We All Have Different Incentives

In his book, Psychology of Money, Morgan Housel wrote:

“Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.”

A recent notable example of this can be found in the newly established Bitcoin ETFs. On one hand, by allowing Bitcoin ETFs to exist, it seems like the SEC and large institutions are giving Bitcoin a seal of approval. In the runup to the ETF launch date, the media was feverishly writing about the potential for huge demand, and Bitcoin evangelists were declaring that Bitcoin would become a core component of every investor’s broadly diversified asset allocation.

It would be easy for an outside investor to see this and think, “If crypto is going to be mainstream, maybe it is time I got in as well.”

The problem of course is that these other parties are all playing different games than the rest of us.

• The SEC is operating from a legal standpoint rather than a financial one.

• The ETF providers don’t care what happens to the price of Bitcoin, they just want to generate the management fees.

• The media wants ad revenue and will write whatever it thinks will get the most clicks.

• The Bitcoin evangelists want to get as many people into the trade as possible so they can flip their existing positions for more than they paid.

None of these parties care if you make money and none of them share your time horizon.

When we brought this up to the investment team we work with at Blackrock (a firm now running the largest Bitcoin ETF), they agreed. In their mind, Bitcoin is not an asset class that will add value to our client’s long-term portfolios. It is simply another thing to trade. People that trade and people that invest are playing two very different games.

This is not to say that Bitcoin cannot experience some massive gains in the short-term. We have no useful price targets and would not be surprised to see a bubble that expands beyond any reasonable expectation. However, in the long term, the market eventually prices investments based on the value they create. If Bitcoin fails to create value, the long-term price will inevitably approach zero.