By Monish Chhabra ǀ February 15, 2021

Missing the boat

Amazon’s stock was listed on the Nasdaq stock exchange in May 1997, at about 2 dollars per share. At that time, it was a tiny company that had started business just three years before.

In about two years from its listing, Amazon’s stock price hit a peak of $105; rising by more than 50-times. For anyone looking to invest in this company in 1999, the message seemed clear – they had missed the boat.

And then, in about two years from that peak, Amazon’s stock price collapsed to 6 dollars per share. It lost 94% of its value, along with most other stocks that buckled when the dot-com bubble burst.

The boat that was missed, seemed sunk.

Sunken boats

Most things that rise like a rocket, and then fall 80-90% in value, never touch their past glory again.

Market loves fads. They come about every now and then. They capture people’s imagination for a while. They hit some inexplicable highs. Then they crash back to the ground.

This is where a ‘real deal’ separates from the fads. By coming back.

Amazon had spent first eight years of its life, rising to a peak and sinking to the bottom. However, it didn’t get buried there, nor languished there forever. It came back.

Over the next eight years, Amazon did what fads can’t do. It rose up from its depths, to get back above 100 dollars per share in 2009, the same peak it had first hit in 1999.

Resurfacing

Statistically, such a resurfacing – that Amazon staged – differentiates the high-growth stories that pan out, from those that don’t.

The trajectory of a massive run up, followed by a crash of 80-90%, and then a recovery back to the old peak in a reasonable time - puts the odds much on the side that this is a real deal. It indicates a high chance that there is something solid behind it, not just a one-off fantasy.

And its not too late to get on it when it resurfaces. If its a true growth story, there is enough more to come.

If someone waited for Amazon to recover its old peak, and then invested in its stock for the first time in 2009 when it came back above $100, that investment would have done just fine.

Amazon's stock grew past $3,000 in 2020. In just over a decade, this investor would have made 30-times his money, even though he got in at what seemed like a previous peak.

The Better Ride

It was okay to miss the first 50-times growth in Amazon that happened from 1997 to 1999. At that time, this was a small boat with low odds of survival, and little to differentiate it from other fads.

However, by 2009, it was a ‘ship’ that had proven its resilience. It had survived an epic wave and come back. The odds were massively in its favour by then. And it could still be ridden for another 30-times growth.

The quality of the second ride was much better. The initial 50X was more of a gamble. The latter 30X was a much better bet.

This is where we are today, for another high-growth story that is playing out now – bitcoin.

Crypto? Blockchain? Bitcoin?

The easiest way to think of Bitcoin is like ‘the money for the internet’. Before this, all other money was invented for the physical world. Some versions of it like credit cards, Paypal, online wallets; may seem digital in appearance, but are really not so. They all need plumbing at the back; money flowing from account to account, through banks and governments.

Bitcoin is the first currency that you can send to anyone anywhere like an email, it can be stored at your online address like a website, and is recorded and verified – completely online through a global ledger, that is not controlled by any single company or government.

Technically, bitcoin is a digital store of value or utility. Its ownership is validated through a global consensus across all the nodes of its digital network. An encryption algorithm is used to secure transaction records, control the creation of new value, and verify ownership of assets – hence the ‘crypto’ part of this cryptocurrency.

This computerized information is spread across several nodes (devices) on a peer-to-peer network - where each node replicates, updates and saves an identical copy of the ledger independently. This is called ‘Distributed Ledger Technology’ or DLT.

As each transaction takes place, each record called ‘block’, must be validated by a global consensus across all nodes, for it to be time-stamped and added. This list of records built over time is called ‘blockchain’.

A blockchain can be used for any application that validates and stores digital records, across a distributed network of ledgers. The first such blockchain invented to serve as a currency - to store and transfer value - came to be called ‘bitcoin’.

There are many other blockchains around today to serve as currencies (Ethereum), smart contracts, for financial applications (borrowing, lending, settlement, trading), as other digital assets (in gaming), and for tracking and record-keeping (in mining, shipping, healthcare, food supply chains).

The Bitcoin Boat

While bitcoin has been around since 2009, there were many concerns around it. It was the first such digital currency that was not controlled by a central authority. Its acceptance in general was not a given.

Some other token may have turned out to be a better blockchain currency than ‘bitcoin’. Or, some other technology may have turned out to be a better distributed ledger than ‘blockchain’.

Then the big wave came to test this boat.

Bitcoin’s price went through a meteoric rise from around $400 at the start of 2016, to almost $20,000 at the end of 2017. That was 50-times growth over two years, similar to the Amazon story.

This was followed by a massive crash. Bitcoin fell to a bottom of about $3,000, in December 2018. It lost 85% of its value in a year.

So far, the price action of bitcoin had followed the trajectory of most other hyped-up growth stories. There was little to tell – statistically – whether it was a real deal.

And then bitcoin did something that fads don't do; it came back.

The Bitcoin Ship

The first sign that something was different about Bitcoin, was evident after the COVID-crash of 2020.

From February to March 2020, all major markets around the world crashed. Almost every market asset hit a price that was lower than the previous crash in December 2018. Not bitcoin.

Bitcoin’s low of December 2018 was not breached in March 2020. Investors liked Bitcoin more than other risky assets at the market lows of 2020, as compared to their relative appeal at the bottom of 2018.

Over the ensuing year, the bitcoin boat kept transforming into a ship.

Then in December 2020, bitcoin recovered its old peak of $20,000. It went on to double in value and set a new peak of $42,000 in January 2021.

Around this level, it was statistically expected to give back some of the gains. Bitcoin did that; falling by about 30% from its new peak. Since then, it has recovered to hover in the range of $40,000 to $50,000.

Chart the Course

Statistically, bitcoin is now a high-probability case of a high-growth asset, that can be modelled and traded. And this is what our model shows about Bitcoin in 5-year time from now:

o A small chance of being lower in price (5% statistical probability),

o At least double in price (30% probability),

o A high chance of being 10-times in price (60% probability).

All these models would self-modulate depending upon the path the price takes. One has to accept and act, according to what is encountered on the way.

Cast Off

Fundamentally: an encrypted, distributed and decentralized digital asset is an attractive proposition. Bitcoin is a good version of it. It has clean technology behind it, that is tested over the last decade. It is accepted enough, with a strong smart group of supporters, and sound-enough rationale.

Statistically: there is now a decent probability that bitcoin is not a fad. It is behaving in a way that a high-growth asset behaves, that survives to be modelled and traded. The next 10X growth has much higher odds, than the previous 50X.

Be thankful to the adventurers who took the first tiny boat into the sea. Be ready to get on the ship for the next voyage. The real juice of risk-adjusted returns still lies ahead.