Bitcoin v. Lithium

With Bitcoin exploding in the charts, we thought we’d explore the topic of which was a better investment right now: Lithium or Bitcoin?  Let’s start with the returns year to date- Bitcoin is up over a whopping 1600%.  While lithium miners, electric vehicle manufacturers, and battery producers didn’t have quite an insane year, the LIT ETF is still up over 60%.  And looking deeper to individual stocks within those sectors, we’d find many names that are up over 100%.  While both Bitcoin and Lithium have performed amazingly well, we aren’t talking about past performance in this post, we are looking forward to the outlook on both hot sectors of the financial markets.

Similarities

Let’s start with why we’re even having this discussion.  Although both sectors have been catching steam over the last few years, they have lifted off in 2017.   Both sectors were also driven by cult, retail followings for the most part- Bitcoin by a tech-centric community, and Lithium by a commodity-driven retail investor base.  Finally, investors in both sectors believe that they are still underfollowed stories and when the institutions start pouring in money the rally will truly begin.

The Case for Lithium

Lithium is an interesting space to be invested in right now- it is the metal that is fueling the energy revolution. From electric vehicles to energy storage, batteries produced from lithium raw materials are becoming more and more vital to the way we live our lives. But moving beyond that broad argument, and looking at what’s actually priced into the market, this is where it gets interesting.  Despite a strong run up in shares this year, there is a clear fundamental story that can be analyzed in basic terms- supply and demand.

Supply of lithium is currently tight, while demand continues to grow.  While this sounds simple, looking out on a longer term horizon is where it gets a bit more tricky.  For investors that truly believe in the long term impact of the energy revolution, the case can be made that lithium demand will grow exponentially from current levels, and that supply will need to play catch up.  Many even liken it to the oil revolution that played out in the late 1800s and early 1900s.  Thus, while it is tremendously difficult to analyze in a quantitative fashion, investors can draw parallels and use it as a reference point to responsibly invest their money way beyond just the next 12 months.

The Case for Bitcoin

Bitcoin is a unique asset that like many things tech has just taken the world by storm. Just a few weeks ago we found out that Coinbase now has more users than Charles Schwab, an institution that has been around for 46 years!  Bitcoin is based on a revolutionary technology, blockchain, which will without a doubt disrupt the fintech space. Additionally, it is unique because it allows for cross border transactions without the mess of conversion rates to some extent.  Furthermore, it’s 100% digital, which supports the way the world is heading.  And finally, the supply is constrained to 21 million Bitcoins, which means there is some scarcity value.

In my opinion, whether you believe in Bitcoin’s power as a currency or not, I believe it definitely has the potential to at least be thought of as an alternative to gold in terms of being a safe haven asset.  In a world where credit cards can instantly make transactions both locally and across borders seamlessly, there is no real need for a Bitcoin like currency, unless one is seeking anonymity.  Thus, the gold like features would be the true power and long term use case for Bitcoin, should it have a place in this world going forward.  And if it does begin to be viewed more and more in this way, then the argument can certainly be made that the valuation is low right now.

Graham and Dodd- Investing vs. Speculating

Finally, analyzing two sectors like this almost reminds me of one of the central themes of Graham and Dodd’s famed book Security Analysis- Investing vs. Speculating.   In this case, I would argue that lithium would be more of an investment, and Bitcoin would be more of a speculation.  The reason for this is that the lithium and supporting industries can be analyzed fundamentally by collecting information, sizing up the market, looking at financials, coming up with valuations, and determining that there is still the possibility of an undervaluation in the space.  With Bitcoin, while we may be able do some of those things, we cannot determine whether the asset is fairly valued, overvalued, or undervalued.  Potential buyers of Bitcoin have to believe in its long term impact on the world and trust that it will lead to much higher valuations.  Additionally, there is no cash flow generated from an investment in Bitcoin, it is purely a bet that the price of the asset will rise.   Whereas investors in lithium at this point in time can find undervalued assets in the space, scoop them up, and enjoy the cash flows that are generated from them.

So, determining which one is better going forward basically comes down to each individual.  For those looking for more traditional investments and the risk profiles that go along with that, lithium may be the better route to go.  But for those who are willing and able to take on more risk, and believe in taking shots on “revolutionary” technologies without regard for valuations, or other traditional metrics (ex. Tesla investors), then Bitcoin is certainly the right choice for them.