Tesla just invested $1.5 billion in bitcoin. Here are the bull and bear cases for the crypto, according to legendary macro trader Mike Novogratz and Goldman's wealth management CIO.
Summary List PlacementIt seems like Tesla CEO Elon Musk's December Twitter exchange with MicroStrategy's Michael Saylor about "large" bitcoin transactions has come to fruition. On Monday, the electric-vehicle maker said in its annual 10-k filing that it had purchased $1.5 billion worth of bitcoin in January for its treasury reserves, and it expects to accept the cryptocurrency as a form of payment for its products "in the near future." News of Tesla's corporate-level bet on bitcoin immediately sent the digital currency up as much as 16% to an all-time high of $44,795.20 early Monday morning. Bitcoin proselytizers such as Saylor cheered on Musk's "leadership," but others like hedge fund manager Michael Burry pointed to the convergence of two big bubbles. Whether Tesla's move to add bitcoin to its balance sheet is a sign of the cryptocurrency's further adoption by the mainstream public or an indication of a bubble that's about to burst, the company has taken the role of bitcoin to another level by indirectly exposing shareholders of any S&P 500 index fund to the digital asset. That makes it all the more critical to understand bitcoin's investment merits or lack thereof. Insider compiled the views of Mike Novogratz and Sharmin Mossavar-Rahmani, who are respectively the CEO of Galaxy Digital and the chief investment officer for wealth management at Goldman Sachs. The bull case Prior to founding crypto-focused Galaxy Digital, Novogratz was known as a legendary macro trader and hedge fund manager. He began his career at Goldman in 1989 and then joined money manager Fortress Investment Group. In a recent SALT Talks interview with SkyBridge founder Anthony Scaramucci, Novogratz said he first bought into bitcoin as "a speculative move" when it was trading at around $100 per coin. He soon discovered that the digital coin was not only a new technology but also played right into people's frustration with the government in the post-financial crisis environment. "We were in the middle of quantitative easing, and people didn't trust banks," Novogratz said. "They didn't trust central banks, they didn't trust authority, and that was this kind of ethos of the Bitcoin community." Novogratz was not an early enthusiast. He had wanted to sell out of his position when bitcoin reached $1,000 but was persuaded against it by his then-partner. It was not until he walked into the Brooklyn office of the blockchain software company ConsenSys, founded by his college roommate Joseph Lubin, that he really "got his religion." "I walked in and I saw this group of people, young and old, plotting out this financial revolution," he recalled. "And I realized that there was a religion to this stuff, that people were in it not just for the money, they were in it for change: To rebuild the financial system in a more egalitarian way, in a more transparent way, in a fairer way." Since then, Novogratz has plugged himself into the crypto ecosystem, buying both bitcoin and ethereum, which went up excessively in the speculative bubble of 2017. He launched Galaxy Digital in early 2018 right as the bubble was popping, but that didn't stop him. "I knew it was a bubble, I talked about it being a bubble, I sold a lot of stuff," he said. "But I decided to start a company anyway, because I figured this won't be a long burst, that the underlying people in this space aren't going to give up and the underlying technology is real." Three years later, bitcoin seems to have reached a frenzy again, generating 300% in 2020 and doubling in value in less than a month this year. But Novogratz believes this time is different. "It's not the same as 2017 at all just given the breadth of players coming in, the amount of capital being poured into the system, and the building of new architecture," he said. "I think this is the early innings of the real revolution, with 2017 being the first tempest in a teapot." The bear case For Sharmin Mossavar-Rahmani, chief investment officer for wealth management at Goldman Sachs, bitcoin is not something that she would recommend as an investable asset in client portfolios. Rahmani, who also serves as the head of investment strategy for Goldman's consumer and investment management division, said in a media briefing last Wednesday that bitcoin's wild gyrations demonstrate that it is not a medium of exchange or unit of value. "Something that has a long-term volatility of 80% can't be considered a medium of exchange," she said. "Imagine you paid for something in Bitcoin three years ago, and now you think my gosh I paid $30,000 for something that I thought I'd paid $6,000 for." Rahmani is skeptical of the argument that bitcoin is a store of value. "The question we ask ourselves is who assigns that value," she said, comparing bitcoin's run-up in price to the surge of GameStop shares, which were driven to as much as $470 a share before plunging almost 60% in the past week. "Just because everybody piles into an idea and talks it up doesn't necessarily mean it's a store of value," she added. A much-touted advantage of bitcoin is its scarcity value, but Rahmani sees no tangible merits behind its limited supply of 21 million. "When people talk about the value of a great painting or the value of an oceanfront property, it is what people assigned to it," she said. "But there is something tangible, and not everything withstands the test of time." The cyber risk of bitcoin is not something Rahmani can ignore either. "The idea that you have total transparency, total safety of the infrastructure, no hacking risk, it just doesn't seem reasonable to us that people think that these are issues and concerns that can be readily dismissed," she said. To be sure, Rahmani acknowledges that the underlying blockchain technology and the idea of digital currencies are positive developments that can make transactions and the global flow of assets much easier. But she is wary of relying on cryptocurrencies as an inflation hedge or in a crisis. "If there's a particular value that Bitcoin puts forth, that value could be put forth by ethereum, it could be put forth by all the other cryptocurrencies," she said. "There's nothing unique about it other than everybody saying it's scarce so it will be more valuable."SEE ALSO: Credit Suisse says to buy these 16 'highest-conviction' stock picks that are set to outperform despite the market's contrarian view Join the conversation about this story » NOW WATCH: Why electric planes haven't taken off yet
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