The Arm That Twists The Invisible Hand

Previously, we discussed how to this day we only have a small percentage of market penetration in what could become a global monetary phenomenon in crypto-assets.

As the technology adoption curve graph that is so frequently floated around the space suggests, crypto-assets have the potential to do just that. However, it may not be for the reasons that most think.

It could happen for something entirely different, something our capital markets have seen time and time again as cycles transition.

I recently read Lords of Finance by Liaquat Ahamed and in it he spoke about how market mentalities could be shifted overnight via strong actions taken by prominent people at the helm of central banks. As Ahamed states:

“The invisible hand of free markets sometimes requires a very dynamic, prominent, and persuasive twist of the arm to get things back in order.”

This is all it takes to change general dynamic in any market psychology: a reputable person putting his/her word out and influencing the wisdom of the crowd. Ever wonder why the meeting minutes of the Federal Reserve are so highly anticipated?

It is because the words of a Paul Volcker, Alan Greenspan, Ben Bernanke, Janet Yellen, and Jerome Powell hold significant weight in the future value of monetary (and inherently, non-monetary) assets. They control capital flows via interest rates, a power that cannot be understated, especially in our current environment of quantitative easing.

Akin to our central bankers, we have other prominent figures that hold a powerful platform when it comes to market psychology. These are the J.P. Morgan's, the John D. Rockefeller's, Bill Gates, Warren Buffet, Jeff Bezos, and company. Household names.

I argue that these household names stand to carry more weight than those of central bankers when it comes to alternative assets. This is due to the fact that alternative assets are the antithesis of the central banker's manifesto. As central banks continue to tinker with their global financial experiment, it is these household names I am paying attention to because just like you and I, they will want to preserve and protect their capital.

Their social status places them onto a platform where their voice can be heard far and wide, and their job descriptions allow them more flexibility when it comes down to matters of money; whereas it is expected that the CEO or chairman of a major bank talk his/her organization's book until the bitter end.

In recent memory alone, we've witnessed the weight that these household names carry when we watched Warren Buffet demonstrate the weight of his opinion.

Buffet, one individual mind you, made it known to the general public that he had skin in the game. It became common knowledge that "the greatest investor of our time" was buying, and that was the only ingredient required for human psychology to take care of the rest.

This exact same dynamic is more likely than not with crypto-assets. Should international money markets destabilize and trust in the system be lost, markets will once again become a game of free-for-all rather than "globally coordinated". The age old balancing act of centralization versus decentralization in action.

Treasuries will catch a bid and gold/silver will likely fall out of circulation, but the new kid on the block in crypto-assets, bitcoin in particular, stand to gather capital at an alarming rate.

Setting deflationary or inflationary fears aside for the moment, the only asset with a clean slate will be the one that has mathematics, computer science, a loyal social network, and an unmeasurable appeal to human psychology behind it. It is this last portion that intrigues me the most. The power of narratives cannot be understated in a world as interconnected as our own.

All it will take is someone of repute to the common public, someone outside the realm of the current existing crypto social network, to make the statement that he/she is investing into the asset and voila.

The likelihood that such an event occurs at a time when SHTF (Google it) is growing by the day. If broad market confidence is weakened by a perceived break in the existing financial structure, and then a prominent figure indicates approval for Bitcoin, where can we expect capital to flow?

This individual’s reputation will precede itself, and the markets will anticipate what should have already been anticipated: value appreciation in the world’s currently most undervalued store of value.

In terms of timing when exactly this will happen, I’d be better off to point you towards a funny video because it is really anyone’s guess.

In revisiting what is likely a healthy approach to investing, patience is key. Meaning, prepare for a longer term time horizon than others and you increase your likelihood of building a successful portfolio.

Patience coupled with buying an asset after it’s been beaten down 80% plus from highs, sentiment is at a low, and the mainstream have moved on from their entertaining news story is generally an investment that warrants further research in my view.

Just recently, Yale’s endowment fund (a who’s who of university endowments) dipped its toes into the crypto-asset space and Fidelity (top-five in assets under management globally) announced a digital assets trading and custodial service. Many are citing these events as the watershed moment. "If Yale and Fidelity are in, then the precedent has been set for other money managers to get in," says the logic.

This is true. However, what fascinates me the most is the prospect of a pension fund or a sovereign wealth fund dipping its toes into the space. This is where the real money lies, as we have already witnessed with the Japanese legalization of bitcoin as legal tender setting the stage for last year's staggering bull market run.

As the dominoes continue to fall it will become increasingly challenging for these pension and sovereign funds to avoid the space; the opportunity costs will become the elephant in each and every boardroom.

Being the retail investors we are, the best thing we can do is to position ourselves prior to these major capital inflows and let these inflows increase the value of our holdings. For those within the financial machinery out there, just ask yourself what other asset you can hold within your portfolio that has the risk/reward profile offered by Bitcoin and company?

“It is not from the benevolence of the Butcher, the Brewer or the Baker that we expect our dinner, but from their regard to their own interest” ― Adam Smith


DISCLAIMER : This content is for informational, educational and research purposes only. This post is not to be taken as personalized investment advice.

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