Would a Rule Breaker Invest in Bitcoin?

Jim Surowiecki calls it a failed currency. Aaron Bush calls it the ultimate Rule Breaker. Who is right? Could it be both? In this episode of Rule Breaker Investing, Motley Fool Co-Founder David Gardner is joined by these two crypto-luminaries to talk about bitcoin.

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This video was recorded on February 16, 2021.

David Gardner: I’ve had lots of fans scripting the opens to my show for years now. It started when guest star Priya Parker, author of The Art of Gathering, joined me on this podcast a few summers ago and reminded us to never start a funeral with logistics. By which she meant that the moment at the start of a gathering or podcast, and the moments at the end, those are the real moments that matter, and so put extra effort into them. Don’t tell the people gathered at a memorial service at its very start, don’t lead off with, “Someone left their lights on in Level 2 of the parking garage, and their license plate is blah-di-blah-di-blah.” Don’t do that. You’ll lose such a key opportunity. From that following week’s podcast onward, for years now, I have made a point of pre-scripting what I say to you upfront each week. It’s what I’m doing right now. Well, what’s ahead this week? I don’t know that this week’s topic needs any further introduction than just its name. Bitcoin. Only on this week’s Rule Breaker Investing.

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Welcome back to Rule Breaker Investing. Thinking back to that Priya Parker interview, I’m reminded one week after we just brought you Blast From The Past, that that was a wonderful blast from the past. In fact, I highly recommend googling: Rule Breaker Investing, Art of Gathering, and going back and listening to that Blast From The Past if you hadn’t previously encountered it. Anyway, that was then, and this is now. I am delighted this week to be joined by two of my favorite people helping me and you think about the future, and maybe how it informs the present that we’re all living through. If we’re talking of the present of bitcoin and the many things tied to it today, the sky-high price that it has achieved in the market’s mind in recent weeks and months and all of the implications of that, I’m delighted to be joined this week by my longtime friend, Jim Surowiecki, and my longtime co-worker, Aaron Bush. They are my two guest stars to discuss bitcoin with you this week. Jim is the author of the book The Wisdom of Crowds. He writes a business column for Marker, he blogs at surowiecki.medium.com. Now, you may not know how to spell Surowiecki. I’m going to do it for you right now because I think Jim’s worth reading. His last name is spelled S-U-R-O, that’s the easy part. W-I-E-C-K-I, so S-U-R-O-W-I-E-C-K-I.medium.com, where he blogs. He wrote for many years the financial page for The New Yorker, and in an earlier life, he was a Motley Fool employee helping us figure out the Internet in early days.

Longtime friend Jim Surowiecki is joining my friend Aaron Bush. Aaron is @aaronbush100 on Twitter. He is an investor at large at the Motley Fool, where he’s been an analyst and friend for years now. He’s previously been on this podcast numerous times, winning the market cap game show, where helping us understand bitcoin. He’s also a founder of his own research effort in the world of video games, and that’s masterthemeta.com. I want to get these introductions out of the way so we can start our conversation. I also want you to know, having already done this conversation, I’m taping this portion after it, that the sound quality at points is not up to snuff for this podcast for a very understandable reason. We were not operating with our normal technology in place, Aaron himself in Texas. Anybody heard about the weather in Texas this week? His electricity came on literally five minutes before we started recording, which made it awfully helpful to do a podcast together, and Jim also worked from his own home office. While some of the sound quality and what you’re going to experience together is maybe below the standard, I think the thought quality is well above the standard this week for Rule Breaker Investing. I want to thank my guests for bringing their Fool selves to share with you today as we discuss bitcoin.

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Aaron, let’s begin with you and the proverbial, alien visiting from another planet, question. Aaron, I’m an alien from another planet. Take me to your leader, but if you can’t, perhaps you can answer me this. What are these cryptocurrencies I’ve been hearing about from you humans, and what is bitcoin?

Aaron Bush: Well, first of all, if we have aliens visiting, we probably have bigger problems on our hands. [laughs] But if I were inclined to start talking about crypto, I mean, I guess I would start by saying it’s magic Internet money. That’s probably the simplest way to put it. But more seriously, cryptocurrency is digital currency or just Internet money in which transactions are verified, and records are maintained in a decentralized way, using cryptography instead of having some centralized authority, typically a government, in control of that system. As we as a society become more digitally immersed, the ways that we make, and store, and use money become increasingly digital as well. Cryptocurrency, which on the Internet is essentially programmable money, it’s an evolution of money for our increasingly digital world. It can be designed and used in multiple kinds of ways, one kind of which is bitcoin, which is the first and largest cryptocurrency still. In its case, the currency part of cryptocurrency might be a misnomer. Maybe we can talk a bit about that later, and maybe it’s best compared to something like digital gold with other long-term optionality, but of course, there are other types of cryptocurrency. Not everything works exactly like bitcoin, and other cryptocurrencies might serve other purposes or act as foundational platforms that others can build apps and services on top of. I don’t think we need to get too into the weeds on that right now, but generally, that’s how I think about what cryptocurrency is.

Gardner: Well, again, thank you as an alien to your planet. I want you to know, first of all, I come in peace. Please don’t make the assumption that I’m coming after your anything, but I did read some of your species history and I understand that originally money was a form of receipt. It was basically grain stored in granaries in Sumer. Then somebody thought, “Well, rather than just be a store of value, what if we started making it tradable?” So metals came in. That’s my understanding of your species and what you’ve been doing ever since then. Now, it sounds like technology is now advanced to the point where it’s invisible, and yet it still can function the same way, but I remain a little confused. I’m going to turn to my friend Jim Surowiecki in a second. I remain a little confused as to whether these cryptocurrencies, this bitcoin is supposed to be a currency that I’m spending or instead like grain in Sumer thousands of years ago, just a form of storage or receipt. Indeed, Jim Surowiecki, longtime friend and author of the venerated book The Wisdom of Crowds, which by the way, my nephew in college tells me is his assigned reading this term, so you’ve already created a modern classic. Jim, I say, you wrote an article for Marker last month, I really enjoyed your article and your premise, by the way, I’m back to me now, I’m no longer an alien. Your premise was that, “Measured as a currency, bitcoin,” you say, “has failed.” You went strong to the hoop with that word. If currency, Jim, by definition is a medium of exchange, it seems it isn’t used that way in any measurable manner in commercial transactions or consumer life today. It’s been about a month since you wrote that article. Bitcoin has been volatile over that last month. Jim, have your own thoughts been volatile, or do you still believe what you wrote one month ago?

