Digital assets as a store of value
Cryptocurrencies have recently garnered increasing attention from the investing community.
Still, many traditional savers are unfamiliar with how Bitcoin works, why it has recently received so much attention, and why it might be a good long-term investment.
Enter Kane Kalas.
Once best-known as a world-class professional poker player, Kalas, the son of Philadelphia Phillies’ Hall-of-Fame broadcaster, Harry Kalas, is the owner and managing principle of Crystal Oak Capital, a hedge fund based out of San Juan, Puerto Rico. As an early adopter of Bitcoin, he is intimately familiar with cryptocurrency. Crystal Oak Digital Assets, which capitalizes on arbitrage opportunities and market inefficiencies in the cryptocurrency space, is one of two funds under Crystal Oak Capital’s umbrella.
Is betting on Cryptocurrency really an investment?
“This is really a question of semantics,” says Kalas. “When most people use the term ‘investment’, they are referring to any situation in which capital is put at risk with the hopes of future profit. Therefore, if someone buys Bitcoin anticipating that it increases in price, that would be an investment,” he explains.
“However, many in the investing community, such as Warren Buffet, draw a distinction between putting capital in non-productive assets and putting capital in productive, cash-flow generating assets. These people would consider purchasing cryptocurrency, speculation, not investment. They reserve the term ‘investment’ for ownership of income-producing such as bonds, dividend paying stocks, and rental real estate.”
Why do digital assets have value?
In 2009, the Bitcoin white paper was published and Bitcoin became the world’s first decentralized digital currency. While Bitcoin was valueless upon its creation, market demand for the first digital form of money has resulted in Bitcoin’s price appreciating impressively. Today a single Bitcoin is worth $37,000 and the entire Bitcoin market is worth a staggering $694 billion.
“The market demand for Bitcoin was driven by its unique properties,” Kalas instructed. He proceeded to lay out three reasons why this demand exists and has grown over time.
First, Bitcoin is decentralized, meaning that those who own and store Bitcoin in their personal computer or hardware wallets, do not assume counterparty risk. Unlike depositors in bank accounts, for example, their access to the value of their Bitcoin holdings is not dependant on the solvency of another entity and they are free to transfer this value to whomever they want whenever they want without requiring external permission. Second, Bitcoin is scarce. Bitcoin’s code dictates that only twenty-one million Bitcoin will ever exist. Third, Bitcoin exemplifies the other textbook properties of money. It is highly divisible, perfectly fungible, easy to store and transport in large quantities, encryptically impossible to counterfeit, and does not degrade over time.
When asked about other digital assets, Kalas explained, “There are thousands of digital assets similar to Bitcoin with different market prices. Some of them, like Bitcoin Cash and Monero, compete with Bitcoin on a basis of lower transaction fees, less network congestion, and improved anonymity.” The downside, says Kalas, is decreased network security compared to Bitcoin.
“Others,” he continued, “have use cases entirely outside of Bitcoin’s realm.” He cited Ethereum, Chainlink, and Polkadot as examples.
Bitcoin or AltCoins?
For most investors considering investing in or “speculating in”, as it were, the cryptocurrency market, Bitcoin is the most obvious choice. It is the easiest digital asset to purchase, has the longest history of network safety and marketplace acceptance, and has tremendous infrastructure built around it. Alt coins, on the other hand, carry with them significant risk.
Kalas advises, “In most cases, the chances of losing some or all of your money when speculating on altcoins is high. Due diligence is key. There are a lot of shitty projects out there.” He continued, “Unsophisticated investors can fall victim to fraud or unethical distribution practices when they buy altcoins. The digital assets market is largely unregulated and there is little recourse when things go wrong.”
Kalas recommends sticking with the two largest blockchain projects, Bitcoin and Ethereum. Between the two he believes Ethereum has considerably more upside but also expects it to experience higher ongoing volatility.
The bottom line is this - those planning to invest their hard-earned money in altcoins should learn as much as they can about the project before pulling the trigger. Read the digital asset’s whitepaper, research the development team, figure out whether or not coins were pre-mined, and fully understand the added value the project intends to deliver to the blockchain.
So, Altcoins are risky. But what about Bitcoin?
Kalas was quick to mention that while Bitcoin is the most secure and least volatile digital asset, investing in Bitcoin is still significantly more risky than most traditional investments. Kalas even believes that there is some small chance Bitcoin could eventually return to zero or near-zero. He warns, “There are just so many variables to take into account – another superior altcoin may take over Bitcoin’s market share, governments could ban together to crush Bitcoin, or quantum computing may threaten the Blockchain’s security and stability. The spectrum of potential outcomes is wider than most people think.” This perspective is very rare among advocates for cryptocurrency like Kalas.
Kalas went on to explain why he expects a long-term investment in Bitcoin is profitable despite the aforementioned risks. “Averaged out for all possible outcomes, though, I’m confident that an investment in Bitcoin today would be profitable over the coming years. Bitcoin’s future price has the potential to escalate to many multiples above its present value, so while the risk of losing nearly 100% is farfetched but nonetheless possible, the possibility of gaining 100% is actually likely. There is even a possibility of gaining 1,000%.”
A soft bull case target Kalas mentioned regarding Bitcoin’s future price involves its relationship to gold. If Bitcoin’s market capitalization one day matches the current market capitalization of gold, he explained, then one Bitcoin would be worth over $500,000. According to Kalas, this scenario is more plausible than people think; he contests that Bitcoin’s properties as a store of value are superior to those of gold. Anecdotal evidence, he claims, can he observed in Bitcoin’s ongoing use among individuals in countries with strict currency controls and high inflation – individuals who, prior to the advent of Bitcoin, would instead resort to bartering with gold.
Can I time the market?
While Kalas is a long-term cryptocurrency bull, he is less than optimistic in the short run. “The recent explosion in price of trivial assets such as Dogecoin and NFT’s indicate that unsustainable market euphoria still exists,” Kalas reasons. “I expect this market to continue downward for a matter of months or perhaps a year before resuming its upward trend.”
How much exposure should I have?
Due to the uncertainty in potential outcomes and the high volatility of investing in digital assets, Kalas recommends a tame position size in the asset class. “Regular investors should limit the total exposure of digital assets in their overall portfolio. Whether that’s 5% or 20% depends on the risk tolerance of the individual investor but anything north of 30% is too high for anyone who is not an actively trading professional.”
In summary, ownership of digital assets has the potential to bolster the returns of a portfolio, however, investors should maintain a balance among a variety of asset classes. While Kalas believes Bitcoin and Ethereum will outperform market indices over the coming decade he still believes the cornerstone of a prudent investors’ portfolio should be stocks, which, “are significantly less volatile than cryptocurrency.”
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