The $600,000 Case for Bitcoin

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But my base case on that model, it's Bitcoin at $620,000, right? Today, at today's price. So I, you know, if I'm correct, my probabilities are correct, Bitcoin should have been— should be trading at $600,000 and not at $60,000 that is trading right now.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voice you just heard, that's Rafael Zaguri. He's chief investment officer at a firm called Swan Bitcoin. He's a Bitcoin enthusiast, a bull, it's fair to say. And in a moment, we'll hear from Rafael and another Bitcoin bull about the case for more upside. Using math, using traditional valuation models. Not that traditional. Some of them are a little weird. We'll get into it. Listening in is our audio producer Jackson, who looks taller. Are you wearing— you wearing Lifter shoes? What's going on with you?

I'm on a standing desk and I have my walking treadmill. I'm ratcheting up. Up the speed as we speak. I gotta speak in the microphone.

I saw you were bobbing up and down. I thought that was maybe one of those West Coast minor earthquakes or something like that. I don't know.

I didn't wear shoes inside my house, and so I was on it in socks, and after about 10 minutes I got off and my socks were totally worn through. Like, the treadmill had stripped off all the sock portion under my feet, and I just—

Well, it's gonna get expensive, but Feel free to Fred Flintstone your way through another pair this episode.

I think I'm ready for a break.

Take a break. Have a, have a seat on one of those big giant exercise balls. I bet there's a Venn diagram of people who use treadmill desks and people who sit on those bouncy exercise balls. There's a lot of overlap there.

I'm guessing, I'm guessing you've got one in the room.

Bitcoin hit a fresh high this past week, and you might've heard mention of it in the news.

A lot of enthusiasm around Bitcoin hit a new record high yesterday.

If you invested in Bitcoin over the past year, you're up 157%. If you were invested over the last 5 years, you're up more than 1,000%.

$69,208, breaking the old record, I think that goes back to November 2021, at $68,990. That is a big turnaround. Bitcoin had dived in price such that the comeback works out to about a tripling of the price in a year. Jackson, how much Bitcoin are you hodling these days and where did you buy doddle it?

I bought it at the last peak and I actually sold it at the last peak for about $77,000 loonies per Bitcoin.

That's, that's what they call money up in Canada.

Yeah, exactly.

So you're not sitting on any big gains right now from this latest run-up?

Unfortunately not.

I actually wrote, and brace yourself for this, Jackson, because it's going to be a sad story.

Oh no.

I wrote about Bitcoin in June 2011, as in almost 13 years ago. And the story, it was a chunky little column. It was a good-sized column for something called smartmoney.com, which is no longer with us. Bitcoin is still very much with us. smartmoney.com is not. And the title of that column was "The Currency That's Up 200,000%." And it said, "Bitcoins are the top-performing money in the world, but what are they?" And it was like an explainer piece for people who, you know, didn't know what Bitcoin were.

Wow, 200,000%. How much money was Bitcoin worth back then?

At the time, it was about $10.50, not $67,000 and change where I saw it just recently, $10.50. I know what you're thinking. Of course, seeing something that's rising like that, I forgot about all the details and I just said, hey, look, let's get in this thing. And I sold stuff and freed up a meaningful amount of money and piled it in. And today I'm sitting on Bitcoin riches. But I did none of that. All I did was just write this story. I wrote about one of the original trading venues for it called Mt. Gox as in Mt. Gox. Which, as we have detailed sometime before in this podcast, stands for— I got to remember— Magic: The Gathering Online Exchange, because it was a site where people would originally trade these cards from a role-playing game called Magic: The Gathering. I interviewed a guy at the time. He was 29, and his parents owned an alpaca business in Massachusetts. And he had talked his parents into accepting bitcoins in exchange for their alpaca socks. True story. Wasn't it? Wasn't a lot of commerce being done at the time with Bitcoin.

Oh my gosh.

I mentioned there were some, you know, some stores that would sell t-shirts. And then I mentioned the infamous—

We got to track down these alpaca farmers.