Jim Surowiecki: No. I still believe what I wrote a month ago. I don’t know, is it up to $50,000 today? I think the piece I wrote came out right after it had gone to $39,000 then fallen back to $30,000 or something. I think it’s up almost 100% since then. Just maybe more like 65% since then. But no, my opinion has not changed. If anything, the incredible volatility that we have seen, and obviously, it’s been good volatility for bitcoin holders, in the sense that it’s gone up. Just confirms the basic premise of the article. Actually, I’ve been writing about bitcoin, it cracks me up, I’ve written about bitcoin since 2011.

Gardner: Wow.

Surowiecki: I always think to myself, I wrote the first piece back, it was called Future of Technology Review. I think it was 2011. I always say to myself, if I had just put $1,000 in [laughs] bitcoin then, I mean, literally if you think about it, I mean, it’s incredible how different my life would be. But I didn’t because even then I thought it was in a bubble, and I don’t even know what it was at the time. But the bubble question is different. This piece that I wrote was really about the fact that if you go back to the origins of bitcoin, to the original white paper that was published, the original design of it, and maybe more importantly to the way people talked about it, it was really talked about as something that people hoped would become a currency. It would become a replacement for fiat money, that is the government-issued money, and that you would use it to trade, you would use it to buy and sell goods and services. That was one of the big appeals of it from a conceptual point of view, and it had a cyberpunk element to it. I mean, not in a bad way, but in a historical sense.

I think what has happened over time is that it’s become very clear that that’s not really what bitcoin is going to be used for. I think, mainly, because of the way it was designed from the start, but also, because of the way its value has risen and fallen, and risen and fallen. It’s just way too volatile for people who use it to buy and sell goods and services, both on the upside end and the downside. I mean, you don’t want to buy something with bitcoin today, if it’s going to be worth 65% more three weeks from now. But alternatively, you don’t want to sell something with bitcoin if it’s going to be worth 20% less tomorrow maybe. That’s one of the reasons. Then I think there’s also a reason we can get into, if we want, about the limited supply of bitcoin, which was one of the greatest feels of it, and I think it still is, but that actually also made it very hard to work [inaudible] in currency. I think the combination of those things has turned it from a potential currency into, and I think Aaron’s phrase is right, it’s essentially become a form of digital gold. I think that’s pretty much the way people see it. When I wrote that piece I got a huge amount of pushback, mainly because I think people thought I was saying bitcoin itself had failed.

Gardner: Those headline writers?

Surowiecki: Yes, definitely. [laughs] But there was pushback and people were like, “No, it’s still going to be used as a currency,” and I don’t know. I just don’t see it. I don’t see it.

Gardner: Jim, I’m curious since you’re one of the great intellectual live wires I’ve ever come across and I always enjoy hearing how your thought has progressed. What would you say is the greatest similarity 10 years later to what you were thinking in 2011 about bitcoin, and what would you say is the greatest change in your thinking?

Surowiecki: I think back then, I still was intrigued by the possibility of it becoming a true currency. I was skeptical that was going to be easy, and in fact, the argument I made in that piece was paradoxically something I still believe, which is that the only way for bitcoin to really become a currency was for it to essentially drop in value. There are complicated arguments about whether that’s true or not, but the problem was as long as bitcoin kept escalating in value, it was just going to be very hard for it to become a currency. I still thought that was possible, I don’t think that’s possible, or likely at least, anymore. In terms of the basic similarities is that the design of bitcoin. There are a limited number of bitcoins in 2040, I cannot remember. It’s going to reach its maximum number and no more bitcoins will ever be issued. I think that creates an incredible incentive for people to hoard it rather than to spend it. There are ways around that people have tried to find ways around it. I think the core reality of bitcoin is that, and so that’s why I think it was always in some ways headed to where it has ended up.

Gardner: All right. Let’s do a quick numerical accounting. Aaron, I’m going to turn back to you now. History will show that the Rule Breaker Investing podcast last invited you on to talk about this subject on December 6th, 2017. Now, that very weak bitcoin would jump from $13,000 to $19,000; that week. One year later, it was at $3,200. Now, it wouldn’t get back to $19,000 again until, wait for it, literally, December 6th, 2020. That was exactly three years after I last had you on this podcast to talk about crypto, and of course since then, it has now risen in just the last few months from around $19,000 to around $50,000, which is where it’s priced today as we record the afternoon of February 16th, 2021. Aaron, first of all, this means I have a pension for having you on at times of extreme appreciation and pun intended, and where things are a year later can sometimes be very different. Yet that dropped even from 2017 to ’18 of $19,000 back down to $3,000 seems possibly irrelevant now on the one hand, now that with bitcoin at $50,000. But it was even a great buy at 19,000, if we think about it, three years later, even at its peak, it’s almost a three-bagger just over three years later. Aaron, I believe when we caught up on this a few years ago, you owned some bitcoin?

