A new and safer way to invest in Bitcoin — 2021 and beyond
The latest ‘understanding’ of the bitcoin phenomenon is that it is digital gold.
(more on that in a bit)
Other times when we have heard such statements where gold was used as a prefix to another commodity was when it apparently had to do with colors but of course we know better.
Oil being the black gold
Unfortunately, Heroin being the white gold.
Ultimately, gold was gold and diamonds are a girl’s best friend but then how does an investor like ourselves figure out what is the intrinsic value of something to be able to make a sound decision with his valuable cash.
It consists of two considerations.
For the first, let us take diamonds and it is a fact that they are quite abundantly available on earth (feel free to google that) and they even rain down on Uranus (google that too). What makes them ‘a girl’s best friend’ is a delicate balance of supply and demand where the supply is kept in strict check and the demand is hyped up through targeted advertisements.
The second factor dictating value is accessibility: The diamonds on Uranus are not exactly within our grasp as you might know so let us take an example of something much closer and being used day in and day out: Oil.
The oil available by the barrel loads in the middle east or off the coast of Venezuela is probably under miles of rock and ocean and therefore not applicable to be poured into our automobiles. An intermediary is required to dig it out, transport, refine and dump it in a gas station next to our homes.
Hence, it becomes of use and therefore of value.
In order to maintain that usefulness, we pay a premium to that intermediary who ensures a consistent supply and quality of the said product.
The keyword here is an intermediary which gives legitimacy to an otherwise obscure, distant, unstable and unknown resource.
Now that we simplified the complex inner workings of the value of a product, we can start talking about Bitcoin.
Bitcoin is an oddball though or at least it has been for all its years of existence.
For one, it does not have any intrinsic value but just the same value as that of a religion — the more people you have believing into the invisible, the stronger you get. The same is true when a whole bunch lose their faith in times of despair.
Now obviously there is no way to know what the 6 billion or so population of the planet would think about investing in bitcoin — Also unverified but the understanding is that 95% of bitcoin is owned by very few parties who can play the market up or down at their pleasure. So far, it has also eluded everyone to put a face to bitcoin which is understandable because the digital currency was designed specifically to discourage exactly that.
There is a saying, ‘trust in god, but lock your car’ — This has been the sentiment with most of the veteran investors who have never taken bitcoin seriously because no particularly known or regulated party holds any substantial part of it. As a friend once put it, “Doing bitcoin can only be a hobby”.
This all changed in the month of November 2020.
A seemingly straightforward company called Microstrategy (Nasdaq: MSTR) dealing with data analytics suddenly made a considerable investment into the digital currency — They exactly described it as buying Gold which then acts as a repository to retain or grow the value of their cash. Cash which you know or should know loses its value over time. I could buy 10 apples from a dollar today but I will only be able to buy 5 with the same dollar in 10 years.
At this point we can refer back to the first line of the article about digital gold and read more on that here.
As a result and understanding of this new player, the stock price of MSTR jumped 5 times within 30 days.
This established that we now had a name that we could bet on if we were interested in this particular digital gold. Think of it as the oil drilling company which partially regulates an otherwise lawless and inaccessible commodity. We have to remember even oil supplies are prone to disaster due to politics, environmental and logistical unknowns. The same is with bitcoin which will keep going up or down at the whim of the unknown but there is now a cushioning which exists between that shock and ourselves — effectively absorbing the shock.
The company creates a sort of buffer between the craziness of bitcoin and someone’s lifelong investments. In terms of some physics, it gives some mass to the otherwise tachyon nature of bitcoin. Tachyons are theoretical particles which are faster than light, do not have any mass and can pass through matter making them exquisite yet not practically helpful outside of theories and maths.
In numbers, we can safely say a $10,000 drop in bitcoin price would translate to a $100 drop in MSTR stock price. Feel free to take a look at the correlation on the stock prices — they are pretty consistent in the last few months.
So, if you want to invest in bitcoin, it is the same as investing in MSTR with only a fraction of the risk.
The second strange and the first of its kind thing is that bitcoin gets traded 24 hours around the globe while MSTR is listed on NASDAQ and follows the usual stock trading hours of the US stock market.
How is that important? It is the part where we mention gold ‘mine’ — we have a sort of window into the future just a minute before the stock market opens:
— If Bitcoin is up, so is MSTR.
In conclusion, our investment is relatively safer and kind of predictable — I would say that is investor heaven and it is time to dive in. MSTR on its worst day would drop a quarter of its value but on good days can double upwards.