That’s right, back in October of last year, PayPal made it extremely easy for you and me to buy and hold Bitcoin.  And Ethereum.  And a couple other crypto-currencies.   No more worries about losing your “wallet” or password, thereby permanently losing access to your Bitcoin.   PayPal fixed all that!

Not only can you now “invest” in Bitcoin on the PayPal site, but you can “invest” in very small amounts of money.   You don’t have to buy a full Bitcoin … you can buy little bits;  you can nibble and just take a few bytes.  Chomp, chomp.   Do you want to own $500 worth of Bitcoin?   Sure thing!  No problem, PayPal has you covered.  How about $100?  Yep, sure, PayPal can do that too!  In fact, a PayPal user can “invest” as little as five dollars! 

As of October 21, 2020, all 300 million PayPal account holders were now able to buy and sell a “bit-‘o-Bitcoin” and hold their “investment” right on the PayPal site.   Without any fee whatsoever!   Well, at least for the balance of 2020.   PayPal plans to shake this up a bit in 2021.  After all, PayPal is a “for profit” enterprise.  😊

PayPal’s adoption of Bitcoin was a game-changer — for both PayPal and Bitcoin.  Why?    

Welcome to this week’s Steak House Index update.

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.  

But is the US economy expanding or contracting?

Before COVID-19, the world’s annual GDP was collectively about $85 trillion.  Then it shrank … then bounced back!   We can thank global fiscal and monetary policy for the bounce.   According the the Q3, 2020 ‘preliminary’ numbers, annual US GDP is back UP to about $21.1 trillion.   And still, together, the U.S., the EU and China continue to generate about 70% of the global economic output.  

The objective of this blog is singular.

It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore related items of economic importance.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

The Blog:

As I mentioned above, PayPal is now charging their Bitcoin owners a fee to use the PayPal platform to hold their Bitcoins.  Beginning in January of 2021, this fee chart applies to all purchases and sales of Bitcoin made thru their site:

And this is one of the reasons I invested in PayPal common stock.  I believe PayPal will do quite well with this “product” … not only in fees from current PayPal users, but by attracting a host of new users looking to own/trade Bitcoin. 

But I will not invest in Bitcoin.  No, not even $5.  You make your own choice … but for my 5 dollars, I believe PayPal common stock is the smarter long-term choice.  During a ‘gold rush’ one makes more money selling shovels than prospecting for gold.

Do you have a PayPal account?   If yes, and you haven’t yet checked out their crypto-currency web pages, I suggest you do.   My feelings aside, I find this whole thing to be fascinating.  In spite of my personal belief that Bitcoin is really worthless, PayPal has done a good job explaining the rudimentary process and making the transaction fairly seamless for the “bit-‘o-Bitcoin” rubes.   Of course, I believe they’re selling snake-oil, but as I said, a whole bunch of people disagree with me.  And may of the folks that disagree with me are billionaires.  They have made a whole bunch of correct decisions before this one … so perhaps they’re right and I’m wrong. 

On October 21^st, PayPal opened up Bitcoin ownership to the masses.   On that date, the 300 million PayPal members could purchase Bitcoin for the first time.  And on that date, one Bitcoin was valued at $13,103.  Less than 3 months later, the price eclipsed $40,000.   A coincidence?  

You decide. 

Here’s a Bitcoin price chart showing movement since the date Bitcoin could be purchased on the PayPal site:

No, it’s no coincidence.   Smart speculators knew that once PayPal launched Bitcoin on their platform, in the short-term the price was almost certain to rise.  

Those that disagree with my nay-saying will tell you Bitcoin is a “store of value.”   Meaning it has value as a hedge against inflation and the over-active printing presses at the Federal Reserve and other central banks.  Much like how gold is regarded as a store of value.  Remember, in theory, there is a finite maximum number of Bitcoins – just 21 million.  Thus, unlike the US dollar, which has an ever-expanding supply, the Bitcoin supply is finite.  As of the end of 2020, about 18.5 million were believed to be “in circulation.”   Once 21 million “mined” and discovered no more can ever be created.  In theory.  So, under the economic theory of scarcity, if the supply of government currency continues to rapidly expand, year after year, the value of a Bitcoin measured in that currency should increase.   In that light, the theory makes sense. 