Bush: I still do, I don’t think I have spent it. I’ve just been holding. I wish I bought more at certain points, but I have still been holding, and it really is amazing to look back. I think on one hand, it was pretty bubbly at the time. I do remember going to restaurants and listening to people, [laughs] overhearing conversations, David talking about crypto. Even I, sometimes, will be in those restaurants talking about crypto, it’s part of my job and I would notice people listening in. The tone of just individual investors was very much driven by FOMO, fear of missing out, at the time. I think it showed, and the demand wasn’t sustainable. But I think over time, we have seen that there actually is something to this bitcoin thing, and it is a situation where some people would say that bitcoin doesn’t have any intrinsic value. But on the other hand, its value is believed into existence over time, and any type of value, or I would even say any type of stability is an emergent property. I think if you even look beyond just the three-years ago that we talked about bitcoin, you can almost see these cycles occur almost in a fractal-like way. When you zoom in, you almost see the same chart that you do when you zoom out, and these ups and downs have been recurring.

Looking forward, it wouldn’t surprise me, again, if we go through other depths. I don’t know if we’re there yet, and I do think that the volatility will continue perhaps for decades from now. It’s hard to say. But I think what we have seen since then is more people believing that value into existence, not just individual investors, but also institutions now increasing the company. I do think the narrative has changed a little bit from now until then, plus, just as cryptocurrency, the whole ecosystem has started to mature a little bit more. But it really is fascinating to look back and see how things have changed so quickly.

Gardner: Well, I want to talk some about storing value, and I want to do it in the context of a stock. A stock that I picked back in 2014, rerecommended in 2016, which had been a pretty perennial underperformer, I’m sorry to say, the ticker symbol, MSTR, the company is MicroStrategy (NASDAQ:MSTR). It is in the Motley Fool Rule Breakers service. We had an unacceptable cost basis looked at from any eyes that were not in the last few months of about $138 a share in 2014. It had gone up to $183 in 2016, so I added to our winners. But then it went sideways. This business intelligence software company stock went sideways for years. Gentlemen, I know your thought of the story, but many others aren’t MicroStrategy, not exactly a household name. Those two stock picks, well, the stock had settled around $140, by last fall, i.e., I was down while the stock market has gone up over those five or six years. Now, the stock has gone from about $142 to I’m seeing it at 988 here as we talk on Tuesday afternoon. This company has gone ballistic, it is now a great winning stock pick for Motley Fool Rule Breaker members showing patience.

Now, why did this happen? Well, this business intelligence software company has a maverick founder, CEO Michael Saylor, here in the greater DC area. A well-known and an increasingly well-known guy, he began to convert the balance sheet of his business intelligence software company, the cash into bitcoins starting last summer. I saw him tweeting out some and just talking about the importance of crypto. Oh, my gosh, if it isn’t also the case, Jim Surowiecki, that I think the company has announced the secondary offering this week. I think even today, to issue more shares of MicroStrategy stock intended to be traded into bitcoin itself. What is happening with MicroStrategy?

Surowiecki: Well, the funny thing I was thinking about as you were talking is I realized that I actually have no idea what MicroStrategy’s business has actually done over the last four years. I remember Michael Saylor was a high-profile figure at the tailend of the Internet bubble. He was, as you said, a maverick, and there was a lot of buzz around and then MicroStrategy went down there. I can’t imagine how low the stock got, but he kept the company in business. I have no idea what the actual business has done, what I know is what you said, that they invested in bitcoin. I think as of today, they’ve made something like $2.5 billion on their investment in bitcoin, so that’s […] [laughs] dollars?

Gardner: Yeah. Well, when you consider that the company’s market cap, as we speak, is just shy of $10 billion. Considering that it’s up six times in a few months, you can see that they’ve made more money on their bitcoin investment than the market capital of the company four months ago.

Surowiecki: Exactly. That’s been fascinating, and obviously, to some degree, there’s a fundamental response there. There are responding fundamentals if you assume that investing in bitcoin can count as real money because he hasn’t converted it back into dollars, but let’s assume that it is. So there has been a response to the fundamentals, but it’s also true that bitcoin has become a little bit of a magic word for investors or speculators, depending on your perspective. I don’t know if you remember, but there were those studies that were done of the late 1990s that showed that companies that just added .com to their name, even if they didn’t really have much to do with it, got a bump automatically pretty much from investors, at least ,temporarily, and there’s some of that. There’s some sense of if you talk about bitcoin, and some people have said the same thing is true with Tesla, that if a company just decided it was going to invest its corporate shares in Tesla, it would immediately get a steep price. There’s some of that. What’s fascinating is what he’s done today, to say we are going to raise another $600 million and put more of it in. It’s $50,000 now, they can obviously invest it when they want, but I think that suggests that he’s serious about this on some level, but it is a pretty extraordinary moment. I mean, there’s nothing I can really think of that’s similar to it in terms of companies using their corporate cash in this way. It’s a fascinating experiment.

Gardner: I want to make it clear to everybody listening that I’m pretty neutral and just wanting to learn and to explore. I think that’s the tenor of our conversation. From my standpoint, Aaron, this is a stock pick I’ve made for Rule Breakers. It’s a multiple recommendation for Rule Breaker members. We have been beneficiaries of this. Aaron Bush, you own bitcoin yourself. You are a beneficiary of this. Aaron, should I recommend selling MicroStrategy sometime in the next month or so in cash in on our eight-bagger or is this the start of something amazing?

Bush: I think the way I would think about it is, should you sell MicroStrategy to buy bitcoin? That’s the question I would be asking, whether in a vacuum whether to buy or sell MicroStrategy. I’m honestly torn on this too, because on one level, it is [laughs] a business that is building technology and serving customers, but it’s increasingly being hinged on bitcoin and it’s strange. It’s hard for me to wrap my mind around a business being like this, but I like the forward thinking about what bitcoin could represent and how they were able to get in early on it, and for me, as someone who is holding bitcoin, I’d like to see that they are holding bitcoin too. I don’t know what I think about them raising money to buy more bitcoin, and basically make themselves a bitcoin proxy of some sort. That is strange to me, but as a whole, I’m intrigued by the experiment, essentially, that’s going on over there.

