“Within the next couple of years, cryptocurrency will probably become a legitimate asset class for investment unless it fails in some way.” – Murray Stahl
It’s not often we see a new asset class emerge, but Murray Stahl (Trades, Portfolio) thinks it quite possible cryptocurrencies such as Bitcoin may be that new class.
Cryptocurrencies satisfy the needs of many consumers, investors and businesses, making it a real solution rather than a solution in search of a problem.
Bitcoin and its ilk also have the potential to be the next big disrupter, radically changing the business of not only banks and money transfer firms but also the biggest players of all: central banks and governments that have a habit of devaluing their fiat currencies.
Who is Murray Stahl?
Stahl is chairman, CEO and co-founder (along with Steven Bregman) of Horizon Kinetics.
He earned a Bachelor of Arts from Brooklyn College in 1976 and a Master of Arts degree from Pace University in 1985. His investing career began in 1978 with a position at Bankers Trust company, where he remained until 1994. While there, he served as a senior portfolio manager and a research analyst.
He and Bregman founded Horizon Kinetics in 1994, and both remain active in it. The firm operates as an investment adviser to Kinetics Mutual Funds Inc., which manages eight mutual funds. Their combined assets under management totaled $1.1 billion at the end of June.
Biographical information from the Horizon Kinetics website.
Why is Horizon interested in cryptocurrencies?
On the home page of the Horizon Kinetics website, Stahl and his team write, “As with other investment strategies, the most prudent and fruitful income investing strategies vary based on specific opportunities that changing market conditions make available.”
Make note of the phrases. “Specific opportunities that changing market conditions make available.” Changing market conditions is a broad, abstract idea but suggests investors might profitably find opportunities when conditions change. Normally, they would look for dislocations in individual stocks or among existing securities (such as stocks and bonds).
Stahl has his eye on a bigger picture, one which he expects could generate a tectonic shift in currency as we now know it. In a December 2015 commentary, he wrote:
“This is a real threat to the established order. This is not a joke. It is serious business. When the stock market realizes what is going on, it will like this development, as a generalization; the possibilities for value-added uses and the scale on which these can take place can hardly be fully imagined yet. This is moving unbelievably rapidly, and there are now 100,000 merchants worldwide that accept Bitcoin and more every day.”
Take this simple example: A few years ago, while an officer volunteer of the Airdrie Festival of Lights Society, I was involved in making a major purchase of LED Christmas tree bulbs from China. Since our decorative light displays were big, we needed many thousands of bulbs to replace older, conventional bulbs. Buying direct from China rather than through a wholesaler in North America would save a significant amount of money. The only hitch: transferring funds to the supplier in China, which turned out to be relatively expensive.
And imagine what it is like for immigrants from the Philippines to send money back home and having to pay those fees each time they transfer money. In a July Bitcoin Commentary, Stahl and associates noted the Philippines' central bank is establishing guidelines for Bitcoin, in part because the country receives $30 billion per year in remittances from abroad.
He reports the Philippines is one of the top three remittance nations; the other two are China and India. China has a vested interest in not only the remittances sent from abroad but also in cutting transfer fees and reducing financial friction on orders from small and big businesses alike. Still, China has reservations, which will be discussed below.
Nevertheless, Stahl reported in July that an increasing number of nations are opening their doors to cryptocurrencies. They include Australia, Japan, Switzerland, Philippines, Singapore and South Korea.
In the U.S., Delaware has made it legal to maintain corporate records on a blockchain (the individual production transactions that comprise cryptocurrencies). Stahl writes, "This is such a significant development it can hardly be understated."
On another front, as a nondiluting currency, Bitcoin has a fixed number of coins, and they will be produced in smaller and smaller amounts each year until 2140, when production will stop altogether. If usage continues to grow, as Stahl expects, then the price of each individual bitcoin must increase in value. In his January Review of Bitcoin, he says there is potential for it to go up a thousandfold, the magnitude of such a return dwarfing even 10-baggers.
Finally, cryptocurrencies offer investors another advantage. They are not correlated to any other asset class, making them a potentially useful hedging tool in the near future.
Stahl believes that cryptocurrency is of more than academic interest. He sees several invaluable applications for it, including some that will be discussed below. Most importantly, he believes it offers gains of a new magnitude for early adopters.
How do cryptocurrencies create value?
The Economist magazine explains that these assets, at least in Bitcoin’s case, are created from “mining” activities. More specifically, specialized computers develop mathematical puzzles, and “miners” with specialized computers of their own set out to solve the puzzles. The first “miner” to solve a problem is paid 25 bitcoins, and those bitcoins have a monetary value that is based on supply and demand.