Yeah. Who knew? No, they're probably long since retired. Them and the alpacas are on Easy Street right now. And then I mentioned the infamous Silk Road, which was a forum for people selling recreational drugs and there was some Bitcoin being traded there. And I interviewed some people about some of the possibilities and problems and potential for regulation down the road. It was so long ago that I wasn't even sure whether to call it Bitcoin or the Bitcoin, kind of like Batman and the Batman.

Or Ohio State.

Exactly. Okay, so fast forward to today, and I'm living in shame, not just because I didn't buy Bitcoin back at $10 when I was spending so much time thinking about it, but also, Look, I have here and there voiced some skepticism, right? Is it fair to say? Oh yeah. I'm one of these nerds who has pointed out like, well, the lack of cash flows and it's not, what does it mean and how do you figure out what the value is and where does it end and where does it take you and so on? And we've had some people on the podcast who have been pro-Bitcoin and bullish. We have also had some people who were skeptical. Our friend David Kelly from JPMorgan Asset Management was pretty skeptical himself. He said what? What do you say, Jackson?

I don't care if it's Bitcoin or Zitcoin.

You can't do— are you doing it?

I can't do an Irish accent, not even on a treadmill desk is that allowed.

That's what he sounded like. That was actually a recording. That wasn't me.

He gets to do the Irish accent because presumably he's Irish. You do not get to do it. What did he say in your own accent?

Yeah, he said, I don't care if it's Zitcoin or Bitcoin or Dick Coin, it's worth nothing. In fact, I should make a David Coin or something to that effect.

Okay.

So yeah. And then we talked with the fellow from Research Affiliates who said basically along the lines of the worst thing that could happen for Bitcoin is that it would achieve its promised role as a vital financial utility because if it did that, it would become boring. There wouldn't be this open-end speculation about what it could be someday and the price would stop running up. And in his view, people were buying it mainly for the price to run up. So I felt like you couldn't have the speculative excitement and the promise fulfilled of what Bitcoin can be. You could have one or the other. And I guess it's fair to say we must still be in the speculative excitement phase of things. There are a couple of things driving this price higher, maybe. I mean, who's ever to say? But there's the new class of Bitcoin ETFs that have come out, so it's easier for ordinary investors to buy into Bitcoin without paying huge fees. We're also coming up on the halving, the halving, halving. And that is— we've, we've, we've explained that in the past. Basically, there's this, you know, process of creating new bitcoins that they call mining, and it uses computers and a lot of computing power. And there's a reward associated with that effort. And that reward gets cut in half every so often. It's this sort of predetermined rate. And eventually they'll stop making new Bitcoins. Well, the next halving is coming up in April, and that's going to mean slower supply creation after that. And that gets people excited. But of course, the question on everyone's mind, if they don't have it, is should I buy? Is it going higher? And if they do have it, what's going to happen here? Does it keep going up? Will it crash? Should I hang on? How long? How high can it go? And I, of course, have no answers to that. You do not want to take Bitcoin advice to the guy who turned his nose up at about it at $10. You really don't. But I got curious about who out there is doing math and what kind of math are they doing. In other words, are there Bitcoin analysts apart from the narratives, apart from, well, Bitcoin is the future of money and so you should buy it because it's going to go way up. Apart from that stuff, is there anyone out there doing kind of traditional Wall Street valuation modeling on Bitcoin, which I know must be difficult because as we always say, there are no cash flows or dividends or things like that that you would usually use as a peg of fundamental value. We started looking around and, uh, we reached out to a couple of Bitcoin analysts, a couple of Bitcoin strategists, and we got 5 models, right, Jackson?

Not 1, but 5.

5 models. We're going to take you through them. Some are simple, some are really anything but simple. And this is not an endorsement. I'm not saying which model I like. I'm not saying that I like any of them. I'm just saying here they are. If you're someone who's wondering what the, what the bulls say about why they think Bitcoin can go higher, We're going to look at that today. And I'm not going to offer a ton of pushback because this just isn't a pushbacky episode, but I might be quietly pushbacky in my heart, or I might just be bitter about not having any Bitcoin.