Surowiecki: Aaron’s point is actually interesting in terms of why own MicroStrategy as opposed to why own bitcoin; because there is something a little odd about it. In a way, you could argue that what MicroStrategy is doing is a little bit like what conglomerates did in the ’70s, when they would diversify away from their core businesses and come over to Gulf Oil, whoever was bought, Montgomery Ward or something. The argument against that from a corporate finance point of view is always that investors can own Montgomery Ward if they want. Why should you buy it essentially with investor money? It’s actually an inefficient form of diversification. Investors can diversify on their own, and I think you could argue that here. Again, I say that as someone who knows nothing about the status of MicroStrategy’s actual underlying business, but you obviously thought it was good enough to tell people to invest in, so maybe that’s a way to do it.

But I will say the other thing that’s interesting about this from an investment point of view, setting MicroStrategy a little bit aside, although it gets into the diversification thing, is one advantage that bitcoin has had over the last decade beyond the fact that it was the best performing asset class basically in the world, is that it was almost completely uncorrelated with most other assets. It’s movements, essentially, there was no correlation between them and what was happening in the stock market. I don’t know if that’s changed over the last year or so, but it evolved into where there was a diversification case for owning bitcoin, which is odd and fascinating, but I do think the idea of why do I want to own the stock that owns bitcoin rather than just owning it myself, if we assume that MicroStrategy is relatively fairly valued, and all these people are already reflecting it. I think it’s actually a really interesting question. Maybe it’s an ease thing. It’s easier to sell MicroStrategy than to, well, it’s not easier than to sell bitcoin so I don’t know. It’s an interesting question.

Bush: I think what else is interesting about this is that there really isn’t a good proxy for bitcoin unless you buy a bitcoin. For example, there is no bitcoin ETF. The SEC has, so far, not allowed that. I think that’ll probably change in time. There are a lot of people who might not want to figure out how to own bitcoin themselves but are interested in basically owning something in their same brokerage account that can be influenced the same way that bitcoin is, and I think MicroStrategy has been clever in the sense of positioning themselves as a proxy. It just reminds me of a term I think about occasionally which is reflexivity. That just basically means that investors don’t often base their decisions on reality, but their perception of reality instead. It boils down to what we think about reality, especially when lots of people start piling it, it actually affects reality itself. In this case, we’ve seen that [laughs] play out with MicroStrategy, where by turning themselves into a bitcoin proxy, they’re now able to raise $600 million more. I don’t know if they’re going to put all that into bitcoin or something else, but the point of it is they’ve allowed some reflexivity for themselves to get more flexibility to then reinvest in otherwise, whether it’s bitcoin, whether it’s acquiring something else or whether it’s reinvesting in their own business and helping them level up. I think that is what’s super interesting about this and that same reflexivity point can be applied to crypto at large in so many other ways.

Surowiecki: I think MicroStrategy is down. Isn’t MicroStrategy down 25% over the last week or month or something like that? Maybe I’m wrong.

Gardner: Yeah, it hit a high of about $1,300 just a week or two ago. Again, everything is volatile [laughs] having to do with bitcoin right now, but as we speak, the stock is right around $988, just short of $1,000. So Jim, it’s down 25% in the last 10 days.

Surowiecki: That’s just interesting in the sense that it’s not moving completely in tandem with the price of bitcoin. There is some separation there. I don’t know. Maybe it was insider selling in anticipation of this $600 million, I don’t know. They shouldn’t be doing that if that’s what happened, but it is interesting to wonder why there’s been that disconnect. I think the other thing that will be interesting will be if bitcoin, well, just say, it goes back down to $30,000 where it was [laughs] three weeks ago or something like that, how does MicroStrategy’s stock react to that? I think that will be intriguing, because on the one hand, you think that’ll be bad, but if it’s going to spend $600 million, it obviously wants the price to drop temporarily, at least.

Gardner: Let’s push MicroStrategy off to the side now for our conversation and just talk a little bit more. You guys alluded to this earlier, to some more of the institutional buy in that we’re seeing. Now, the master of reflexivity of our time and it’s a concept that George Soros has written a lot about. I always think of Soros, Aaron, when I think of reflexivity, but if you actually want to talk about the embodiment of it, it’s Elon Musk, somebody who can persuade people that an electric car can be real, and then in so persuading, he got the dollars to build it and then he made it real and then it changed the world. It undermined the entire industry and it led to, I think, a better future and one of the greatest consumer products I’ve ever seen or ridden in. That’s reflexivity.

The Velveteen Rabbit is loved into being. If you love it, it becomes real and it’s a real dynamic, especially when it comes to MicroStrategy, maybe the last time I’ll mention in this podcast, is being able to do a secondary offering, raising more money it couldn’t have before, or guys, how about GameStop, the prospect of another business, where their stock ran up a lot because people wanted it to be real. They also wanted to run the shorts out and I think they had a lot of fun. Although when you’re having fun in real life with real companies, it starts getting to be a more complex fun, but whether we’re talking about running up a stock like GameStop, which was real, or electric cars, which will become real, or Elon Musk saying you can buy my electric car with bitcoin, which made bitcoin more real for people, we’re starting to see more of that institutional adoption. So I’m just curious whether you guys expect that to continue. Jim, if it does, maybe all of a sudden this commodity, Jim, bitcoin, does start to correlate with more of the world if more of the world is adopting it.

Surowiecki: Yeah. That last point is a really interesting one. I think you’ve actually seen institutional investors like, I could be wrong, but […] Miller has talked about crypto. There are bigger money managers who are now starting to think about it. JPMorgan Chase has talked about the potential value of adding it. So I do think that you’re seeing actual institutional investors saying this is something we want. I assume the big case for beyond the light, “Oh, we can make 60% in a month,” is the diversification thing. But beyond and last thing is fascinating because well, I think there are a couple things: one is [laughs] that it was fascinating to me that you talked about you can use bitcoin to buy a Tesla, when of course, my whole thing is no one’s going to do it, to use bitcoin to buy Tesla because no one wants to use it as currency, but it still provides the kind of credibility for bitcoin. Musk, let’s face it, he just had this weird magic touch. It’s not even clear to me at this point whether it’s that people think Elon Musk knows where the future is going or whatever, or it’s that everyone else thinks that Elon Musk knows where the future is going. So if I buy [laughs] […]. I’m sure it’s some weird mix of the two. It’s illogical. If you know everyone’s going to run, you want to get there ahead of time, so that’s it. But yeah, he has always been a champion of the concept. Aaron, I don’t even know how to pronounce it. How do you pronounce it? Is it Dogecoin or is it Dogecoin?

