So, let’s firstly talk about value, and then let’s talk about the value of Bitcoin.
Recently, WeWork tried an IPO based on an enterprise value of US$47bn (per reporting). This was supported by ‘valuations’ from, no doubt, highly respected firms. Some pessimists thought that a company that leases real estate long term (creating long term liabilities) and re-leases the same real estate short term (generating short term assets) may have some income and expense duration exposure, and that the company should therefore be valued more on real estate sector multiples to take into account real estate cycles and sector comparatives etc; and so deduced that the $47bn valuation may be a touch optimistic.
Other, more positive thinkers thought, no worries, many of our re-lease clients are in the tech space; we provide table-tennis tables and a central kitchen facility (plus other add-ons, such as power-nap and massage facilities for stressed tech workers, brought to you by We and Goop (nice eggs, BTW, very smooth) so the WeWork value should largely ignore the real estate duration risk and be priced more on a “tech” multiple to reward the genius of leasing to generally, micro-clients whose business outlook, and capacity to pay, is, shall we say, “in the business plan”?
Well, we know what happened – Softbank had to pile in to protect prior money, kick out the entrepreneur at an implied WeWork valuation of $8bn (as reported), and try to regain some vestige of market credibility. As they say, you’ve never got too much cash to be stupid, and we’ll see how the “revised” WeWork business plan turns out, although it might be a while until a fabulous FOMO opportunity to invest in WeWork resurfaces for the general public. Who knows, it could be just a premises sub-leasing company after all? (I’m looking at you, thousands out there, but “PS-LC” doesn’t slip off the tongue like “WeWork”, so props for that)
There are many explanations as to why this fiasco happened – (1) greed; (2) greed; and (3) greed, depending on who you talk to. The only good result for all, including the “delicate” reputational risk profile for IPO and PE market promoters (and except for the aforementioned success-fee based “expert advisors”) is that WeWork remains private.
We won’t go into a full valuation tutorial here, but there are basically two concepts of value to touch on for our discussion: –
- Monetary Value, generally defined as that “number” in “currency” that a person, business, or a market, places on a resource, product, or service. It could be a glass of beer, or an equity security, or anything else you pay for in “currency” which forms the recorded basis of the exchange.
- Intrinsic (aka Fundamental) Value, is the “true, inherent, and essential value” of an asset independent of its market (monetary) value. Many well-known representations of this metric – discounted cash flow, price-earnings multiples, et al.
An active marketplace demonstrates that everyone’s perception of the Intrinsic Value of an item is different – that is why you get buyers and sellers. When the buyer and seller converge and strike a deal, that deal is represented by the Monetary Value of that trade. But that trade, at that value, does not change that fact that many market participants (who did not deal at that price for whatever reason) do not necessarily regard that Monetary Value as being a fair representation of the item’s Intrinsic Value.
In our WeWork example, Seller (and handsomely paid advisors, valuers and spruikers) decided that the Intrinsic Value of WeWork was $47bn, and the Buyer (IPO market providing cash) decided that (even after a couple of “totally explainable market change circumstance” value adjustments (absolutely definitely not in their desperation to do a deal, any deal before the market craps out)) – well, having thought about it, no. That moved us pretty quickly from Chapter 10 in the story straight into Chapter 11 territory, at which point Softbank, with a pile of real cash at risk in WeWork, decided it was time to stop talking about “Intrinsic Value” and start thinking about that cash; so, (now forced) Seller, how much do we need to pay you to go away, so we don’t end up spending more money on legal fees and PR rehabilitation than the “Intrinsic Value” of the whole joint?
Which is a lovely segue into the Intrinsic Value of Bitcoin.