In your column, you mentioned having to wear a paper bag over your head out of shame. I hope it's not coming to that.

It's approaching double bag levels of shame. Let's take a look at model number 1, which I will call good as gold. JP Morgan has actually used this one. It treats Bitcoin kind of like digital gold because there are some similarities between the two assets. There's limited supply. They are fungible, which means, you know, like one gold coin is just as good as another. They're divisible. They're stores of value. They're not really under government control. And, and they're both durable. I mean, I think Bitcoin's durable. It outlived that publication where I wrote about it.

I'll get my third paper bag ready.

Okay, so if they're comparable, maybe there should be as much Bitcoin as gold. The value of all mined gold is estimated at close to $15 trillion, but a lot of that is jewelry, a lot is held by central banks. So if you just look at the gold that's held by private investors, the bars, the coins, the stuff they're selling you on those infomercials, and the ETFs which are tied directly to gold, some of them. That's estimated at $3.3 trillion. Bitcoin's market cap was recently around $1.3 trillion. So, if you plug in the latest numbers, you can come up with a fair value for Bitcoin of over $160,000 per coin. Now, that doesn't have any risk adjustment, and Wall Street loves a good risk adjustment. It gets into some murky territory, but you basically have to use something as a proxy for risk. Usually they use volatility, and you can compare the past volatility for Bitcoin with that for for gold and see that Bitcoin has been more volatile. And if it's more volatile, you might say, well, then it's riskier and maybe I should adjust my price lower. And how much lower you adjust it depends on how much riskier you make it out to be. Okay. I reached out to Reda Farhan. He's an analyst at a financial information site called Finimize. And he likes JP Morgan's approach, but he has notes. One of them is he thinks maybe JP Morgan has been too punitive in that risk adjustment to Bitcoin. He observes that Bitcoin is becoming less volatile, so he takes that to mean it's becoming less risky. And so that adjustment downward shouldn't be as great. And he also says there's some things about Bitcoin that he views as better than gold. One of those has to do with new supply creation. Here's Reda.

So after the halving event due late April, which basically will reduce the growth rate of new bitcoins entering into the supply, the total annual supply growth of Bitcoin will be about 0.8% per year. Okay, if you compare that to gold, the annual expansion in gold supply is 1.7%. So Bitcoin supply is growing at half of the rate of gold.

Reda also argues that Bitcoin is more useful in many ways than gold as a financial instrument.

But like, in contrast, there's a lot of stuff you can do with Bitcoin, right? First of all, you can use it as a form of payment. So according to CoinMap, there are more than 30,000 merchants worldwide that currently accept Bitcoin, including, you might be surprised to hear, brands like Subway, Starbucks, BMW, Coca-Cola, and even Microsoft.

I can pay for Subway with Bitcoin?

In certain stores, yes. Okay.

It's getting more interesting. That alone is not enough to make me bullish, but it's got my attention.

Look, the second thing you can do with Bitcoin that you cannot do with gold is basically right now I can easily and cheaply send Bitcoin to another person on the other side of the world without the middleman and without any risk of censorship. So you can use it as a method of money transfer. You can also deposit Bitcoin on centralized or decentralized lending platforms to earn interest. So gold not only generates zero yield, but also it incurs storage costs in the form of custody and insurance fees if you're trying to hold it physically. And then finally, you can also use Bitcoin as collateral. So you can again deposit it at certain lending platforms and you can use it to borrow other cryptocurrencies. There's also fintech in the US called Milo that actually lets you use your Bitcoin as collateral to take out a mortgage. Not enough to make you bullish, but just highlighting some of the use cases that Bitcoin has over gold, some of the utility Bitcoin has over gold. And the argument I'm making is that utility is worth something. So if you look at PayPal, which is tied up to electronic payments, it's valued at about $63 billion, right? If you look at Wise, formerly TransferWise, and Western Union, which are tied up in money transfers, they're valued at $11 billion or $5 billion respectively. So that framework I discussed with JP Morgan completely ignores that additional value that comes from Bitcoin's higher utility compared to gold.