But scarcity in itself does not create value.  Scarcity without demand is meaningless.  Only when scarcity meets widespread demand will an asset’s value grow.  Which is precisely what Bitcoin has going for it:  Strong demand.   And scarcity.   I absolutely believe that cryptco- and digital-currencies are foundational and instrumental in the future of global money.  In my opinion, this is not debatable.   

What is debatable is the future of any single crypto-currency (“CC”).   Is Bitcoin the best CC?   Why is it better than Ethereum?   And why is Bitcoin any better than any of the other 7,800 crypto-currencies currently circulating at this moment?  That’s right, according to www.currency.com there are more than 7,800 other CCs floating around right now.  And there are 1,984 “dead” or failed crypto-currencies.   Yes, even this shamelessly self-promoting “regulated crypto exchange” – whatever that means – suggests: 

“When it comes to how many cryptocurrencies will survive, it’s worth remembering that there’s a rather extensive graveyard of the digital assets that are no longer active. Many of these relate to initial coin offerings that were held during the boom of 2017 and 2018. In some cases, projects never came to fruition – and some investors lost a sizeable sum of money.

Others were later outed as scams. A notable example of this is BitConnect. At one point, BCC was one of the top 20 cryptocurrencies in terms of market cap. However, it was later revealed to be a Ponzi scheme – and the coin’s price quickly collapsed after the platform was closed down by administrators. Some digital assets fell off the radar because they weren’t used any more, others suffered devastating hacks that shook investor confidence and there have also been a few parody cryptocurrencies designed to be a joke.”

Ouch. 

Today, the top five (5) CCs – Bitcoin Ethereum, XRP, Tether and Litecoin – make up about 80% of the value of all crypto-currencies.   Why?  I’d be hard-pressed to offer an explanation that holds water. 

I do not take exception with the finite number of Bitcoins.  I accept that fact and limitation.  No, my problem is the nature of the “space” itself:   Why will Bitcoin “win” and the majority of the other 7,800 CCs be losers?  Perhaps even more on point:  What would prevent someone from creating “Bitcoin2” – a new “coin” identical in design and function to Bitcoin – from formation and trading?  The answer, clearly, is nothing.   Copying a success is far easier than creating the success itself.  We all know that Facebook will probably enter the CC frenzy in 2021; which begs the question:  Why won’t Mastercard and VISA be right behind?  What prevents these 3 companies from using the same basic rulebook and playbook of Bitcoin?   Short answer:  Nothing.   And they probably will. 

Daily Bitcoin volatility shows the frenzy.  If, like me, you watch CNBC in the mornings, I’m sure you’ve noticed they now “track” Bitcoin along with other financial indices like the DJIA and the S&P500.   Is this because financial experts now consider Bitcoin to be a credible “thing” … or is it simply due to the asset’s staggering daily volatility and massive price increases?   I’m not sure … but in 2021 Bitcoin has certainly gone mainstream. 

Just one year ago, a single Bitcoin was “worth” about $8,000.  Today?  About $40,000 per Bitcoin.    If you purchased one Bitcoin precisely one year ago, today the “value” of your investment would be about 5X your original purchase price.  This price movement is not unique to Bitcoin:  Ethereum, Bitcoin Cash and Litecoin have all enjoyed a similar movements.   In fact, Ethereum is up almost 8X in just one year.  These staggering up-side moves are definitely fueling FOMO.   Yes, the “fear of missing out.”

