Analyzing Mark Cuban's Advice on Bitcoin
Bitcoin has been on the radar lately due to its sudden increase in value in 2020. There are people who follow it like a religion and swear by its name, there are also people who dismiss its value and think bitcoin is in a bubble, and there are folks who are neutral about it.
I personally think there is value in understanding smart investor’s take on different investment opportunities like bitcoin and one of these people is Mark Cuban. For me, understanding Mark’s take on bitcoin is important as he is both a techy as well as an investor and he also survived and had a successful exit in one of the previous bubbles (dot-com bubble) back in 2000.
So before diving in, always remember that
It is not a smart move to take people’s words at face value. Dig a bit deeper to see what is hidden behind their words.
And that is exactly what we are going to do in this piece. Let’s try to analyze and understand Mark’s take on bitcoin.
Mark owns bitcoin and is holding for the long run
Before understanding Mark’s take on bitcoin, we need to know if he actually owns bitcoin. and the answer is YES, he does.
He has been given bitcoins in the early days of Coinbase and he has also bought new bitcoins along the way. Mark mentions that he has no plans on short-selling the bitcoins and wants to keep them for the long run.
Many folks will lose, but there will also be winners
Mark believes that like any other financial investment, some folks are bound to lose in the bitcoin game while few others make a lot of money. Bitcoin could keep going up or go down to zero in the future; nobody can be 100% about the outcome. But what we can rely on is smart investment habits that could get us out of the losers pack and place us in the smaller circle of successful investors. There are few things you can do to make it happen.
Learn how to hedge against your investment
This means offsetting the risk of investing in the volatile bitcoin market by including other investments with other levels of risk (maybe other credible cryptocurrencies or other means of investment like index funds, stocks, bonds, etc.). In this scenario, you should be happy with WHATEVER outcome you get. If bitcoin keeps going up and up, you can be proud that you have included some in your portfolio.
You also should not have any regret of not investing more of your money in it; Because if you decide to invest 100% of your money in Bitcoin and it goes up even 1000%, you still made a BAD investment decision. The result doesn’t reflect it as your gamble paid off, but a gamble is still a gamble no matter the outcome. And if bitcoin tanks in the future and decreases in value, you can pat yourself on the back for not risking all your assets and having hedged it properly by investing in other investment opportunities.
Hold for the long run
There are people who consider bitcoin to become a store of value in the future. This means that we can treat bitcoin as a digital asset, currency, or commodity that can maintain its value without depreciating. Bitcoin seems too volatile at this point to be safely assumed as a store of value, but due to the fact that volatility and risk are not the same concepts and bitcoin’s volatility tends to be positively correlated with its price (when the price goes down, so does the volatility), it can reach more acceptance among traditional investors in future as well. And if we imagine a scenario where bitcoin can play a role and become an accepted mean for storing value (like gold or any other currency), then those who HOLD will benefit the most, as they will not be the subject to all the volatility that happens in the short term. HOLDers are usually people who have their primary stash in other forms of assets, so they can sit comfortably in crazy times and without gambling their main capital.
Just imagine the scenario of borrowing money against your house to buy bitcoin and bitcoin keeps going up, until one day when it DOES NOT. I don’t believe your loan collector will be very sympathetic about how you can make your next payments in that scenario. Always do high-risk investments with the money you do not need and then HOLD for a very long time to get the true benefits.
Understand Bitcoin’s Supply, Demand, Scarcity, and Core Value
Mark believes that the whole value of Bitcoin is in an equation that is dependent on scarcity, supply, and demand. We need to break this down into smaller pieces and analyze different aspects of it for bitcoin. Let’s start with scarcity.
What is considered scarce?
Well, gold can be considered a scarce asset. A VIP concert ticket can also be considered scarce if there are a lot of crazy fans ready to buy it. Bitcoin is also scarce right now (2021) as there seems to be a lot of demand for it. So as you can see, scarcity has nothing to do with a finite supply (as it is for both gold and bitcoin) but more with persistent demand for it.
What about the supply?
Well, that is another piece of the puzzle. By nature, things that have infinite supply tend to be lower in price (or FREE), even if the demand for them is high and there is a lot of value in them. The perfect example is the air we breathe now. Air is the most essential element to our being, but since it is abundant in supply, the price tag of it is free. One other example would be drinkable water which also has a lot of demand but not the same supply as air. So even though the price of drinkable water is not high today, this can change in the future with lower supply while the demand will increase by the growth in the world’s population as well.
But if we consider something like Bitcoin or Gold, we know they have inherent limited supply built into them. There is not an infinite amount of gold on earth and bitcoin’s algorithm is designed with a finite supply that will stop increasing in 120 years from now (so technically we can never have more than 21 million bitcoins with the current algorithm). But this finite supply of bitcoin is not the driving factor that is increasing its price. It is the continuous demand that is responsible for it. This effect was visible in both 2014 and 2018 when the price of bitcoin decreased as the demand also decreased; while bitcoin still had the same inherent finite supply. This is a very fundamental fact that we need to grasp:
Finite supply of an asset is not the driving factor that increases the price of the asset. It is the persistent demand for the asset that makes the biggest difference
So the next time somebody brought the argument of the finite supply of bitcoins as the argument for making it valuable; just take a deep breath and remember that: You can have 21 million of something that nobody wants and then there will be no value for it. As long as the persistent demand is there, so is the increase in price
Now we need to mention that the finite supply of bitcoin does have an effect on its price. Because we cannot massively increase the number of bitcoins and also go beyond the potential number of them, the price of bitcoin will be adjusted based on the increase of its demand. This will be more inherent when the market of bitcoin increases, as we can expect more price swings and bigger volatility; and the main reason for this would be the supply of bitcoin can not be adjusted to the new levels of demand from the market.
So with all these said, mark believes the future of bitcoin will be dependent on its demand from the market which can be mainly related to its core value and use a case in the long run. If bitcoin can become the true currency of the internet, replace certain portions of other stores of value such as gold or can properly be integrated into the DeFi concept.
As you can see there are a lot of IFs here, so be a smart investor, invest what you can afford to lose in bitcoin or similar cryptocurrencies, and get more knowledge about this concept to make smarter investment decisions.
This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.