So if you're doing a risk adjustment that brings Bitcoin lower, you should also be doing a utility adjustment that would bring Bitcoin higher in your view.

Absolutely.

Okay, so that is the good as gold model. The second model has to do with Bitcoin mining, and I have named it miner detail, as in M-I-N-E-R. That's a bit of wordplay that comes through in print, and now that I hear myself say it aloud, not all in audio. So, so forget I said anything. Now, one of the things people do with gold when they're trying to figure out how much it should be worth is they look at the cost to mine an ounce of the stuff. And you can do kind of the same thing with Bitcoin. You need computers to mine for Bitcoin. To do a decent job of it, you need a tremendous amount of computing power. There's people who've set up data farms and centers where they do nothing but mine for this stuff. And so you can kind of figure out your marginal cost of production. And one of the most expensive inputs is going to be electricity. In that column that I wrote like 13 years ago when the thing was around $10 and no one was really sure whether there was a regulatory crackdown or something like that coming. I mentioned a Bitcoin miner whose house had recently been raided by the FBI, but the FBI wasn't looking for a cryptocurrency operation. They looked at the electric power being consumed in that home and they assumed that the guy was growing cannabis. And that was that long ago, so imagine what the power consumption looks like today. Okay, so you can come up with a cost of production by factoring in the world price for electricity, the efficiency of the equipment being used, and the reward rate, which as I said, is due to be halved in April. And that stuff is beyond me. But there's a researcher who has published some work on this subject. His name is Adam Hayes. He's at Hebrew University in Jerusalem. And late last year, he predicted that after the coming halving for Bitcoin, halving, that it will cost $75,000 to mine a Bitcoin after that point. That's his prediction. So that's a little bit over the recent price of Bitcoin. And as Retta at Finimize says, that's more of a floor for the price than a fair value. That's his view. Okay, so that's the second model, minor detail. That brings us to the third model, but I'm feeling a break coming on. Is this where we do it? Is this the spot? Is it time for a break?

It sounds good.

It feels just right.

By the way, I was thinking Minor Detail could be a great name for Rio Tinto's a cappella group, but spelled with O-R.

O-R as in a minor scale? Is the—

are we still recording?

Because I want to make sure we're getting this. I don't want to lose a word of this. I got to get this right over to the people at Rio Tinto. All right, we'll be back.

Right after this quick break.

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Welcome back, Jackson. I'm going to hate myself for asking, but what did you find? What do you— first of all, what did you search for?

Yeah, I had ChatGPT come up with a list of potential mining-related a cappella names.

Okay, so mining-related names for a cappella groups. Go ahead.

All right, we have Quartet, which is a twist, I assume, on quartet and quartz.

I'll give that a B. I'll give it a solid B+.

Go ahead.

Vein Melodies. Vein as in ore deposit.

I'm not allowing it.

No.

Go ahead.

Minor chords and the fracapellas.

That one feels like it might already be in use. That's ridiculous.

Let's get to Rafael Zagori. I reached out to Rafael. He's chief investment officer at Swan Bitcoin, which is an investment company. You can go there, you can get a platform for getting Bitcoin for financial advisors. You can get a Bitcoin IRA, all sorts of stuff. Raphael has a background in traditional finance, so he was just the guy to ask for what we were looking for— mathy approaches to figuring out what Bitcoin is worth. Okay, so the simplest of Raphael's models, I have named it Chart Envy. That's my term, not his. This isn't really a specific price model that tells you what Bitcoin should be worth, but it's an argument that it's headed much higher. Basically, if you've ever heard of an Ibbotson chart. Jackson, you know what an Ibbotson chart is?

No clue.