Bush: I think it’s Dogecoin, yeah.

Surowiecki: Dogecoin, essentially, a cryptocurrency invented, even more than bitcoin, out of almost thin air. It felt like a joke when it happened. You have lots of people going out there and buying, aiding driving the price up, mainly because Elon Musk cracked a joke about it. I mean, that’s nearly a slight exaggeration, but I’m not sure it’s that much of one. It’s a fascinating investing phenomenon, but it’s also a fascinating cultural phenomenon, a fascinating phenomenon about reflexivity and about collective behavior. I think the GameStop thing was as well. I know I’ve moved on […], but I don’t know. I’m interested in hearing Aaron’s thoughts on Musk.

Bush: Yeah. I think if you zoom out a bit more, bitcoin, its legitimacy is all about people believing it into existence over a span of decades. It started out a decade ago literally on a discussion board in the corner of the Internet, where first it had to win over that crowd and help believe some value into existence with that crowd. Then it slowly emerged since, finding like-minded people who believed in the ethos of what this cypherpunk community was trying to accomplish, and then slowly that larger group believed more value into what bitcoin was doing. Of course, along the silhouette of what I was talking about earlier, we still saw the boom and bust over this long period of time. Slowly, that group becomes larger, then you start to see they win over the first institutions, and now, you’re starting to see the first funds or the first money management shops, or first, even crypto-oriented funds emerge that are trying to bring some legitimacy to investing in bitcoin or having it be some part of a portfolio as a whole.

Then now, we’re at this new phase where we’re starting to see more and more institutions are starting to believe in this thing. Now, we’re at the beginning of companies trying to jump on board, and I do think, in the same way that you have cash and cash equivalent, more people might start to put bitcoin as a small part of that equivalent part of their balance sheet. We’re still very early in that happening. Then after that, if this was a video game and bitcoin were trying to level up, I think there are still probably bigger bosses to overcome in terms of how do you now win over governments, like who are you going to get on your side, how do you win over the masses. I think it’s right to think of bitcoin more akin to digital gold, but because it is programmable money and there are still are lots of communities and teams who are trying to build things on top of it, I do think that there probably is some optionality here to become slightly more than digital gold over time. I think that’s TBD. But just that general trajectory of bitcoin trying to level up and beat these bosses and win over new crowds, I think that is what happens, and we’re still right in the middle of it because there is a long way left to go.

Gardner: What would be crazy is if bitcoin actually just went sideways for an entire year. It became completely dull to look at, and everybody, it was dead money. You know what? It would all of a sudden ensconce itself more to our culture and into institutions because of its stability. Agree?

Bush: I agree. I guess I would add one more thing. I think you’ve talked about a couple of times before, in other episodes, David, just the idea of antifragility, how there are some investments, some assets, some companies that, most probably, they suffer from chaos and volatility, but others at their core can benefit from volatility and chaos. I think that is what has happened with the bitcoin community at large. You can see these peaks and troughs. Really, in those trough moments, when you’re really left with just the builders and just the people who believe, that a lot of times is when you see the strength in the community come out where the people who still believe really double down on building what they think is going to make a difference. So far, it’s paid off in bigger and bigger ways. So I still expect that to happen, but I do think bitcoin is more anti-fragile than perhaps most people expect.

Surowiecki: It’s interesting, because I’m a completely bitcoin skeptic, mainly because I think, psychologically, I’m risk-averse, and my training mainly with you guys at The Fool is really in fundamental investing, and the value of a company is their present value of its future free cash flows and all this stuff. So, the lack of an intrinsic value in the case of bitcoin unnerves me, because it does feel at any moment people could just feel like, “Wait, why are we spending our money? Why am I [laughs] willing to pay $50,000 for this thing?” But the interesting thing is that obviously, you can say the exact same thing about gold, and I feel the same way about gold, so it’s no difference. Gold, obviously, has some industrial uses, etc., and it has a longer track record. But ultimately, the decision of people to be willing to accept gold in exchange for anything, or to be willing to spend money to acquire gold and hold it is very akin to the bitcoin thing. In principle, I don’t think there’s any obvious reason why the same logic that is applied with gold, that is to say, it can be a store of value over time can’t work in the case of bitcoin. I do think that the fact that the supply is limited, so you know there’s not going to be any more of it, that helps it in terms of as a selling point, that helps it in terms of being constructed as a store of value. So, I think it’s going to be fascinating to see. The fact that you said sideways is interesting to me, because I am intrigued by what happens if it goes sideways for a year. What happens? Does it just become a thing you’re like, “Okay, great?” In a way, that would seem to be better in terms of solidifying it, but on the other hand, maybe Aaron’s right, that the volatility is part of what makes it antifragile. I don’t know. Yeah, it’s interesting.

Bush: I think it will turn sideways at some point. I just think there’s a ways to go. I guess I would be the bull here. I’m happy that I own bitcoin. I’ll probably buy more before I sell any. If you compare the market cap of bitcoin to gold, I think bitcoin is something around $900 billion now, which is an amazing achievement, and gold I think is north of $7 trillion last I looked. It might even be larger than that. Bitcoin has come a long way, but there still is multibagger potential if you think that in an increasingly Internet-driven society, that store of value, that bitcoin just has better characteristics than gold at carrying forward what a store value can be inside a digital world, and so I think that still is interesting.

