Peter Thiel, one of the world’s most successful investors, shared some keen thoughts on crypto the other day. Thiel has been loosely involved in the space for a number of years, and his fellowship has funded projects like Ethereum and Augur.
I’ll run through what I see as his most interesting points and share my two cents.
Point #1: Store of Value is the Most Investible Use Case of Crypto
While Thiel is skeptical of other use cases of crypto as an investment, he thinks the ‘digital gold’ utility of crypto has great potential. I agree that even though it’s not the most exciting use of crypto, store of value remains the most concrete value proposition as an investment.
For instance, even if smart contracts will create far more value in the long run than ‘digital gold’, it’s less clear who will capture this value. The store of value use case is also more mature and proven than other use cases. Arguably, crypto already has the technology and network effects to be an effective store of value. Compare this to smart contracts where the infrastructure to build and scale economies, companies, and public utilities that run on smart contracts is still immature.
Point #2: The ‘Digital Gold’ Use Case will Mostly be Winner-takes-all i.e., One Cryptocurrency will Emerge as the Premier Store of Value
The idea here is that due to network effects i.e., a network becomes more valuable and trusted as more people use it, one cryptocurrency will monopolize the store of value use case. I agree this is likely, but I question whether Bitcoin is the most promising candidate. It all comes down to what are the most important traits for something to become an effective digital store of value. Potential factors include network effects, trust, scarcity, security, censorship resistance, governance protocols, utility, developer mindshare, community, fungibility, and transaction speed. This is a deeply complex set of tradeoffs, and I think radical open-mindedness and non-maximalism is key here as probably nobody has all the answers and no single crypto asset wins in all of the above categories. This topic runs deep, and I may dive into it in a future post.
Point #3: Money is a ‘Bubble that Never Pops’ and any Successful Store of Value is Basically a Bubble
A suitcase full of 100 dollar bills could buy you a house in some places, but it won’t get you very far if you land in the middle of this island in the Indian Ocean. Money is just a story after all. As long as everyone tells the story that it has value, it does. Just because it’s a story does not mean it’s unstable. After all, barring any black swans, folks will keep telling this story… at least for a while.
So even if something is a bubble in that it has no value outside of the fact that people think it has value, it can still be stable. Gold’s real-world utility as jewelry and an industrial metal, for example, accounts for just a tiny fraction of it’s market value. The vast majority of its value comes from the belief that it’s an effective store of value. Circular reasoning but still relatively stable. As Thiel puts it “even if bitcoin is bubblelike that doesn’t rebut its core use case as a store of value.” So the most accurate answer to the question of is Bitcoin a bubble might be ‘yes, but it doesn’t matter.’
Point #4: Crypto as a Good ‘Probability-weighted’ Investment
Even if you think a cryptocurrency will most likely fail, it may still be a great investment. Because if it succeeds, it will succeed big. Under Thiel’s logic, Bitcoin could be said to have an addressable market of 8 trillion dollars i.e., the market cap of gold. This may be conservative as it doesn’t account for the potential trillions from other stores of value like offshore banking and from other use cases outside of store of value like remittances. As of this writing, Bitcoin has a market cap of ~140 billion dollars. So if Bitcoin has a 20% chance of succeeding (the lower end of Peter Thiel’s estimate) as the New World’s premier store of value, that would translate to 1.6 trillion (.20 * 8 trillion) dollars in expected value. Under this model, Bitcoin is expected to go up by ~11.5, which means 100 thousand dollars per bitcoin. Yes, oversimplified, but you get the point.
Point #5: As a Store of Value, Crypto can be Seen as a “Hedge Against the World Falling Apart”
This is a big point. If you see the world becoming a less stable place due to economic or political forces, then it makes sense to hedge your bets with assets that live outside existing economic and political structures. I don’t think that it’s a coincidence that bitcoin took off in the wake of a major financial crisis. Cryptocurrency can be seen as a hedge, just as much as it can be seen as an investment.
Point #6: Cryptocurrency is Still Contrarian.
Thiel points out that investing in crypto still seems ‘deeply contrarian’ compared to investing in high tech companies during the dot-com Boom. You want investments to be contrarian if you assume that the market already prices in the consensus. You can only have an edge if you see something that most people do not.
The idea that crypto has value may be a mass delusion. But the idea that crypto has no value is probably still the bigger delusion.
As always, just some thoughts. Not investment advice.
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