market folly

Bill Miller of Miller Value Partners recently appeared on Consuelo Mack's Wealthtrack.  His hedge fund, MVP1, invested in bitcoin in 2014 and 2015 and he said it now comprises 50% of his fund.  Here's a summary of the conversation:

His average cost is around $350 and he was buying between $200 and $500.  Bitcoin recently traded around $20,000.  He likened his purchase of bitcoin early to his purchase of Amazon (AMZN) way back in the day.

"One of the things we try to do is to have an open mind, especially about new technologies.  Most of them don't work, so you have to believe you have a high probability of being wrong, and if you have confidence in it, it's likely not going to work.  So it's really a question of assessing risk and reward on a case by case basis."

He says he was aware of it before he bought it but didn't take it too seriously... likened it to an experiment.  He read a book called Digital Gold and he also found it interesting that people he had a high regard for in the venture capital world took an extreme interest in it (Marc Andreessen, etc).

He was convinced bitcoin had a future because it had already passed its biggest stage of risk in the early days.  "There really hasn't been any technological innovation in money... ever.  There's been stages... rocks, to jewels, to gold and silver ... by and large money was a tangible thing.  Governments began issuing fiat currency that was also backed by something tangible."

Miller says bitcoin is uncorrelated as a potential asset to anything else.  It doesn't matter what's going on in central banks or geopolitics.  Another book Miller mentioned was The Construction of Social Reality.  Miller said that the founder of Bitcoin likened the cryptocurrency to 'digital gold.'

Given the risk/reward, he mentioned advice he heard that you could put 1% of your net worth in it and that way if it goes to zero, your downside is limited but if it skyrockets, you've got exposure.

Miller says the problem with bitcoin is you have to store it, and if you store it on an exchange and that exchange gets hacked, then you lose it forever (there was a hack of a major exchange a few years ago).  He says the emergence of futures contracts for bitcoin is a big move and the next step will be exchange traded funds (ETFs).

He pointed out that right now there's about $7.5 trillion worth of gold while bitcoin's market cap is around $290 billion dollars.

If you consider it a currency, he says bitcoin would be the 17th largest in the world right now.  While it won't supplant the major currencies, there's a chance other volatile currencies could see people seek a store of value elsewhere.  The problem, however, is of course bitcoin itself has had wild fluctuations in value.  So it can't really be viewed as a major currency replacement at the moment.

While he has 50% of his hedge fund in bitcoin, he's never run that concentrated before... citing previous top holdings at around 20%.  That said, he's looking at hedging the exposure but isn't ready to disclose how he's going to do that, but he's not selling the long.  He started it as a 5% position and it's grown so much.

He also has some bitcoin cash, which is an offshoot, but he doesn't own any other crypto currencies.  He likened bitcoin to VHS tapes or Bluray, etc were one format became the defacto choice, so the others won't be as relevant.

When asked about risk, Miller quoted someone saying "I wouldn't have anymore money in bitcoin than I was willing to lose 100% of." He thinks the chance of it becoming worthless are far, far less than they were in the early days though.

Embedded below is the video of Bill Miller's appearance on Wealthtrack talking bitcoin:



For more on cryptocurrency, we've highlighted Bart Stephens' presentation on bitcoin from the Invest For Kids Chicago conference a few months back.  Back in 2013 we also posted the Winklevoss twins' presentation on bitcoin from the Value Investing Congress.