China and Bitcoin - The Arrogance of Crowds
Arrogance is the primary difference between great investors and those who aren't even a footnote.
While the gap between highly convicted and dogmatic is tiny, the problem will always arise when an investor thinks nothing can go wrong. More specifically, you should always be wary of those who have an answer to every single challenge to a thesis.
It does not mean the thesis is wrong, but no idea is perfect, no strategy evolves without a drawdown. An investor who doesn't see a flaw in their idea is destined to fail.
I have been told by some of the smartest investors on the planet that China cannot ban Bitcoin. The people will not stand for it. This ultimate store of value, this libertarian ideal, will be forced upon the Communist Party, whose senior members are making far too much money out of it.
I feel that Cryptocurrencies run counter to the ethos of the Party because they cannot control it. China is embracing blockchain and digital currency like no other nation, but strict capital account controls, environmental priorities, and anti-corruption have been a hallmark of Xi Jinping, and wide adoption of cryptocurrency makes this more difficult.
I am not sure if it will be banned, but I am confident it will be strictly regulated over time.
The Chinese Communist Party may not ban cryptocurrency, but to believe that they cant is arrogance of the highest order. To not have the legitimate concern that China prevents its citizens from dealing in bitcoin is reckless and shows a complete misunderstanding of how China operates.
Any ban may not influence prices, it is a global phenomenon, and the underlying demand for bitcoin, in particular, is growing exponentially but do not think for a second that China cannot prevent its use in the mainland with the stroke of a pen.
Bitcoin is no different from any transformative asset that has come before it. No asset has ever been bigger than sovereign governments. While governments adapt to the demands of their people, no asset will be permitted to undermine government policy, democratic or otherwise.
When the "otherwise" is the Chinese Communist Party, those assets or people who fly against policy will be reined in. If it can happen to Jack Ma, it can happen to bitcoin.
The number one concern that bitcoin advocates have is the volatility of the underlying asset. What they fail to discuss is why it is volatile. The price swings we consistently witness are inherent with any nascent technology. Yet, like any new technology, there are inherent flaws. Volatility is not a risk; it is a reflection of the embedded risks that many evangelists refuse to acknowledge. Hype without consequence is why a slew of investors have negative returns via crypto investing in 2021.
The early adopters with a cost base well below current levels aren't overly concerned about these downturns. They desire to constantly build momentum for this new asset class in an attempt to generate network effects by any means possible. Elon Musk's actions would be criminal in the equity asset class. This hype will continue to be a detriment to the extraordinary technology that underpins the tokens themselves.
There is a place to own bitcoin. I have written consistently that we are in the phase of bitcoin's evolution where it can be 1% of a portfolio.
Frankly, given the underlying volatility, that number is too high. It can play a role in your portfolio, but when it dominates returns, like any asset, it is sized incorrectly. With the price fluctuation we are witnessing, prudence tells you it should not be any more than 50bps.
China putting added restrictions on cryptocurrencies doesn't change the overall thematic. It doesn't change the use case for blockchain or the interest from institutional investors to engage.
It exposes that this theme is the same as many others that have captured the imagination. It is compelling but not perfect.