Paul Tudor Jones’ Bitcoin Investment Thesis

In his latest investor letter titled “The Great Monetary Inflation” billionaire hedge fund pioneer Paul Tudor Jones revealed he is buying Bitcoin, stating his Tudor BVI fund may hold as much as a “low single-digit percentage” of Bitcoin futures. Provoked by unprecedented monetary expansion and an economic environment prime for inflation, Jones sees a growing role for Bitcoin. Thinking about what store of value assets will be winners in ten years’ time, he stated “at the end of the day, the best profit-maximizing strategy is to own the fastest horse. Just own the best performer and not get wed to an intellectual side that might leave you weeping in the performance dust because you thought you were smarter than the market. If I am forced to forecast, my bet is it will be Bitcoin.”

Inflation fears

Jones does not see immediate inflation due to a large demand shortfall that will prevent goods and services inflation from rising in the short term; however, the long-term is less certain. He argues that central banks will be “on the hook” to help fund a historic and increasingly leveraged economy. He highlights that the US M2 money supply is expanding at its fastest rate since WWII, far outpacing real GDP growth - which has historically led to inflation. Furthermore, unlike the 2008 crisis banks are well-capitalized and policy is more precisely aimed at putting liquidity in the hands of households and businesses, instead of being used to shore up banks’ balance sheets. This will reduce the fall in the money multiplier seen in the aftermath of the 2008 crisis. Lastly, he suggests that the repatriation of supply chains could reverse “two decades of disinflation attributable to globalization,” stoking fears of inflation.

Store of value assessment

To assess store of value candidates Jones evaluated financial assets, fiat currencies, gold, and Bitcoin across purchasing power, trustworthiness, liquidity, and portability. While Bitcoin scored lowest of the four overall, he highlighted key attributes of Bitcoin like its “known fixed maximum supply” and 24/7 liquidity. Jones astutely went on to describe Bitcoin’s superior portability over other assets emphasizing its ability to be easily transferred over the internet under extremely adverse circumstances like war.

“So that was the flavor behind some of the discussions that were had when scoring the suitability of each asset as a store of value. What was surprising to me was not that Bitcoin came in last, but that it scored as high as it did. Bitcoin had an overall score nearly 60% of that of financial assets but has a market cap that is 1/1200th of that. It scores 66% of gold as a store of value, but has a market cap that is 1/60th of gold’s outstanding value. Something appears wrong here and my guess is it is the price of Bitcoin.”

Bitcoin bull case

Jones believes the most compelling argument for owning Bitcoin is the coming digitization of currency. “Bull markets are built on an ever-expanding universe of buyers.” Projects like Facebook’s Libra and China’s DCEP will make digital currency wallets commonplace, making Bitcoin easier to own, use, and understand than it is today.

He goes on to draw an analogy between Bitcoin and gold in the mid-late 1970’s after gold had just been productized as a futures instrument, like Bitcoin. Gold had previously tripled in price in a bull market before correcting more than 50% in two years, similar to Bitcoin’s 28-month 80% correction.

Gold went on to quadruple past prior highs, and Jones thinks Bitcoin could perform similar today.

Why it matters:

• Paul Tudor Jones investment is one of the biggest validations of Bitcoin as an institutional investment ever. His decision to make a significant allocation to Bitcoin removes career risk for other institutional investors thinking about making a similar decision. It’s hard to imagine the news not prompting investment teams to take a more serious look at Bitcoin if they haven’t already.
• Tudor BVI has nearly $22 billion in assets under management. A low single digit investment could bring hundreds of millions if not a billion dollars of fresh inflows into Bitcoin.
• Renaissance Technologies, the renowned $160 billion quant hedge fund recently stated in a Form ADV that its Medallion Funds are now "permitted to enter into bitcoin futures transactions.” While there was no indication of Renaissance taking a directional view of Bitcoin it is a display of trust in the asset class.