Again, we don’t want to go through the whole genesis story here, so let’s stipulate a few things: –
- We accept the merits of the decentralised ledger argument, and the attraction of creating a low-cost, borderless, trust-less, value transaction architecture;
- We accept that “proof for work” consensus architecture of Bitcoin (validation via unlimited dispersed mining) is a clunky mechanism not really suited to large scale payment applications (e.g. like Visa/MC volume);
- Other digital payment mechanisms will inevitably permeate – be they Libra, or WePay, or AliCoin, some monstrous Amazon creation with horns and sharp teeth, or whatever else crops up;
- At this point in the technology cycle, all these mechanisms will be focused more on maintaining or building market power in an existing (different) business; reducing costs by avoiding (currently) bank controlled payment mechanisms; and so be based on “proof of stake” consensus (e.g. Libra Association), which does enough to gain current market acceptance, but does not match Bitcoin’s proof of work consensus purity for trust-less transaction validation.
- We’ll also stipulate that Bitcoin is not (acknowledging some bad actors) a mechanism specifically designed for money laundering, drug smuggling, terrorist financing, child (or adult) porn, car re-birthing, or various other nefarious activities. That mantle is currently held by our esteemed regulated banks and cash/fiat payment providers (oh, and Government-sponsored gambling and gaming systems, but let’s not talk about that because Government needs the money), who seem dead keen to hold on the that No.1 spot by frustrating or slow-walking efforts to promulgate digital transactions which have more transparency and traceability. Who knew our esteemed banks would do that, right? But hey, if you can get away with charging your first home buyer a credit card rate of 20%, when that outstanding is secured by an all-monies first mortgage on their home, why change – KPIs and all that, right?
- And finally, we’ll stipulate that there are many countries who have recognised the logic, attractiveness and inevitability of decentralised, digital payments, and have or are adopting a welcoming environment by providing a regulatory and commercial structure to enable new business and technologies to locate there with confidence.
So, OK, another lovely segue into the Intrinsic Value of Bitcoin. Oh, and one more stipulation – we are ignoring technical / charting views of Bitcoin’s Monetary Value for current purposes.
Bitcoin is currently used for payments, but we don’t think that fact alone gives Bitcoin its key Intrinsic Value.
We think Bitcoin’s key Intrinsic Value comes from its growing scarcity and therefore, its ability over time to develop into a “Reference Value”. There is usually a “Bitcoin v Gold” bake-off at this point in the discussion, but we’ll leave that for another rant.
The reason for our WeWork riff was to identify an outlier example of massively divergent value perceptions in an asset class (renting real estate) which has a long performance history, and (relatively) low scarcity (office space in cities – who knew?). So why the massive divergence (other than the 3 reasons mentioned above)? Because there is always a divergence in Intrinsic Value perceptions of any asset. Real estate, like all most asset classes is subject to endogenous and exogenous value influences, but realistically, you can basically keep building office space until the cows meander through the farm gate for an evening feed.
Not so with Bitcoin. The supply of Bitcoin is capped. You can’t print more of it (if, for example, the Federal Budget has a pesky hole in it such that you need to inflate your way to debt repayment). 21 million Bitcoin is the cap. As digital payments (aka cryptocurrency) acceptance grows, Bitcoin has the ability to provide the “Reference Value” for a variety of digital initiatives, and by so doing, provide a demand driver for Bitcoin to support a variety of “transaction based” digital payment mechanisms which will inevitably emerge.
Stablecoins are paving the way – paradoxically, the market is currently accepting stablecoins referenced to fiat (e.g. USD) as “stable”, as the name infers, when the USD is constantly manipulated by the USG for its own purposes by interest rate manipulation, trade denomination, sanctions and other regulatory pressures, and outright inflationary increases in money supply to devalue the fiat currency.
But, we are where we are in the development cycle – things evolve.
The evolution of stablecoins, we think, is a good but interim measure, and itself a constructive reaction to the volatility in Monetary Value of Bitcoin – we accept that this volatility is caused by many factors – developmental nature of blockchain; comparatively low volume; some bad actors and bad press; limited familiarity; immaturity of regulations etc.
But, we think that will change, and the immutable architecture of Bitcoin, and its evolving scarcity, digital and decentralised nature via proof of work consensus, will see a broader recognition in the Intrinsic Value of Bitcoin over time as it takes a central place in the digital asset environment. There is a good chance that Bitcoin will become THE stablecoin.
And to sum up with WeWork, the starting Implied Value of the WeWork IPO was US$47bn, and the Monetary Value of the WeWork IPO, you guessed it, nil.