Diamond Hands .. Anyone?

Over the past decade, Bitcoin has ascended into mainstream investment discussions based on 1) increase in value and 2) the rabid nature of its ownership base.  Rather than a programmable network, or a transacting medium, Bitcoin has evolved simply into an investment medium – an alternative commodity of sorts.    The 45% drop in value over the past month has ignited the same-old debate on the value and utility of Bitcoin.  Bitcoin, along with other Cryptocurrencies, are evolving platforms.  Therefore, it is critical to keep an open mind to new information and developments, instead of getting locked into a dogmatic belief that is for, or against.  Here is the framework for owning Bitcoin the way I see it today. 
 
Pros of Owning Bitcoin

1. Finite Supply: For most commodities, price dictates supply.  As price rises, the prospects of higher profits bring more capital investment.   More investment leads to higher supply.  Over the course of a market cycle - higher price leads to higher supply over demand - which eventually lead to lower prices.  However, the supply of Bitcoin is fixed at 21 million.  Economics 101, If the demand for Bitcoin continues to rise and supply is fixed, price will rise.  This finite supply is the most differentiated and the least discussed feature of Bitcoin.

1. Rising Institutional Interest:  Historically, Bitcoin has been a retail asset.  Bitcoin also has the best returns of any asset class over the past decade – with a side effect of maddening volatility.  The attractive trailing return has caught the eye of the global institutional community.  Today, early adopters and very smart investors have invested in Bitcoin.  This interest will only increase over the next 5 years.  Additionally, many more CEO and CFO’s are willing to invest a small proportion of their corporate cash in Bitcoin.  Square, Micro strategy, and Tesla are the early adopters.  Therefore, the future demand for Bitcoin is likely to be much higher as the pools of money controlled by institutional investors and corporations is significantly higher than retail interest.

1. A substitute for Gold:  Gold has been the metal most synonymous with ‘store of value’.  Historically, Gold has especially been useful in portfolio diversification in 2 specific tail cases – sustained deflation and high inflation.  However, times change.  As masses become digitally savvy, we are more accepting of digital assets.  Therefore, Bitcoin will likely make a transition from ‘millennial gold’ to ‘everyone’s gold’.  Historically, Gold’s market capitalization (based on the amount of physical gold in circulation) has ranged between $12 - $15 trillion dollars.  Today, Bitcoin’s market capitalization is below $1 Trillion.   Therefore, if the supply is finite and demand from retail and institutional investors as a substitute for gold rises, Bitcoin prices will rise.  I see it a distinct possibility that Bitcoin can grow to be 50% of Gold market capitalization- which means Bitcoin could rise 5-8x from current prices.

Cons of Owning Bitcoin

1. Lacks Intrinsic value:  Unlike a business or real estate, Bitcoin does not generate cash flow.  Without cash flow, Bitcoin lacks intrinsic value.  Therefore, the value of Bitcoin depends on the prevailing sentiment of the market. 

1. Competition from other digital currencies:  Emerging protocols such as Ethereum are developing underlying programmable layers that are increasingly attractive.  While widespread innovation in crypto legitimizes the entire asset class, it takes away mindshare from Bitcoin.

1. Not a transactional vehicle:  The swings in Bitcoin are too wide.  Can you image getting paid in Bitcoin on April 1st to only see Bitcoin lose 50% of its value?  No.  High volatility is the biggest deterrent to Bitcoins acceptance as a transactional currency. 

1. Diamond hands anyone?  The average intra-year decline for the stock market is 14%, yet most investors consider stocks to be higher on the risk curve.  Bitcoin averages 30% declines every six weeks, with multiple 80% declines.   The memes of HODL (hold on for dear life) and diamond hands (or the conventional ice water) have emerged because of this maddening volatility.

1. Government intervention:  Bitcoin is a decentralized protocol; therefore, a government cannot stop it.  However, a government ban will eliminate the institutional and corporate demand pressure much needed for prices to advance. 

 
When an asset lacks underlying cash flow, price depends on the emotion of the market.  Momentum then becomes the strongest emotion.  High prices attract buyers and low prices bring on more sellers.  If you look at the large swings in bitcoin over the past decade, momentum is the easiest explanation.  It is the ultimate confidence game.


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This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund").  Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law.  An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal.  There is no secondary market for interests in the Fund and none is expected to develop.  No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment.

This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund.  These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described.  These forward-looking statements will not be updated in future.