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What Tudor Jones’ bitcoin investment means for other institutional investors and for bitcoin

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By Andrea Bianconi

The recent disclosure by Wall Street investor Paul Tudor Jones that his Hedge Fund will start trading bitcoin futures to gain exposure to bitcoin of approx 2% of their total investment portfolio made financial headlines. What was little discussed though were the reasons that caused Tudor Jones to take such an important and still contrarian investment step for a highly respected institutional investor on Wall Street?

To put things in the right perspective, Paul Tudor Jones is not a Millennial. He is a Baby Boomer, a veteran Wall Streeter. Someone who got big in the ’80s at the time when Michael Milken and Ivan Boesky roared Wall Street and inspired the Hollywood fictional characters of Gordon Gekko and Buddy Fox in the Wall Street movie. Under that light, his opening to bitcoin is even more remarkable, simply because digitisation and cryptocurrencies — for one of his age (don’t mean to be disrespectful, I am myself close that age group as well) — are not exactly in the DNA.

Rather, it requires both an open mind and much critical thinking to consider an asset which has revolutionary characteristics and complexities like bitcoin. Maybe, his MD Lorenzo Giorgianni, has contributed to that. If so — considering that Giorgianni was for over a decade at the IMF — this makes their investment disclosure even more valuable and worth of careful consideration for all other institutional money managers. In my opinion, this decision is so far the most important catalyst to attract institutional money to the crypto sector. Far more important than that of younger Wall Streeters such as Michael Novogratz or Andreessen Horowitz in the past.

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Tudor Jones has summarised his investment decision in a short paper which I advise you to read to make proper sense of his reasoning. I will skip the economic backdrop which causes Tudor Jones to consider bitcoin as an investable asset to fight monetary inflation (I wrote two months ago about the effects of the incoming monetary tsunami on bitcoin and gold) as well as the decision to trade bitcoin futures rather than physical.

I will simply look at the reasons why bitcoin has become “investable” for someone like Tudor Jones.

His analyst team — in what they have called “the inflation race” — has compared the historical performance of ten assets which have traditionally performed well in such a macroeconomic environment including gold, equities, yield curve plays (long two year notes vs short 30 year bonds) etc.

Surprisingly bitcoin came out 4th. This sparked their interest even more, and they decided to dig deeper. So they proceeded to analysing how bitcoin scores as a store of value in respect of 4 key features:

(i) purchasing power,

(ii) trustworthiness,

(iii) liquidity and

(iv) portability.

Even here, bitcoin scores very well — especially as far as liquidity and portability are concerned. Little less so for the two additional features due to its volatility and its short track record, only ten years compared to over two millennia for gold.

Then Tudor Jones goes on to highlight the additional features which make bitcoin his number one bet, what he calls the “fastest horse on which to bet to win the race”:

(i) its scarcity by design is a feature which makes it really unique; and

(ii) its very low market cap in respect to financial assets and gold.

Indeed, with a market cap of only US$ 176 billion — i.e. 1/1200th of financial assets and 1/60th of gold as Tudor Jones puts it — bitcoin looks underpriced.

And this is an important valuation coming from an institutional investor. So far other prominent investors like Buffet, Jamie Dimon or economists like Roubini, have repeatedly referred to bitcoin as a “bubble”, without ever going into clarifying why it is a “bubble”, what are the criteria to evaluate that and more importantly in respect to what is bitcoin to be considered a “bubble”. The point is that since bitcoin is not an investment and cannot be compared with and valued as any other yielding assets — but it is primarily money and a store of value — how do you evaluate then its fair market price?

Bitcoin’s value as “money” and as a store of value is derived by a comparison with those instruments which can be either debased more or less discretionally (like fiat currencies) or which prices can be pumped up via monetary inflation (like all other financial assets, real estate, classic cars, arts, etc.). The only way to forecast a future price for bitcoin is to assume that a share of the money currently invested in traditional financial assets and in gold will slowly migrate to bitcoin.

Talking about “bubble” territory for bitcoin at US$ 10.000, 20.000 or 100.000 does not make any sense. Bitcoin’s future value will be equal to the amount of money that in the future will leave global financial assets, cash, precious metals, arts etc., to migrate to this new asset class. We are talking about well over US$ 300 trillion of global assets. To assume that only 1% of that will be, sooner or later, attracted to bitcoin is not unthinkable. With a market cap of just US$ 3 trillion and a money supply of 19 million coins (considering that at least 2 million have already been lost) one bitcoin could well be worth over US$ 150.000. A long way up from what Buffet and Roubini defined long ago already “bubble” territory.

Though, there is a lot more than that to the “value” of bitcoin and the whole crypto sector.

Kyle Samani’s The Crypto Mega Theses, which I have discussed in the article “Oops! Ray Dalio missed the biggest of all paradigm shifts: Crypto”, makes the crypto investment case compulsory for every institutional investor. And bitcoin — as a digital gold/store of value — is only one of such investment cases.

Decentralised finance, Web3 networks and the Covid-19 generated catalyst for global digitisation are the others.

But the seminal work for any institutional investor is — in my opinion — John Pfeffer’s 2017 paper “An (Institutional) Investor´s take on crypto assets”.

I will finish off quoting Pfeffer: “…the potential for a crypto asset to emerge as a dominant, non-sovereign monetary store of value, which could be worth many trillions of dollars. While also risky, this potential value and the probability that it might develop for the current leading candidate for this use case (Bitcoin) would appear to be sufficiently high to make it rational for many investors to allocate a small portion of their assets to Bitcoin with a long-term investment horizon.

Here you go, a rational bet and asymmetric returns make it possible to allocate just 1–2% of your wealth to crypto and one day this might well become the largest portion of your wealth.


© www.bianconiandrea.com — 2020

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