The consensus view two or three years ago was that Bitcoin was a fad, even during its surge in 2017. The consensus view today is that Bitcoin is the future. Tesla bought some Bitcoin. Ray Dalio is on board. Even pension funds are adding it to portfolios. I own some, too.
The fundamental premise of this Substack is that non-consensus ideas are the only way to generate extraordinary returns, so if Bitcoin is consensus, does that mean the extraordinary returns of Bitcoin are over?
I’ll attempt to answer that question as a student of consensus rather than an expert on crypto, but we first need to understand the value of consensus to Bitcoin as an investable asset before we consider the implications for relative investment returns.
What does consensus belief mean for Bitcoin the asset?
This emerging consensus around the asset is profoundly important because the success of Bitcoin always depended on a broad market of people agreeing that it has value. Unlike gold or silver, Bitcoin has no physical utility. Unlike the US dollar, it is not backed by a nation (setting aside any debate over what value that backing really creates). Neither utility nor sovereign backing is necessary to deem something valuable. All that’s necessary is a group of people that deem the thing valuable enough to trade something else of value for it. As long as consensus believes in Bitcoin, and there seems limited reason for that belief to change at this point, the asset should be a decent store of value.
Consensus belief seems to trigger a feature of Bitcoin that I think of as a slow squeeze mechanism. It works as follows. There are a limited number of Bitcoin available as necessitated by the structure of the protocol itself, and the number of Bitcoin in existence only shrinks due to users losing access to assets through lost passwords, losing cold storage devices, etc. On top of this natural shrinkage, institutions buying Bitcoin generally seem intent as long-term owners of the asset, and that is where the squeeze comes in.
Institutions often follow consensus, so consensus becomes self-reinforcing. Bitcoin is the consensus winner in crypto right now, and there’s nowhere else for these institutions to go with their crypto allocations as compared to stocks or bonds, where there are many options with which to adjust long-term allocations. As consensus continues to form around Bitcoin, long-term institutional interest will grow and create a reduction in tradeable supply of the asset.
This effective reduction in available supply could create a tailwind for Bitcoin prices. This doesn’t mean Bitcoin will continue to go straight up — no asset does that as demand ebbs and flows — but it seems possible that Bitcoin stays in a sustained long-term trend higher (not investment advice).
What does consensus belief mean for investing in Bitcoin?
Bitcoin becoming consensus reminds me somewhat of how the FAANG stocks became consensus winners in tech. I think this started to happen around 2015 or 2016, and those stocks have enjoyed something like ~30% average annual growth since then. Owning them was consensus and comfortable and happened to come with strong returns relative to historical broad equity market averages. This is an important thing to understand: Consensus doesn’t necessarily mean that the returns aren’t great in some absolute sense, it just means the returns will be common to the large group that participates in owning the asset.
An investor would have faced a serious headwind if he or she avoided FAANG in the mid-2010s just to be contrarian. Bitcoin disbelievers may face a similar headwind. Sometimes you need to embrace consensus as part of an investment portfolio; however, if consensus owns some level of Bitcoin and your goal is to meaningfully outperform your peers, it will become harder to do it if Bitcoin is the core of your “differentiated” investment thesis.