Goes back like 30 years ago when I was a stockbroker. Basically, everybody had a chart on the wall that showed the performance of stocks versus bonds and bills and inflation. And when you had clients sitting there who were reluctant to put money in stocks for the long term, you'd point to the chart and you'd show them how stocks have historically outperformed all these other asset classes and explain to them why they should have some money in stocks for the long term. And if you had Bitcoin on that chart, I suppose the Bitcoin's returns would dwarf everything else. And maybe you'd be telling that same client that they should have an allocation to Bitcoin. Rafael tells them just that.

And I'm still to find a portfolio where the right answer would be to have zero Bitcoin, right? Quite the opposite. If you actually get a 60/40 portfolio, which doesn't get any more traditional than that, the right answer, if you just look at historic returns, the optimal risk-return that you would get in a portfolio is a 20% Bitcoin allocation, right? And people look at that and they're—

20% of your portfolio in Bitcoin is the right allocation?

Yeah, that's where you optimize your risk-return allocation, right? This is the optimal point on the efficient frontier.

Now's probably a good time for me to reiterate, these are not models that I'm saying you should follow. I'm not saying 20% is the right allocation to Bitcoin for you. My allocation is zero. With Bitcoin hitting new highs, I'm living in shame with that allocation, but who knows down the road what'll happen. So I'm not endorsing anything here. I'm just sharing these models with you. And that brings us to the next one, which I call Gobble Gobble, because not as in turkey, more as in like Pac-Man, because it has to do with Bitcoin gobbling up some of the usefulness of other financial assets. This is the most extreme of the models in terms of the price you come up with. Let me see if I can explain. Let's use real estate as an example. There's a lot of real estate in the world. The collective value is estimated at $320 trillion, and some of that value is the usefulness of the actual structures and the land. But some of it is also investment value or speculative value or what Rafael calls the monetary premium. He puts the monetary premium for real estate at 30%. So if you're very optimistic about the future of Bitcoin and you assume that Bitcoin is basically going to be the apex predator of savings technologies, that all of the ways that people save their money now, they're going to prefer to do that in Bitcoin down the road, then you would believe that this monetary premium is going to be stripped from these various financial assets and given over to Bitcoin. And that's a tremendous amount of money. And that's far from a slam dunk that that's going to happen, but you can put low probability on such a big event and still come up with a pretty sizable value. It's complicated, I know. Raphael has created a website where users can plug in their own assumptions. It's called nakamotoportfolio.com.

Nakamotoportfolio.com.

I'm not a great speller. N-A-K-A-M-O-T-O. Is that right?

N-A-K-A-M-O-T-O.

Okay, I got a swirly thing in the middle and I'll click discover.

Just click in the middle to start.

Oh, it's a lovely graphic. The model result is $621,775. Yep. That's a 9— it says here 9x. That's a 9-fold gain from where we are now.

You see on the right-hand side, real estate.

Yeah.

Just click there on that arrow and it will show you like that the market value, it's $320 trillion. Right. And then the monetary premium price here in this model is 30%. Right. And there's a probability of capturing of 5%. So on my base case, I'm only saying that in 20 years Bitcoin only has a 5% probability of capturing what I say is a 30% monetary premium in real estate. I think it's conservative.

Raphael calls this website tool his Schrödinger model after Schrödinger's cat. Jackson, explain for people the significance of Schrödinger's cat. Please don't dumb it down for the audience.

Oh, man. I'm not equipped.

Please give us the full—

There's a dead cat in the box. Sometimes it's not dead because quantum physics. And so the cat isn't dead or alive. So it's 50%.

