total global central bank foreign reserves excl. gold = $13.3 trillion
  • Assume range of 0.1-0.75 for BTC displacement of foreign reserves
  • BTC market cap of ~$1-10 trillion from displacement of int'l reserves
  • Bull case (gold+int'l reserves displacement): $242k - $1.08m

Call me crazy!

A philosophical summary of why I believe bitcoin is better money than we have today and why it will be adopted globally, if I may. H/t to Allen Farrington @allenf32 and Mike Green @profplum99 for the ideas that have jointly culminated in this (current!) view.

I believe structural inflation is inherently bad for efficient capital markets and the economy because it incentivizes the zombification of asset prices through the growth of "passive" (or index) investment strategies. Here's why.

Inflation makes it so that everyone needs to invest their savings to retain their purchasing power. There's no law of the universe that says this needs to be so.

We should not reasonably expect everyone to be an investor. Most of us have other interests and day jobs, after all.

Thus, a whole industry, asset management, has been created to fix the problem that not everyone wants to be or can be an investor. People pay other people to invest their money for them.

(Remember, if it wasn't for structural inflation, there would be no need for this. Your savings would retain their purchasing power over time.)

So you could be tempted to say that the asset management industry is a leech on people's savings (or "society's capital") due to structural inflation.

Active asset management (i.e. price discovery), however, does provide tremendous value to society. There is valuable information encoded in prices. Discerning investors pricing things in the capital markets leads to productive capital formation in the economy. Available capital finds its way to its highest and best use. This is really important and good for society.

The growth of passive asset management, though, ultimately presents a problem for the usefulness of prices, and thus for society.

Passive investment strategies free load off of the work of active investors to provide useful prices. They present an excellent option for savers who are not investors but need to invest to retain their purchasing power, who get all the benefit of paying an active manager to invest their money, but at a fraction of the cost! It's really an unbeatable value proposition for the saver who is compelled to become an investor because of inflation.

But this is no panacea.

Since people can get the same service at a lower cost, the market incentives savings to flow from active investment strategies and into passive index strategies. There is no stopping this trend absent intervention - the market incentives are such that the flow from active to passive will continue unabated (unless and until stopped by financial regulation).

This continues to be the case over a long period of time until ultimately, price indiscriminate index funds are the dominant buyer and seller of financial assets. When that occurs (arguably already has today), the signal encoded in prices has been degraded and capital markets become less efficient.

Capital is no longer able to find its way to its highest and best use because prices no longer contain the information that allows it do so. Prices are distorted. This is bad for society and economy.

This whole cataclysm - completely rational and incentivized by the free market, mind you - is set in motion by inflation.

Inflation dictates that everyone must be an investor. Everyone must be an investor dictates the inevitable growth of passive index strategies. The growth of passive index strategies dictates a degradation of the information encoded in prices. Distorted prices dictate sub-optimal economic outcomes and, likely, more frequent and more severe boom-and-bust cycles as prices get less and less useful. Severe economic downturns cause societal unrest and strife.

Bitcoin fixes this.

(Ok, I couldn't resist. It doesn't fix it, but it makes it way better).

Without inflation, not everyone is compelled to be an investor. The normal person can simply be a saver, and their savings will retain their purchasing power over time.

The economy is still able to function and grow just fine. Some people can and will still choose to risk their capital in search of a good return. The difference is the cost of capital will be higher, which means capital will allocated more efficiently. The incentive to invest in productive business growth will be strengthened and the incentive to speculate unproductively will be diminished.

The economy will still be cyclical as fear and greed do their thing, but to a much lower degree and without the need for as much government intervention.

Bitcoin is simply a better mouse-trap than fiat as the base money in an economically productive society, because monetary policy is predictable and not dictated by the desire by everyone to have more.

Bitcoin may be the technological break through that, for the first time, allows for truly efficient capital markets.
Golden Lake Partners's avatar
Awesome and very detailed piece of research!
Nathan Worden's avatar
Really great piece— it got me wondering: What is the current balance between assets that are passively managed and actively managed. Is that something that can be looked up easily.

Did a little bit of googling and it looks like as of March 2021 42.9% of assets were managed passively.


Are there easily accessible places to look this up today that doesn't require access to a Bloomberg terminal?
Zack Morris's avatar
@nathanworden not that I'm currently aware of but I'll ask around and come back to you here if I find anything.
Nathan Worden's avatar
@zmo thanks! I’ve been keeping an eye on the rise of assets going to passive strategies. The more assets that are passively managed, the more opportunity active participants will have to find mis-pricings.

Interesting thesis you present:
Bitcoin allows for more savers, which will decrease passive investors. Would this make active management more competitive?
Zack Morris's avatar
I should have included this screenshot of my working $/BTC model in the post.

Also, I'll quickly mention to those who might be following my portfolio: BTC is my largest position (slightly larger than ETH currently) but I hold the majority of it in wallets/on platforms not connected to CS. I hold GBTC (and ETHE) in my IRAs as exposure vehicle.

Nathan Worden's avatar
@zmo I checked out your Commonstock portfolio and looks like we have a 10% overlap 😎

Eric Messenger's avatar
Nice, finally rational intellectuals presenting cases without 🚀