The pursuit of “mined” profits is becoming a big business. MGT Capital Investments Inc. (MGTI, Financial) announced on Aug. 25 of this year it had added even more Bitcoin mining rigs, and the subheadline to the news release read, “Addition of over 1,000 Mining Computers Estimated to Bring Monthly Revenue to over $1.0 Million and Monthly EBITDA to over $750,000.”
Why cryptocurrencies in the first place?
According to Wikipedia, the idea behind Bitcoin (the first mover behind cryptocurrencies) was the creation of a peer-to-peer payment system, one in which two individuals or organizations would be able to exchange payments without the need for an intermediary such as a bank or a Paypal (PYPL, Financial). Through an elaborate online system of transparent ledgers, everyone in the Bitcoin community (including miners) can see the complete history of every bitcoin ever created, thus providing full accountability and safety.
It seems no coincidence Bitcoin and other cryptocurrencies took off shortly after the concept was revealed in a 2008 white paper authored by a mysterious programmer or group of programmers using the name Satoshi Nakamoto, according to Wikipedia. Stahl writes,
“Some cryptocurrencies were designed for specific purposes, but basically they are intended as alternative currencies. Everyone realizes the ability of the central bank to destroy the value of somebody’s bank account. Central banks say as much, that they intend to inflate, and interest rates are lower than the inflation rate.”
There are two strong reasons for the development of cryptocurrencies, lower- or no-cost money transfers/exchanges and a currency that cannot be devalued by central banks. If these alternate currencies take hold, expect a disruptive effect on money handlers, including banks (which will lose a near-captive and material market). Governments and central banks will also have diminished power and influence.
Stahl has not mentioned it that I know of, but cryptocurrencies might well head off a so-called Tobin tax. Popular among many left-wing politicians and advocates, the original idea was to tax all spot conversions of currencies. It has since become the buzzword for any kind of tax on short-term transactions. In one variation, Wikipedia reports Hillary Clinton's platform for the Democratic Party's 2016 nomination included a tax on high-frequency trading. In another variation, China proposed in 2016 a currency transaction tax, which apparently aimed to stifle shorting of the yuan (its national currency).
Not surprisingly, bankers, including Jamie Dimon of JPMorgan Chase (JPM, Financial), don’t like cryptocurrencies; Dimon recently called Bitcoin “a fraud.” Critics in many major media outlets soon popped up to challenge several of Dimon’s assumptions and even more unkindly pointed out that JPMorgan has been busy buying a lot of bitcoin itself.
But the biggest mover behind a recent decline in bitcoin prices has been China, which is trying to clamp down on Bitcoin and the other cryptocurrencies. As noted above, China would very much like to see remittances roll in without transfer fees, but it really hates giving up any control on its economy, including micromanagement of Chinese people and firms, and control trumps better margins for its exporters.
Stahl observes, “The whole idea behind cryptocurrencies is to bypass the banking system – cryptocurrency developers do not want the banking system making the rules – and to bypass the governments because they do not want governments making the rules.”
And “It will be hard for governments to stop this activity. One government could make a law to suppress a cryptocurrency, but as long as only one country makes it legal, that action could easily demonetize that country’s whole economy [the country that tries to suppress] because the money would flow to the country where it is legal.”
In "Cryptocurrencies as an Emerging Asset Class," Stahl writes there are now more than 600 cryptocurrencies, of which Bitcoin is by far the largest. And the existence of that many of them, he argues, demonstrates the great demand to take away the power of central banks to create currency and control its value.
Stahl has the weight of history on his side, no matter how much banks and governments may protest. Given how much of the economy has been disintermediated by technology, it seems unlikely governments and banks will do better fighting it than retailers, video stores and book stores.
Conclusion
Give Stahl, Bregman and the team at Horizon Kinetics credit for exploring a potentially rich source of future wealth for investors, and a tool for preserving capital.
Preserving capital in the sense that savers and investors will no longer see their capital devalued by governments and central banks with their own agenda. Preserving in the sense of reducing the cost of money transfers, thus leaving consumers with more money to save and invest.
If cryptocurrencies do become established, they will provide astute investors with an uncorrelated asset category, to help protect against downturns (although no doubt acquiring shortcomings of their own). Stahl has also argued that early investments in Bitcoin specifically could pay off in a big way in the future, since this currency cannot be devalued (but buyer beware).
Note to readers: An earlier version of this article incorrectly referenced the deadline for Bitcoin production as 2040, rather than 2140, and that led to an incorrect reference to 23 years in a followup paragraph. The errors are solely my own, and the references have been corrected.
Disclosure: I do not own any cryptocurrencies nor do I expect to buy any in the next 72 hours.