Gardner: Thank you, Aaron. Guys, let’s widen the focus a little bit more now. Let’s get away from just MicroStrategy or just bitcoin and let’s think about the world. I’ve got a lot of good listener questions coming in on this topic. This one’s from Pablo […]. Pablo, writing in from Spain, says, “I love your podcast. I listen to you every week,” Thank you very much, Pablo. Pablo says, “In this world where institutions, states, and central banks have so much power, is it really possible for bitcoin to unseat fiat currencies and official digital currencies that countries are themselves already developing in some cases?” Thoughts?

Surowiecki: My answer would be no. In a way, that’s the point of the marker piece, and I think even of our conversation right now. Although I think Aaron’s right, that there is some optionality built into it, it could evolve in other directions. Actually, there are other cryptocurrencies that potentially could become more commonly used, just because of the way they’re designed. Having said that, I think the idea that it’s going to unseat the Dollar or replace the Yen, it was something people tossed around as an idea. I don’t know, to me, I say, it doesn’t seem like a realistic goal. It doesn’t even feel like it’s integral to the bitcoin mission anymore. It doesn’t feel like that’s an essential part of what the bitcoin mission is about. I mean, the idea of having a store of value that is independent of Central Bank issued currency is, but the idea that you’re going to replace the Dollar, I don’t know. To me, it no longer feels like a big part of the discourse.

Bush: Yeah, I intend to agree. I don’t think bitcoin is going to replace a government’s currency anytime soon. I wouldn’t think that another cryptocurrency would do the same either. I think it’s largely different use cases. That said, I do think bitcoin is the tip of the spear in some ways for opening up new possibilities. Maybe shifting the conversation a little bit to Ethereum, and we don’t have to talk too much about this. Ethereum being the No. 2 cryptocurrency, it was built because the founders thought that bitcoin was too inflexible in what it was. People were able to build on top of it. There has been this whole movement, it’s called D5, which is decentralized finance, where people are attempting to essentially build financial infrastructure on the Internet that is separate from the financial infrastructure of big banks that governments are associated with. I think this is still very small and still mostly unproven. But I think that there are interesting things going on. Again, I don’t necessarily think that anything going on here will replace the Dollar, for example. But I do think that this whole digital world that’s opening up is going to increasingly complement what is going on with how we think about currency today and how we use it. But I think, again, that we’re just at the tip of the spear moment. So there’s still a lot left to be built and proven out.

Surowiecki: The only thing I would say is, I think one thing that’s important to recognize is how much better the financial system is for consumers today than it was even a decade ago. How much easier it is to transfer money at low cost. I mean, I have no idea if crypto played any role in pushing banks to do that stuff more quickly than they otherwise would have. But if you think about 2010, what a pain it was to try to send a money transfer, transfer money between accounts or whatever it is, it’s so much easier, so much cheaper now. In that sense, you’ve actually seen the traditional banks take on some of the characteristics of a — it’s not exactly decentralized, but certainly a digital finance world. I think obviously, that made it easier to see why the Dollar might still be around because it’s so much easier to do transactions in it than it used to be. But we, like most consumers, take things for granted as soon as we get them. But I’m still amazed that using […] like, wait, I can send money, and it gets there and it costs me nothing? That wasn’t true even 10 years ago. But I think the different use case idea is exactly right for how people are going to use cryptocurrencies going forward. But yeah, replacing the Dollar, I just don’t see it.

Gardner: I was having fun online last night with friends playing a board game over the Internet. One of my friends pointed me to a new site. I should’ve researched this more, but we’re having a spontaneous fun conversation. So here I am. It’s something like basketball cards. Do you remember baseball cards? I know you remember baseball cards. This one is digital basketball cards, and it’s not just a picture of an athlete like LeBron. It’s actually a clip. It’s a video clip of an amazing dunk by LeBron. These are being created instantaneously and then purchased by people, including my friend, who then hope to sell them to somebody else at a higher value as a new currency is created. Now, on the one hand, it looks a little silly. You’re like, well, even basketball cards aren’t that big a business today after decades. So, why is this all of a sudden going to be big? But at the same time, I’ve seen other things pop up in my lifetime. I will say as a Magic: The Gathering card player of some vintage, I was buying cards to play with 30 years ago, and now, they’re actually worth a fair amount in the real world. This is getting to what is worth something in the real world. That’s the topic. That’s what I wanted to spend a few minutes on.

I can play my Magic cards or I can sell them to somebody else. They’re playing in real-world tournaments with sizable money […] internationally. So I can see the utility of that. I can see the utility of buying shares in a company. You are a part-owner of that company. All of its assets, you own a small slice of. That’s what we do as investors. Jim Surowiecki, you and I talked offline beforehand about GameStop and just the phenomenon of GameStop. You were tying it in a little bit to bitcoin. I want you to speak to that in just a sec. But whether we’re talking about speculative shares like GameStop or, I would say, more solid shares like my holding in Apple, these are all stores of value where we’re all agreeing they’re worth something. Some things have utility, some things don’t have any utility at all. Bitcoin, I think, the big volatility is based on whether this actually has real-world utility or not. That feels like a speculation to me. Magic cards, gold, bitcoin, shares of stock, anything you or I want to put mutual value on and trade with each other, I guess, can reflectively have value.

Surowiecki: I mean, the basketball card thing is fascinating. I actually think the right analogy for the basketball card thing is probably art. I think it’s actually similar to works of art, that the value that those cards get. In this way they’re different from the Magic cards or baseball cards traditionally. I could be wrong, but I think there’s only one card per highlight. If you own the highlight, you own that highlight. Now, what’s weird about it is it’s not like you have sole rights to reproduce that highlight. Other people can still go on YouTube or the NBA can continue to show that highlight or whatever. It’s not like you have exclusive rights, which is actually a little different from, say, a painting or something like that. But I think it’s similar to art. You want it because it’s the only example of it in existence and other people will therefore perhaps value it, and it’s kind of cool, I guess. I have a friend who’s bought one, I think, looking to trade it, who’s also somebody who’s done a lot of bitcoin trading as well. But it is interesting because you can also see even if you think about it in terms of art, you can think like, there would be certain highlights you might be willing to pay more for like Vince Carter dunking over, what’s his name? The French guy. I don’t think the NBA has rights to that because that was an Olympics games, but it’s the same idea. Or LeBron’s block in the finals.

