Was wrong before, I now understand bitcoin but still not buying it: Howard Marks

A Bitcoin (virtual currency) coin is seen in an illustration picture taken at La Maison du Bitcoin in Paris, France, June 23, 2017. REUTERS/Benoit Tessier/Illustration - RTS18BQW

Howard Marks, who had labelled bitcoin as "not real" and a "pyramid scheme' among other things in his last memo back in July, now seems to understand the technology better and has somewhat warmed up to the idea of it being a currency.

In his latest memo, Oaktree's fund manager says that he sat down with his colleagues and various other experts to better understand the topic of cryptocurrency and humbly admits that he has been looking at bitcoin the "wrong way".

After having a change of heart, here is what Marks now has to say about bitcoin.

Got the joke wrong

In the last memo, Marks tried to explain the digital currency movement with the help of a joke. He took the humorous route this time as well:

"Two friends meet in the street, and Jim tells Sue he has some great sardines for sale. The fish are pedigreed and pure-bred, with full papers and high IQs. They were individually de-boned by hand and packed in the purest virgin olive oil.  And the label was painted by a world-renowned artist."

"Sue says, “That sounds great.  I could use a tin.  How much are they?” and Jim tells her they’re $10,000.  Sue responds, “That’s crazy, who would eat $10,000 sardines?”  “Oh,” says Jim, “these aren’t eating sardines; these are trading sardines.”"

Marks says that he was thinking about digital currencies such as Bitcoin like investing sardines, and that may have been a mistake. Crypto experts tell him that cryptocurrencies are spending sardines whereas, he is of the opinion that these are being treated largely as trading sardines.

The question remains as to whether Bitcoin is (a) a currency, (b) a payment mechanism, (c) an asset class, or (d) a medium for speculation, he adds.

Bitcoin and fiat currency: Same but different

"When I first responded to comments on the memo – even before my recent enlightenment – I found myself admitting that much of the criticism I had leveled at Bitcoin is applicable to the dollar as well. "

In July, Marks had said that bitcoin “isn’t real” because it has no intrinsic or underlying value. This time he says  that this is the same case with the dollar and other fiat currencies as well: "there’s nothing behind them either."

He goes on to even say that government-issued fiat currencies are accorded value only because of a government edict.

"Why, the fans of Bitcoin ask, is such an edict superior to an agreement among people to accept a non-government-issued currency?"

"Fiat currencies have value simply because of faith in the governments that issue them.  If enough people believe in it, why can’t faith in Bitcoin suffice?  If you consider the properties of fiat currencies, these are darn good questions."

On the supply dynamics of bitcoin, he says that since very few people own it today but millions more will want it in the future, demand is sure to rise faster than supply, meaning the price will rise.

"Specifically, the US money supply is almost $14 trillion, so if people and businesses decide to hold just one-third of their wealth in Bitcoin rather than dollars, (and who wouldn’t want to do so given all the advantages described above?), the value of the Bitcoin in circulation will rise to $4.5 trillion, from today’s $73 billion, for a gain of roughly 60x."

"There’s absolutely no reason why Bitcoin – or anything else – can’t serve as a currency if enough people accept it as such.  While I’d point out that no private currency has gained widespread use in a long, long time, there’s nothing to say it can’t happen."

On bubbles and bitcoin

"Being willing to agree that Bitcoin may become an accepted medium of exchange is not the same as saying you should buy it now to make money."

On bitcoin's price rally, Marks had the following observations: (a) there is a grain of underlying truth as set out above; (b) there’s the prospect of a virtuous circle: widespread demand will lead to wider acceptance as legal tender, which will lead to widespread demand; and (c) thus this tree may grow to the sky, as there is no obvious limit to this logic.

On the back of the above observations, Marks concludes that none of these things necessarily make bitcoin a mistake but they merely say elements that contributed to past bubbles can be detected today with regard to bitcoin.

Altcoins and ICOs

On the rise of altcoins and initial coin offerings, Marks opines that with the hundreds of digital currencies in circulation at present and no limits on the creation of new ones, it is hard to tell which one will survuve and thrive.

Drawing a parallel between the dotcom bubble and the ICO frenzy, he says: "Hundreds of e-commerce start-ups appreciated rapidly in the tech bubble based on the premise that 'the Internet will change the world'. It did, but most of the companies ended up worthless."

Finally, after an honest attempt at understanding the underlying technology and idea behind bitcoin, Marks feels that that he is now 'less of a dinosaur' regarding bitcoin compared to when he wrote his last memo.

He concludes by saying: "I think I understand what a digital currency is, how bitcoin works, and some of the arguments for it.  But I still don’t feel like putting my money into it, because I consider it a speculative bubble.  I’m willing to be proved wrong."

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