Yogi Berra said “In theory, there is no difference between practice and theory. In practice, there is.” A lot has been written and discussed recently about Paradigm Shifts. I could not help myself — I had to offer my 2 cents. As someone who has started over 5 companies now, I’ve always been fascinated with innovation. This fascination led me to stumble across Thomas Kuhn’s work, specifically how Scientific Knowledge progresses in a non-linear fashion through periodic Paradigm Shifts. I strongly believe that at any inflection point, possessing superior information and having the willingness to act upon it separated my winning endeavors from the others. I will also add that on two occasions what I perceived to be a Paradigm Shift was simply Noise…it is crucial to separate the “Signal” from the “Noise”.
Do I believe we are witnessing a historical Paradigm Shift and complete re-calibration of Capital Markets…ABSOLUTELY! I do NOT refer to Bitcoin as “Digital Gold” because frankly I think that assessment is limiting, sloppy and ill-defined. In my opinion, Bitcoin is much more than that. As Warren Buffett said of gold: “It gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Having spent my entire career either trading or brokering derivatives, I can’t help but think in terms of optionality. To me, taking a long position in Bitcoin is analogous to owning a Synthetic Straddle (i.e. you own both a put and call). When there is unrest in global markets, Bitcoin rallies — this is the long-put leg of the trade. Now, the long-call leg is a bit more complicated. In my opinion, Bitcoin represents a play on an exciting and potentially very disruptive “General Purpose Technology”. GPTs are technologies that can affect an entire economy and systematically alter society. Examples of GPTs include the wheel, the steam engine, electricity, the computer, the internet, and now blockchain technology.
The Bottom Line
Bitcoin is emerging, to some, as an intermediate-term portfolio diversification tool, perhaps similar to gold. To me, Gold is merely a “safe harbor in a storm” and lacks the upside of a technology play. Bitcoin demonstrates positive correlation with global unrest and can act as a long-term inflation hedge, but can also gain leverage on open-ended optionality on further use cases/protocol within digital assets. Bitcoin can be a vehicle to gain exposure to a potential discontinuous leap from the way we view Capital Markets today.
Seems like I am getting the 60–40 on this trade. I think I will wait for the flop…