Imagining Bitcoin as a FANG Stock

By John Banks

In the TradeSmith Daily for Oct. 12, 2020, we wrote:

If you haven’t bought Bitcoin for the first time yet, the odds are good that you will. The question is whether you will do it sooner — and be glad that you did — or do it later and wish you had acted much earlier.

Bitcoin as priced in U.S. dollars (BTC/USD) closed at $11,563 the day those words were broadcast. As we write today on March 18, 2021 — just over five months later — the Bitcoin price has more than quadrupled.

The speed of the move has been a pleasant surprise. The direction and magnitude, however, were no surprise at all. As we explained in 2019, Bitcoin has a historic one-time journey to make on the road to becoming a global store of value, and that journey is far from over.

The way to think about it, in our view, relates to the stabilization point for Bitcoin’s “store of value market share” relative to gold; were Bitcoin to attain 50% market share, for example, the value of all the Bitcoin in the world versus that of all the above-ground gold in the world would be equal.

Were Bitcoin to have 33% market share, in contrast, the ratio of Bitcoin’s total value versus gold’s would be 1-to-2; at 25% market share versus gold, it would be 1-to-3.

Either way, the present-day, above-ground gold supply is worth roughly $11 trillion. Such implies that, wherever the ratio ends up, Bitcoin has miles to go before it sleeps (in the sense of reaching a low-volatility price plateau). 

In 2019, we explained in detail to TradeSmith Decoder readers how Bitcoin would cross an “institutional bridge,” with a cycle of adoption and investment allocation from the world’s largest money managers and asset allocators driving a cycle of higher Bitcoin prices through the laws of supply and demand.

In recent months, the flow of institutional adoption news — Bitcoin being embraced by this institution or that — has felt almost constant, with headlines every week if not every trading day. The trend continued this week, with CNBC breaking the following news on March 17:

Morgan Stanley is the first big U.S. bank to offer its wealth management clients access to Bitcoin funds, CNBC has learned exclusively.

The investment bank, a giant in wealth management with $4 trillion in client assets, told its financial advisors Wednesday in an internal memo that it is launching access to three funds that enable ownership of Bitcoin, according to people with direct knowledge of the matter.

The move, a significant step for the acceptance of Bitcoin as an asset class, was made by Morgan Stanley after clients demanded exposure to the cryptocurrency…

To quote Bruce Willis in the 1980s action movie, Die Hard: “Welcome to the party, pal!”

For many investors, the “digital store of value” concept is hard to wrap one’s head around. But they are starting to get it, in part by expanding their repertoire of mental models — the mental picture of what constitutes a store of value, what its critical functions are, and so on.

When a concept is so new or different it feels hard to grasp, it can help to relate that concept to something more familiar. On May 5, 2020 — when BTC/USD was below $9,000 — we said the following:

Before Bitcoin, only gold had served as a reliable and immutable store of value for the entire world. Bitcoin has taken that use case and gone digital with it.

In our view, that level of value-add to the world — acting as a store of value that is truly digital, truly trustable, and accessible to everyone — is potentially worth more than all of the FANG stocks put together. We also suspect that, in due time, the world will figure this out.

In the name of mental model expansion, we can play around with the FANG concept by imagining Bitcoin as a FANG-like entity — a technology juggernaut like one of the “big four:” Apple, Amazon, Google, and Facebook.

At present moment, the market capitalization of Apple, Amazon, Google, and Facebook added together amounts to slightly less than $5.9 trillion.

For Bitcoin to be worth more than all those put together, it would need a market cap in the $6 trillion range — or about 500% appreciation from current levels. Given that physical gold’s market cap is currently about $11 trillion, a BTC/USD market cap of $6 trillion does not feel like a stretch; in fact, it feels conservative.

But the point is not to pick a level or a dollar-based target, because all of these numbers will move around. It is more to get a sense of magnitude, and to compare the potential trajectory of BTC/USD to more of a known entity that investors are familiar with — the valuation of the tech juggernauts, in juxtaposition to the services they provide.

As a hypothetical FANG, Bitcoin does not have a physical, tangible presence. But neither does Google, unless one counts, say, thermostats and home speakers, which are less than a rounding error in total revenue terms. (The same goes for all of the physical devices Google makes, in comparison to digital search advertising.)

One can then ask: Since all the FANG juggernauts make money, what monetizable service does Bitcoin provide? The answer there, as one might guess, is “digital store of value:” It is useful having the ability to hold one’s savings in a commodity (Bitcoin is treated as a commodity by U.S. regulators) with maximum scarcity, maximum ease of transport, and global reach.

And in terms of universality, it is hard to get more universal than the global store of value case. Not everyone needs web search or social media or e-commerce — but anyone with savings, from the largest conglomerate to the lone saver, can benefit from having a place to store those savings, easily and simply, in a manner that protects against fiat currency depreciation.

What about the profits, though? All of the tech juggernauts are money makers, and Bitcoin seems to have no return-on-revenue stream. Except this isn’t exactly true: Bitcoin provides a stream of cash flows for BTC miners, who keep the network running by mining new coins and verifying transactions.

Then, too, investors in BTC see capital appreciation in the same manner as, say, the holders of a tech stock that pays no dividends; the increasing value-add is built into price appreciation as a supply-and-demand function.

What about the innovation factor, and all of the brilliant engineers and coders who work for the tech juggernauts? On this front one could argue Bitcoin is even more FANG-like than the juggernauts: The Bitcoin ecosystem is a kind of decentralized collective, maintained and upgraded at the margins by some of the smartest people in the world.

If one had to tally the number of brilliant coders working on innovative Bitcoin use-case extension projects at any given time — including all of the private entities and institutions building payment rails for BTC, and on-off ramps for usage of BTC in various ways — the collective coding power of the Bitcoin ecosystem might even exceed the big four already (think tens of thousands of brilliant individuals, all working on BTC-related projects that benefit the Bitcoin ecosystem as a whole, at any given minute of any given day).

One reason investors may feel intuitively comfortable with the FANG juggernauts, but not with Bitcoin, is because the dominant sphere of, say, Google or Facebook has the feel of a tangible thing. Even though these entities are virtual, they have servers and people and services and network effects, and a level of power, built up in a kind of flywheel, that cannot be replaced or replicated.

Trying to build another Google or Amazon or Apple or Facebook, in a world where the original already exists — and wields its competitive advantages with full force, while continuing to innovate as fast as it can — would likely not just be hard, but almost impossible.

In that respect, Bitcoin is the same. The inherent dominance of Bitcoin is not just about the decade-plus ledger history (although that matters quite a bit) or the global reach and branding (which matters a lot, too); it is also about the living, breathing nature of the Bitcoin ecosystem, and all the ways BTC is rapidly evolving at the margins in terms of accessibility and use-case applications.

Trying to replicate Bitcoin’s inherent advantages — and most critically the physical tangibility of the Bitcoin ecosystem — strikes as just as hard, if not even harder, than attempting to rebuild a tech juggernaut from scratch, while fighting the mighty incumbent who continues to improve as fast it can.