Can Bitcoin Ever Be Money?

Wednesday, 10 February 2021
Wollongong, Australia
By Greg Canavan

[3 min read]

I’ve been talking about risk management lately. With markets stretched to the upside, it just seems like the right thing to focus on.

In the same way that during a bear market, when stocks are good value, you should be looking at what you’d like to buy when the trend turns, you should have one eye on the exits when ‘hot’ stocks cool off.

That’s not the way some people roll though. Take Elon Musk. He’s just put US$1.5 billion into Bitcoin [BTC]. Well, not personally. It’s Tesla’s money. Musk founded Tesla and owns an 18% stake.

As James Kirby wrote in The Australian yesterday:

Tesla’s decision to sink $US1.5bn ($1.9bn) of company money into the digital currency bitcoin is historic. Whether history will judge it brilliant or crazy is another question — for now we will just have to regard it as momentous.

Yep, let’s stick with momentous for now, and let history judge this one.

What’s momentous is that one of the most overvalued companies in the history of the stock market decided to put a chunk of its cash into one of the (potentially) most overvalued currencies in the history of the stock market.

I say potentially because when it comes to bitcoin, no one knows its correct value. It’s in price discovery phase. The market is still trying to work it out.

But we can equivocally say that Tesla is massively overvalued. It’s got a market capitalisation of $830 billion and trades on a price-to-earnings multiple of 288 times FY21 forecast earnings. It has a price-to-book multiple of 37 times, yet only has a forecast return on equity of 20% in FY22.

So you’re paying 37 times the value of the company’s equity, despite that equity only generating an expected 20% return in the future. Even allowing for the benefits of compounding (assuming all earnings are reinvested) it’s still a very hefty price to pay.

Tesla’s equity capital at the end of 2020 was around US$22 billion, with cash and cash equivalents of $19 billion. So in effect, you’re paying $830 billion for $3 billion in genuine equity value.

Of course, that US$19 billion in cash could go into productive investment that would generate long-term returns for shareholders, and no doubt much of it will. But the board just decided to sink US$1.5 billion of it into bitcoin.

If I’m a shareholder, I’m asking why?

Is digital, free market decentralised money a better bet than the core business?

One would hope not.

The obvious reason for the decision is to promote the use of bitcoin and encourage Bitcoiners to pay for their new Teslas in the digital currency.

And on that front, it could well be a genius move. The only problem would be in getting bitcoin holders to unhodl and part with the currency.

Which brings me to the issue of whether bitcoin is effective money or not.

When something is rising in value so quickly (or is just volatile in nature), it is not an effective form of money. You need to be able to buy and sell knowing that the value will be stable from one day to the next.

The whole reason bitcoin came into existence was because of the instability of the fiat currencies governments mismanage and force us to use.

Realistically, it cannot perform the function of money until the price discovery phase is over and volatility leaves the market. Ironically, volatility leaving the market will increase the value of bitcoin as money. But volatility is what keeps attracting new entrants!

Where this price discovery phase takes us is anyone’s guess. There is only a fixed supply of bitcoin. The remaining tokens are becoming harder to mine. And the taps in fiat currency land continue to gush at a rapid pace.

This is why predictions of $100k, $250k and $1 million per bitcoin are not divorced from reality.

But it does raise the question of whether something with its characteristics can ever be money? Money with a fixed supply is deflationary. Maybe in a crypto-based future monetary system that is OK. But in the current set up, it’s not.

That’s the reason why gold was demonetised in the 1930s. As a limited supply asset, it didn’t perform the function of money very well as people began to hoard it. It became a store of wealth more than a unit of exchange.

Money is meant to move around, not remain inert.

It’s interesting to note that up until that time, gold was a decentralised form of money. It was money in the hands of the people.

But then the government forced people to turn in their gold. Gold went from the hands of the people to the vaults of the commercial banks. Now, it is in the vaults of the central banks. Over a few decades, gold was centralised so governments could take full control of the monetary system.

And look what they’ve done to it.

The system has become so broken that the free market has come up with a new form of decentralised money. But, like gold, it’s too valuable to be used as money.

Which makes the whole bitcoin thing fascinating. Like gold, bitcoin may not be very good money. But right now, it’s looking like a pretty decent store of value. 


Greg Canavan Signature

Greg Canavan,
Editor, The Insider