The 3 Fundamental Flaws of Bitcoin (and Other Cryptocurrencies)

As the value of a bitcoin climbs to $9,000 today - a level not seen since December, 2017 when it was crashing from its all-time high of $20,000, I felt it was a good time to write about my concerns with the cryptocurrency. [Granted this is off my usual topic of biotech stocks, but the volatile nature of both asset classes seems to interest many of the same speculators, your truly included.]

Here are the three main reasons why I feel any sustainable value or use of bitcoin and its crypto brethren will forever be limited.  Unlike other practical, legal, and tax issues (see footnote 1 below), these three are fundamental problems with the core design of bitcoin and can't be legislated, engineered, "forked", or marketed away.

1. Security. 

The problem I speak of is not security of the bitcoin blockchain itself (which has shown to be quite resilient thus far), but of how to manage its security.  Conceptually, all bitcoin ownership is represented by a record in a blockchain database identified by a public key and accessed by a private key.  That is all you get: 2 large strings of jumbled characters.  You can layer whatever of your own security policies or toys on top of that, but in the end, you can't get around the problematic fundamental design that all is hinged on these 2 keys.

The incorrect decisions about managing those 2 keys: how to store them, who should have access to them, how to change their keepers before someone or some piece of electronic equipment dies - has led to the loss or theft of millions of dollars worth of bitcoins on a regular basis.  And unlike FDIC-insured assets in US banks, where not a penny has been lost or stolen by a depositor since the FDIC's inception in 1933, bitcoiners have no recourse once they have been totally wiped out.  They have but a small hope that any government enforcement agency will make an effort to recover their coins or prosecute their thief. (Though ironically it is the lure of being detached from any government control that attracted much of the bitcoin crowd in the first place.)

2.  Lack of a Moat (no durable competitive advantage).  

As bitcoin's value started to increase in 2017, everyone and their brother created new 'improved' cryptocurrencies and there was no way bitcoin could stop that, or the trespassing on its brand (looking at you "Bitcoin Cash").  Bitcoin and other cryptocurrencies are unable to 'improve' themselves to a point where they can prevent new currencies from easily resolving any of their their shortcomings, marketability or utility.

Shown below, as the value of bitcoin started to soar in 2017, its percentage of the entire cryptocurrency market (termed 'Bitcoin Dominance') shrank as "me too" currencies were created daily to steal its thunder. There are now thousands of cryptocurrencies in existence and even more of their sketchy cousin, the ICO.

This is worse than the built-in 'poison pill' of a corporate equity structure that will cause dramatic dilution.  And it will happen whenever bitcoin gets any momentum in price appreciation.  A supposed great advantage of bitcoin over fiat currencies is the impossibility of any dilution beyond its predetermined, finite rate; but the lack of any moat from competition negates that benefit.

3.  Absurd Wasting of Electrical Power (due to the mining process). 

The process of mining bitcoin currently uses (wastes!) as much electricity as all of Denmark consumes. And all for what?  To create a 'lottery' that distributes small amounts of bitcoins to incentivize users to run/host the blockchain network on their computers.  This lottery is implemented by requiring blockchain network hosts to use massive computing power to 'solve puzzles' to win bitcoins.  (Source, and counter arguments.)

Though the concept of incentivizing by awarding bitcoins assures a large, strong network, its implementation that consumes so much to accomplish something so simple has to be the most asinine waste of power I have seen. Those idealists who look to bitcoin to lead the New World Order are celebrating one of the most senseless contributors to global warming.  Thanks a lot Satoshi!

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Footnotes:


1.  By the way, yours truly was in the room and sitting just a few feet from SEC chairman Jay Clayton when he made his famous statement June 13, 2018 in Atlanta regarding treating ICOs as securities.  Actual photo I took as that statement was being made. 

Thoughts from Attending the 2019 Berkshire Annual Shareholders Meeting.

This time of year I am usually fresh off my fix and fill about the legendary success and wisdom of Berkshire Hathaway's Warren Buffet and his vice-chairman, Charlie Munger. The period around Berkshire’s annual meeting, where Warren and Charlie reveal their thoughts in abundance, and get extensive media coverage while doing so, is where I get recharged and re-reminded of the simple, basic, common sense that I need to carry me though the rest of the year.  Predominantly investing in biotech companies I don't resemble the typical Buffet “value investor”, but the common sense and wisdom that flows from Charlie and ‘The Oracle’ finds applicability across all assets classes, and indeed, all facets of life and human behavior.

This year, since schedule has allowed, I made my first trip to the meeting in person. This was a “bucket-list” event for me that I justified to myself by arguing that there can’t possibly be too many more opportunities to see these two legends (now 88 and 95 years old) in this particular forum. Of course, however, one could have said the same thing for the last 20+ years. 