Paul Tudor Jones is a hedge fund manager.  According to Forbes magazine, he’s worth $5.8 billion.  And he’s a big Bitcoin supporter.  In fact, he claims that he’s invested about 2% of his portfolio into Bitcoin.   There are his comments: 

“What you can be certain of is that probably 20 years from now, our kids and grandkids, whatever, all of us will be using some type of digital currency. Digital currency will be used by every sovereign. They may have their own digital currency, whatever. They’ll be very, very, very commonplace at that point in time. Cash may be gone. And so in that world, where does bitcoin fit in, as well as some of the other cryptocurrencies, where does ethereum or tether [fit in]. I don’t know. I’m not smart enough to figure that out.”

“Because of its finite supply, Bitcoin might be the precious crypto. Then you’re going to have transactional cryptocurrencies along with the sovereigns. And they may be more like the industrial metals. So where you have gold as the precious metal, then you’ve got copper and platinum, palladium, etc. that are … industrial metals. You may have precious crypto and you may have industrial crypto.”

Perhaps Mr. Jones is right and I’m the rube.   After all, he is clearly a far savvier investor than me — he’s made billions of dollars.  I have not.  On the other hand, if I had billions to invest, I might choose to speculate 2% of my capital in Bitcoin.  Thru that lens this might be an intelligent “bet” for Mr. Jones. 

Let me close with these thoughts:   Bitcoin has a lot of supporters.  The fact that you can now purchase small bits and bytes on PayPal definitely adds both increased credibility and lower barriers to entry to millions of new investors.  It is certainly possible that the value of Bitcoin keeps on climbing year after year.

The Winklevoss twins believe it will.  You remember them:  They sued Mark Zuckerberg claiming they founded Facebook with Zuckerberg in the early years.  Ultimately, they ended up with a $65 million settlement and a short time later opened a “Bitcoin exchange” in New York.  The “twins” claim the current Bitcoin “bull run” has legs … and will keep on running.  Their belief: 

”This is the most sophisticated investors, the smartest people in the room, buying the Bitcoin quietly.” 

Perhaps.  But if they’re the smartest people in the room, I suspect they’ll probably sell it ‘quietly,’ too, well before the top.  

Regardless of the final chapter in the Bitcoin saga — whenever it is written — the mainstream adoption of Bitcoin on the PayPal site is a significant milestone for both Bitcoin and crypto-currencies.   It adds mainstream ‘fintech’ credibility to the entire budding crypto industry.   Which is why I’m quite ‘bullish’ on the industry, in spite of my ‘bearishness’ on Bitcoin itself.  

Admittedly, I am not a Bitcoin or crypto-currency expert.  Far from it.  So take my comments with a grain of salt.  And remember these are simply my opinions and many very wealthy, very successful investors, disagree with me. 

But I think that Bitcoin is a bust.   And I think Bitcoin’s value could ultimately fall to zero ala ‘Tulipmania,’ the first major financial ‘bubble’ back in the 17^th century.   At the peak, the average price of a single flower (bulb) exceeded the price of some houses.  In 1635, a “recorded” sale of 100 bulbs transacted at a price of 100,000 florins.  Note that a ‘skilled laborer’ earned perhaps 350 florins per year at that time.   By 1636, tulip bulbs were “traded” on “exchanges” in numerous Dutch cities.   A rare tulip bulb, known as the Semper Augustus, traded in exchange for a ‘basket of goods’ valued at 2,500 florins … a basket that included four oxen, eight pigs, 12 sheep, and a whole bunch of other stuff.   All for 1 tulip bulb.   Insane. 

Even at its peak on February 3^rd, 1637, many “investors” expected the “value” of tulip bulbs to go higher and higher.  It did not.  The price soon collapsed and by May 1^st many “investors” went bankrupt. 

Could this happen with Bitcoin?  If I’m right, the answer is yes.   I couldn’t tell you when, of course.   And after its collapse, we will change its name to “Bit-con.”   There is no ‘I’ in Bit-con … because I will not be a Bitcoin speculator.  Is there a ‘U’ in Bitcoin?   U decide.   Step right up … place your bets!    😊

• Terry Liebman