But I do think it’s like art. Art clearly is a situation where value is constituted because we collectively decide it’s worth something. That, in turn, depends in part on whether you think you’d be able to resell it […]. I think that GameStop thing was interesting, because in a sense, some element of it was built on that idea, that they could elevate the stock, by an act of collective will. The people at the subReddit’s WallStreetBets. They got together, they said, “We can make this thing go up.” Now, they were quite strategic, it wasn’t just a pure act of will. Because they also said, “If we do this, shorts will have to cover the option. Sellers will have to buy shares because we bought all these options and that will drive the price up. There was actually a quite clever strategic play there. But I think the problem for GameStop, and basically we saw it happen, I think its problem is actually weirdly harder for them to solve than for bitcoin, was that when it got to a certain point, it wasn’t clear what was going to keep it elevated. Once it got to $400, the question was, what reason is there for me to hold the stock and not cash out? Because it was very hard to see. There was no case. There wasn’t even a store value case, really, to think like it’s going to keep going up or it will hold its value over time, because the core problem for GameStop was you had an underlying business and you knew what that underlying business was — relatively speaking — worth.

I have to think that it acted as a gravity pull, ultimately, bringing things down to earth. I mean, if you think about, David, your model of investing or any fundamental investor on some level, the idea is eventually the market will realize, to some degree, the real value of this company. That the fundamental value of the company will eventually be reflected in the stock price. That’s how you get rich, by buying it before the market realizes it and then the market catches up. In GameStop’s case, I just think, at some point, it was like, “We did this. It was a great magic trick. Okay. Now what?” The value was always going to be bringing it down rather than up.

Gardner: The fascinating comparison then, Jim, and to extend it back to bitcoin, GameStop, we can all see the underlying business apart from the speculation in it’s shares. MicroStrategy, in a sense, we can look at the underlying business separately, but still tied to its balance sheet converted into bitcoin. But bitcoin itself, it remains very murky what its additional value that we can see beyond itself. Aaron, thoughts on that?

Bush: I think that even if it has failed as a currency, it doesn’t really matter. It doesn’t necessarily need to have lots of utility in order to hold lots of value. In some ways, that’s the point. I actually do think it will have more utility in time as more people build on top of it. Even just to backtrack a moment and just hit on, I think you were talking about NBA Top Shot.

Gardner: That’s it. Thank you, Aaron. Yeah.

Surowiecki: That’s the name, right.

Bush: Yeah. The card collection, digital thing that’s going on. It’s also made by Dapper Labs, the same company that made CryptoKitties back in the day. It’s a comeback for them. They’re actually working on some pretty interesting things, but I guess they tie some of this together. We haven’t even really mentioned the word blockchain yet. But essentially, all that allows you to do is to build scarcity in a digital environment and be able to hold accountability to who owns what. In that sense, it just enables digital collectibles. Those collectibles can do different things or they can just be themselves, and bitcoin, in that sense, is the ultimate digital collectible. But a lot of those other things that we mentioned like NBA Top Shot or digital art or I would even say, I call this the “Avatar economy.” What if your card games that you’re playing, you could actually own the cards, and then be able to trade them and sell them as you see fit? I think that there’s this giant wave that is going on right now, where it’s just, what does a digital collectible mean now that we have new technology that can add scarcity to what people are allowed to truly own and not through a company like Activision Blizzard, but truly own themselves? How does that change the nature of digital art, of video games online, of all these different industries?

I think, right now, a lot of that is being built on platforms like Ethereum, and some people are building their own token systems and such too. I don’t think bitcoin has a huge role to play in what people are building on top of that for this. But I think it could, in the future, as teams are building new technology on top of bitcoin. One of those that I would just call out is called the Lightning Network. That’s probably the most notable example of what’s being built on top of bitcoin. Essentially, that just allows you to set up a channel between two parties and allow them to transact back-and-forth really easily. It happens quickly and low-cost. It’s really just the beginning and end of that channel that is marked on the actual blockchain itself as a transaction. There are really smart people out there who are finding ways to build efficiency and cost-effectiveness into what is going on with bitcoin itself. If I look at that in pair with a lot of what’s going on with, I guess, the Avatar economy and just these digital goods that people want. Some of it does stuff; some of it just is what it is. But really over time, seeing those two worlds potentially unite is what strikes me as like another $1+ trillion opportunity where bitcoin might help unlock some value. Either way, that value will be unlocked, whether it’s bitcoin or another cryptocurrency, but whether bitcoin has a role to play in that is TBD. But I think I would bet on it over a long period of time.

Surowiecki: The one thing that’s interesting to me is the idea that actually, bitcoin’s relative lack of utility at the moment, let’s say — let’s put it differently. The fact that it’s not obvious what bitcoin’s intrinsic value is actually, in some ways, makes it easier, to use Aaron’s phrase, for it to be believed into existence. Because it doesn’t have that thing pulling it down, which GameStop’s $200 million a quarter of losses were. It doesn’t have that, so it actually, in some ways, makes it easier for people to say, “Look, this is what we have chosen to invest our money in.” To go back to the gold analogy, gold has certain utilities, but that is not why gold became as valuable as it became. It did not become as valuable as it did because of its industrial uses. It was, in a sense, a collective act of maybe because it’s beautiful or whatever it was initially. I actually think there is a paradox that the relative lack of utility may be partly what’s making it such a good store value.

Gardner: Such a provocative point, Jim. Thank you for that. Actually, before we go to final statements which we’re about to go to, I would be so remiss if I have The Wisdom of Crowds‘ author on, and I don’t ask him if he sees any wisdom in this particular crowd right now.