There's two kinds of listeners who are furious right now, quantum physicists and PETA members. Let's save the Schrödinger's cat explanation for never. But let me dig a little deeper into this model that Raphael has created. I see a bunch of assets that are listed here— stocks, bonds, gold, silver, real estate, as he mentioned. Also cryptocurrencies, not including Bitcoin, all the other cryptocurrencies. And fine art. If we take a look at another example, let's say stocks, and you pull that down, it shows the monetary premium for stocks as 90%. In other words, just about the only reason people buy stocks is as a financial utility of some sort. You can't live in your stocks, you can't drive your stocks around. So 90% monetary premium, and the default setting on this tool is a 10% probability that Bitcoin will capture that monetary premium for stocks within 20 years. If we look for cryptocurrencies, there the monetary premium is 100%. That's everything. They're currencies. And the probability, the estimated probability of capture is 90%. In other words, almost a sure thing. And the time period, the default time period is 6 years. In other words, Bitcoin is envisioned gobbling up the value of these other cryptocurrencies and soon. Okay. So if you make all these assumptions across these different asset classes, you come up with that price of more than $600,000. I think the assumptions are pretty bold. If you imagine a scenario where the value of stocks dissolved in that way and bonds and a big chunk of the value of real estate and all these different things, Jackson, what would that world look like?

It would be riots in the streets.

It would be Mad Max. I don't know if it would be the new Mad Max or the old Mad Max, but it would be one of the Mad Maxes. My question is just, in that Mad Max world, is internet money really the thing that's going to save you, that's going to get you out of a jam? I don't— I just don't know how helpful Bitcoin will be in that world. If we're talking about beef jerky, yes, I can make a definite case. I think beef jerky might be the world currency in that scenario. So if we're talking about $600,000 beef jerky, maybe. But again, I'm the last guy on planet Earth that you want to ask on this subject based on my Bitcoin non-investment record. Okay, so that's what Raphael calls the Schrödinger model, or what I have called gobble gobble, because it anticipates Bitcoin eating the financial world. And that brings us to the last model, which I have called swap thing. You see what I did there, Jackson?

No.

Let me give it, let me get, let me give it to you again. Swamp Thing. Go ahead, Google it.

I'm Googling it. Okay, so this is a 1982 film.

Swamp Thing is a comic character, a guy who's transformed into a, into a monster, into a swamp monster. And it was a movie in the early 1980s. That was before the Before the Jackson era. So that's the—

so the model involves BOGS?

Close. Credit default swaps. Basically, a credit default swap, or CDS, is a financial instrument that pays off in the event of a bond default. And there are credit default swaps for treasuries, even though the U.S. government can print new money if it needs to. So you think of the chances of default default on a Treasury being about zero. But the CDS market for Treasury suggests that there is in fact a non-zero probability of default. And you can use that CDS pricing to predict the probability of default. And if you believe that a default on Treasuries would be such an extreme calamitous scenario that it would cause just a collapse of various kinds of money and the rise of Bitcoin as an alternative, Then you can use CDS pricing for treasuries to predict the probability of a huge rise in the price of Bitcoin. Did, did any of that make sense?

I'm underwater on the details.

Some of the details are murky to me too, but Raphael is basically saying that you can use the pricing on treasury default protection to imply what kind of price would be appropriate for Bitcoin today., and that that price, as you might imagine, is higher than where we are now.

Between today, it would already say that Bitcoin should be, depending on the assumptions, between $75,000 and $100,000. In the same way we look at the Schrödinger model, people can go to the same website and can change their assumptions and have an idea. And the point in all these models, and I call them models, but for me, Jack, they're much more like frameworks, right? So I can have an idea of, You know, what is the range of potential outcomes here, right? Is there a scenario where this really could take off? And if it does take off, you know, what are we talking about? Are we talking about, you know, a 20% gain? Are we talking about, you know, about a 2,000% gain? And in most of the ways that we look at Bitcoin, if it really takes off, you know, it should be trading much higher than it is trading right now.

Thank you, Rafael. And thank you, Retta. And who else are we thanking? I want to thank Roger Ibbotson for those marvelous charts. I want to thank Swamp Thing. I want to thank quantum physicists and alpaca farmers and thank all of you for listening. Jackson Cantrell is our producer. He's got a desk treadmill and he's not afraid to use it.

Heart rate rising.

Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, Write us a review. And if anyone wants to explain Schrödinger's cat to Jackson, it's jackson.cantrell@dowjones.com. See you next week.

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.