The most memorable part of this event that can only be witnessed in person were all the people from around the globe, from all walks of life, from all levels of sophistication that make this pilgrimage, and have done so for many years. Everyone is cool, everyone is equal, everyone is family, everyone has easy ability pick up conversation with everyone else -- from the most successful captains of industry that attend, to the retiree that counts pennies.  Seldom is the concept of a “level playing field” experienced as well as when a billionaire has to stand in line to use the same porta potty as you in the Borsheims parking lot.

I have attended shareholder meetings from other companies that manage well into the billions of dollars of assets only to be greeted with a that look of surprise when “a shareholder actually showed up”. That is not the case here, and that is only the beginning of the differences that set Berkshire Hathaway apart from so many others.

A long weekend of events, parties, and cheesy promotional antics centered around the 8:30 am Saturday morning start time of the actual meeting. I woke up at 4:30 am, debated my options to get from my hotel to what will be a congested part of downtown Omaha, which I did by 6:15 am. I was greeted by a very long line of people waiting outside that may have already exceeded the 19,000 person capacity of CHI Arena that holds the event. Through friends I was able to get a seat in the upper deck for the meeting, then later an acute case of FOMO forced me to 4^th row right in front of the stage.  My “note to self” for next year is to only sit where I can be comfortable; the screens are big enough and the audio loud enough to not have to endure being uncomfortable for a lengthy period of time.

The “investment industry” often feels like it is as much about collecting fees from its clients as it is about actually improving their net worth.  As such it is quite rewarding to see these 19 thousand people, and all the other believers that were not present, that they all must “get it”. They won’t get ‘taken’ the way so many others have and will by this industry. And that was encouraging.

The stamina for two gentlemen aged 88 and 95 to engage in questions and answers for six hours outlasted most of the crowd. Warren, cordial and verbose, Charlie, brief and candid; both continue to retain their amazing wit. Their ability to address the most over-complicated question or subject matter, and respond with the most simple, yet complete and satisfying answers, is a talent that I quite admire and have never seen mastered so successfully elsewhere.

This year, and as I understand this was for the first time, we got to see interactions with members of the next generation that will likely lead Berkshire.  On appropriate occasion, Warren passed questions about Berkshire’s businesses from shareholders to managers Ajit Jain and Greg Abel to address the crowd. I was hoping they would do that. 

The formal parts of this weekend could easily be viewed online from my home.  But the people I shared the experiences with over the long weekend could not.  I am grateful to have shared a lot of fun and enlightening experiences with those that I spent time with.  I do not know if I will attend annual meetings in future years, but if I do, I expect they will continue to be satisfying, fun, and rewarding regardless as to who will be sitting on top of the stage.

2019-02-11 Bio Review

Brief video to go over biopharma stocks with upcoming catalysts.  (Viewed best when maximize video window by pressing button on bottom corner.)

ADMA, AEZS, LXRX, REPH, FENC, KPTI, RMED, VKTX, AMRN

#ArbitageFun3.0: Celgene Corporation (CELG) & Bristol-Myers Squibb Co (BMY) Proposed Merger

In the following set of videos I analyze the proposed CELG & BMY merger and look for arbitrage opportunities with beneficial risk/reward profiles.  It's an unpolished draft.

In part 1 we summarize the deal terms and relevant economics:

And in part 2, we analyze arbitrage strategies.  I compare the standard strategy of "long target / short acquirer" to another strategy I found, that involves only CELG stock and options. 

(Note: for those wishing to buy a copy of the underlying spreadsheet, DM me on Twitter, @philkobi.

An Interesting Interim Analysis for Bellerophon is Imminent.

This blog post was being written to discuss the interim analysis of Bellerophon Therepeutic's (BLPH) phase 3 INOvation-1 clinical trial for pulmonary arterial hypertension.  While I was still drafting it, the company announced that the trial was being stopped for futility. As a result this blog post was not completed. 

ASM Microbe Conference, June 2018

With CDC Deputy Director Dr. Anne Schuchat after her excellent keynote presentation on the need for novel antimicrobials.

My Dilemma with Tesla; TSLA

At a $50B market cap (as big as GM and Ford, but at less than one-tenth the revenue) with current liabilities at 3.25x their cash and operating losses at $600M per quarter, Tesla ($TSLA) seems like a classic overvalued short play that is badly in need of cash.  I would guess that the odds of a company in this situation being able to maintain itself as a "going concern" without significant equity dilution or taking on additional debt at significantly worsening terms, are pretty thin.  The confounding issue is, Tesla overcame what I would have to believe are far more difficult odds in accomplishing all it has thusfar. 

This cult favorite, with the largest short position of any in the US stock market, has its supporters and detractors firmly entrenched.  It 's story has now drawn me in, like a good soap opera.  I really want to root for Elon Musk, but every way that I look at their financial statements and position tells me that a fall in Tesla shareprice is not "if", but "when".

With the shareprice at $300 I am scaling into a long-term 400/175 short strangle taking advantage of the high $25 premiums; expecting that bulls and bears will keep the shareprice in this range until my year-end expiration. 

Here is the spreadsheet I've put together thusfar of Tesla's key financial metrics:

And the P&L of each single short strangle mentioned above: