The Pros Not Understanding Bitcoin Is a Good Thing for Us

“Amateur investors have always had advantages over professionals: They can invest for the long run and ignore the short term, since they can’t get fired for underperformance and don’t have clients who give them money (or take it away) at the worst time.” 

- Jason Zweig

Last year, I bumped into an advisor friend, a highly intelligent professional that I respect, who serves many satisfied clients. He asked me about my interest in bitcoin. I shared a few pithy thoughts (I am usually reluctant to be a promoter on this topic). The advisor’s response was friendly and not atypical - “that's great, but I think the real game changer is the different use cases of blockchain technology!" Perhaps he was being polite, wanted to contribute something to the conversation, but I immediately understood that he didn’t get it. 

For those of us deep down the rabbit hole, the case for holding bitcoin is that it is a long term store of value. It is better money that can preserve purchasing power over time and space. This simple thesis, although intuitive, and the most proven of all use cases in crypto, is still niche (outside of a very loud minority). It is particularly niche amongst those select portfolio managers and investment committees who control a majority of financial assets. I am not picking on my advisor friend focused on “different use cases of blockchain technology,” because he’s not alone, and I’m sort of glad to see it. While bitcoin is in common parlance now in market commentary, politics, and internet culture, few understand what could be an idea hiding in plain sight. This is good news for us, as herein lies the opportunity. 

Individuals have won out over institutions during the dramatic rise of bitcoin over the last 15 years. While the proverbial yuppy elite were dismissive, the profits from holding have accrued instead to regular joes, anons, and (previously) second/third-tier venture capital types. It was individuals who were able to front-run Blackrock and Fidelity prior to the approval of the spot ETFs earlier this year. Although I own a firm and invest on behalf of my clients, (and am therefore more constrained), I have always tried to emulate intelligent individual investors rather than large institutions. This is why we don’t focus on short-term results, we don’t merely allocate to the total market portfolio, we have opinions, and we eschew the scandal of “indexing nihilism.” This principle is what allowed us to first allocate to bitcoin in March of 2021 and then to add to our position in May of 2022. 

I like fundamental equity investors a lot, but they have a hard time with bitcoin. After all, there are no physical assets, no cash flows, no business at all. This is why I enjoyed a recent interview with Eric Semler, a former hedge fund manager turned CEO of a publicly traded company. Semler has implemented a bitcoin treasury strategy at Semler Scientific. He represents the trickle of large institutions that are slowly catching up to the individuals that have already adopted the strategy. His response to professional equity investors scratching their heads is that this mindset provides the opportunity. ‍

“I think that's great. I mean I think we need more people to think that way.. Because, that's how to make more money in this concept, how it succeeds, you know. I think that you need that friction to continue and I think most of those people will come around once they really understand what bitcoin is.”

In other words, if everyone agreed with us, there would be little opportunity left. Semler also gave his explanation on why institutional inertia, on Boards of Directors, for example, contributes to the friction:

“What I've learned from serving on public company boards is that most boards, in my opinion, are filled with directors who are looking to just collect a paycheck every quarter. They don't tend to own a lot of the company stock that they're on the board of, it's not something where they have a lot of skin in the game.. So I think that board members generally are risk averse.. They see it as a gamble, they see it as, you know, potentially a threat to their paycheck as a board member.”

Even after the successful Bitcoin ETF launch, which opened the gates for anyone with a brokerage account to invest, there is still a sense that most pros are not on board. With this barrier to entry removed, it begs the question, why is this? Where are the institutions? As Semler points out, we are still left with the classic principal-agent problem. The interests of those managing the investor’s money are not necessarily aligned with the investor. Let me put it this way, why would a successful portfolio manager allocate to bitcoin, even if it was a good idea, when it could tarnish his reputation, affect his paycheck, or even get him fired? It sounds harsh, but incentives matter. James Burnham used even stronger language over 80 years ago in his provocative book The Managerial Revolution, “Managerial activity tends to become inbred and self-justifying. The enterprise comes to be thought of as existing for the sake of its managers – not the managers for the enterprise.” Semler continues:

“..it’s probably, you know, just too outside the box for them to make that bold decision and they'd rather just maintain the status quo. And so that's why we did it. That's why we were able to do it and maybe why it's not happening as fast as it should. You would think that more companies with lots of cash on their balance sheet, big and small, would turn to owning some bitcoin, just the way that Wisconsin Pension Fund is buying bitcoin or so many other institutions are buying it now with the ETFs. You would think that there would be more announcements. It's surprising there hasn't been. But maybe we were able to be early because our board has so much skin in the game.”

Sure, taking the status quo is perfectly appropriate in some cases. Being contrarian for contrarian’s sake is foolish, the other side of the same coin. The point is that the status quo is often chosen for spineless reasons, like saving face, or guarding a paycheck. Because I work with families with long-term outlooks, as in many years and decades, we have the opportunity to dream about results that are greater than the status quo. So we can choose to be slightly different, which is a necessity for outsized returns. Ian Cassel put it this way, “alpha is generated by being just a little bit different in a disciplined and thoughtful way.” 

Granted, being an independent thinker, avoiding some of the perils of institutional managerial thinking, does not mean that we are correct. The status quo exists for a reason, after all. Bitcoin may offer an attractive risk/reward opportunity, but it is no guarantee. Allocating to the asset gives us a chance that others who have not done the work will miss out on, for better or worse. It means that there still might be an edge to be had, something we have been told is only available to a select few, if to any at all.  Complacency, ignorance, and inertia, especially amongst those who represent the largest pools of capital, present opportunities for us as individuals.

The pros, collectively,  don’t yet understand bitcoin, but that is changing. Notably, Blackrock’s Larry Fink and JP Morgan’s Jamie Dimon have changed their tune, sounding more like Andy every day. It is surreal in 2024 to hear Donald Trump do a similar 180 and make appeals to the bitcoin community, indicating he at least now has people in his camp that get it. Looking ahead, with the gradual increase in the number of long-term bitcoin holders, the coalescing of more “buyer’s of last resort,” and new price floors being established every boom/bust cycle, we can continue to validate the thesis playing out. If this happens, with the finite supply intact, the price should increase over time. And along the way, I suspect others will come around to bitcoin at their own pace

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