Surowiecki: It makes me incredibly nervous to see bitcoin trading this high. On the other hand, I actually think, in some sense, it really doesn’t fit that well into a lot of the models in The Wisdom of Crowds or even The Madness of Crowds. I was always interested in […] how do groups make good or bad decisions collectively, not by necessarily talking to each other, but the way they do in the stock market we’re in like. I do feel like bitcoin, the core element of it is a little bit closer to a decision to, in a sense, elevate this thing into being, rather than a classic judgment in the same way that you are going to decide about the value of Amazon stock or something like that. Part of the Madness of Crowds that I think you do see in bitcoin is just the bubbling state sends it up to $50 whenever we’ve decided that they need to do it and it drops back down. But what can I say? I mean, I’ve been wrong about bitcoin. Maybe that’s my statement, so I’ll just leave it at that. [laughs]

Gardner: Good. Well, thank you for pushing us into final statements, and I’ll say final statements for now, because I know this topic is going to come back, and I predict this is not my final statement. I predict we will not wait another three years before broaching this one again on Rule Breaker Investing. Final statements, and I’m going to go first, because I have a lame one, but it is my final statement so I’m sticking with it. I have never bought bitcoin. I have not bought any cryptocurrencies. I didn’t personally speculate in most of these speculative stocks that people have been running up these kinds of things. It’s just not how I am. I think everybody knows that about me. If you see something of me in yourself, be comfortable with that. We’re doing well. We’re doing well investing in common stocks. Some of those common stocks even have bitcoin built in them, whether it’s very obvious like MicroStrategy or maybe a little bit more subtle, like perhaps Tesla. If this boom continues, and if it’s all real, I don’t even think you have to own it directly and outright, because it really is that big and that systemic, then it underlies the creation of value across numerous contexts. My final statement, guys, for anybody who might have a fear of missing out or be bewildered by all this, I say, don’t fear it. You’re fine being bewildered. You can do really well in this world without feeling like you need to be right or wrong right now about bitcoin. All right, that’s it from a Fool, let me turn to another Fool. Aaron Bush, you’re up next. Final statement, sir.

Bush: I don’t know what’s going to happen to bitcoin next, but I do think, and I’ll say this because this is the Rule Breakers podcast. I do think bitcoin is the quintessential Rule Breaker. If you look at the six signs of a Rule Breaker and I’ll just run through them really quickly. Feel free to correct me if I’m saying this —

Gardner: You go, Aaron. You go.

Bush: No. 1, top dog and first mover in an important emerging industry. That is bitcoin. It is the top dog and first mover in an important emerging industry. No. 2, sustainable advantage gained through business momentum, patent protection, visionary leadership for an EPS competitor. Obviously, it’s not a business, so you have to think a little bit differently about this, but bitcoin’s network effect advantage and brand advantage is really strong and, I think, gives them a sustainable advantage at least at being that store value. No. 3, strong past price appreciation. We’ve seen that for a decade now. [laughs] No. 4, good management and smart backing. Again, bitcoin doesn’t add management. Instead, its founder, who is pseudonymous, actually has been silent and left the project, which for a decentralized system and entity, actually is probably the best thing that could have happened for it. I would actually give that a check, even though it’s counter-intuitive. No. 5, strong consumer appeal. Again, I do think we are starting to see some type of consumer appeal with people liking what bitcoin stands for and has become as a brand. Then No. 6, grossly overvalued according to the financial media. [laughs] I think that is also a big check. Every time I hear people write about it or talk about it on CNBC or something, and start talking about bitcoin’s energy or bitcoin is bad as a currency or just all of these things. It hits me that they’re just not thinking about it exactly the right way, and therefore, think it’s overvalued when maybe it shouldn’t be. I personally, although you’ve got to make some little tweaks, because bitcoin is a cryptocurrency, it’s not a business. I would actually put a check mark besides every sign of a Rule Breaker and I think it is a quintessential Rule Breaker.

Gardner: You’re opening up some eyes right there, Aaron Bush. Thank you. Jim Surowiecki my good friend, you’ve got the last words. Final statement for this crypto-podcast.

Surowiecki: I think my final statement is that you can understand something and be right about it in some ways and still be completely wrong. That has really been my experience about bitcoin. I’ve been writing about it for nine years, just off and on. I think I would go back to 2011, and say, yeah, that was accurate, but it was completely wrong about bitcoin as an investment. I think two things. One is, don’t ever listen to me about what’s going to happen to bitcoin. [laughs] In fact, you might want to do the opposite of what I suggest. But the other thing I would say is just don’t chase, you just have to be willing to accept where you are. You’re going to make mistakes as an investor and what you don’t want to do is end up chasing just because it feels like everyone else is doing that.

Gardner: That’s where we left it. Again, thank you to Jim Surowiecki and to Aaron Bush. I really loved both of their final statements. My hope for this podcast, I think, was fulfilled. It was to get you and me, selfishly me too, to get us to think smarter about the world. In this case, the world of bitcoin and cryptocurrencies, the world that we’re living into as we watch the volatility of a very disruptive potential Rule Breaker in the form of bitcoin. The past at this point is but prologue, even this present is prologue. Let’s see what happens going forward. Speaking of going forward, next week is your Rule Breaker Investing mailbag. Yep, it’s the final Wednesday. In this case, February 2021. If you find yourself interested, provoked or inspired by anything that you’ve heard, not just in this week’s podcast, but by my Blast From The Past: Volume 5, last week, or the touch off to this month, horse of a different color. That would be the joy I had, having my friend, Reiner Knizia, the famous German board game designer, joining us in the first week of this month. Well, I’d love to hear from you. The email address is rbi@fool.com. We read every note sent to us, because many notes are sent to us, we can’t share them all, but I always try to give you the best. In the meantime, I hope you have a great week. Fool on!