One opportunity investors can't afford to ignore over the next 5 years

It's probably because of the enviable rise and subsequent "told you so" fall of cryptocurrencies over the past few years. Or the fact that Elon Musk pushed Dogecoin "to the moon" before it crashed back down to earth, taking investors' savings with it. 

But now, with Bitcoin ascending from the ashes, and with ETF providers coming to the fore (even BlackRock is planning to launch a Bitcoin ETF, although it already has one available to institutional investors), it may be time for you (and I) to reconsider our position on the seemingly risky asset. 

While I may not be there just yet, Regal Funds Management's Jessica Farr-Jones sure is. She's forging her own path by taking this position, likely thanks to the competitive spirit that has been passed down from her father, Wallabies great Nick Farr-Jones. 

"The reason why I think it's interesting is it's obviously been created to have the characteristics of something that can be a perfect store of value, i.e. a money supply," she explained. 

In this wire, I'll outline Farr-Jones' thoughts on how investors are best placed to get exposure to the "asymmetrical risk-reward opportunity" in Bitcoin miners, as well as some locally listed emerging companies that are on Regal's radar. 

Note: These quotes are taken from Livewire's recent interview with Jessica Farr-Jones on the Rules of Investing podcast, recorded on 2 August 2023. You can listen to the podcast below:

Why Bitcoin

Cash wasn't always king. As Farr-Jones explained, civilisations have used everything from shells to artefacts and cattle to represent value. 

For something to be a store of value, or be considered a form of money, it needs to satisfy five properties. It needs to be divisible, durable, recognisable, portable, but most importantly, scarce. 

"Scarcity is very important so you can't inflate money supply easily," Farr-Jones explained. 

"The market decided that the best form of money back in the day was precious metals because it satisfied these criteria and of the precious metals, gold was typically selected as the best form of money because its annual supply inflation is sub 2%. So the total supply of gold goes up by less than 2% per year." 

And so, the gold standard was born. A monetary system where an economy's currency had a direct link to the value of gold. 

"The US dollar was pegged to the gold price for a period of time. And then we had obviously the gold-backed currencies in paper form," Farr-Jones said. 

"What happened though was that the central reserves printed more currency than their gold reserves could justify, which culminated in the 1971 Nixon shock and the de-pegging of the US dollar from the gold standard." 

Today, governments use fiat currencies - those that are not backed by a physical commodity, like gold. This is a challenge, Farr-Jones believes, as they can debase currencies over time. 

This refers to the practice of lowering a currency's actual value - like what happened when central banks around the globe "printed money" and bought treasury securities en masse during the COVID pandemic. Doing this causes inflation, as we have seen, reducing the common man's purchasing power but also helping governments pay back debt. 

Now, with central banks around the world having lifted interest rates hundreds of basis points to combat inflation, many have been left with a sour taste in their mouths - and a lack of trust in the institutions which are meant to "contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the [people]", according to the Reserve Bank of Australia's website. 

"Bitcoin was obviously envisaged to have all these properties that make it the perfect form of money. And the real key to that is there are only 21 million Bitcoins that are ever going to exist. The supply is fixed," Farr-Jones said. 

"And so if you think about price dynamics and supply and demand, it's the perfect supply scenario for price to improve over time if you have growing demand and growing adoption, which obviously, there is." 

Why 'picks and shovels' plays over Bitcoin itself?

"[Bitcoin miners have] operating leverage in their business model that means that their top line can accelerate quickly with the Bitcoin price, but they've got a fixed cost base so their earnings can grow substantially," Farr-Jones explained. 

"It's the dynamic that we see with equities, which can outperform currencies, but on both the upside and the downside." 

In fact, Farr-Jones believes the "risk-reward asymmetry is so interesting that you can't afford for it to at least not be a small part of your portfolio." 

"It certainly doesn't have to be a large part. It's going to be inherently volatile, but it's got such an interesting asymmetric risk-reward upside that it's hard not to have an allocation to it," she said. 

"[Companies] like Iris Energy provide a lot of asymmetric upside. Iris has a fantastic management team and also it trades at about a third of the multiple of some of its peers like Riot and Marathon. So it's one that we're happy to have a position in." 

She's not alone in her positive outlook on Bitcoin. US investor and ARK Invest CEO Cathie Wood believes the cryptocurrency could exceed US$1 million per coin by 2030. 

While Farr-Jones doesn't subscribe to this forecast, she does add that "market wizards" like Paul Tudor Jones (of the Tudor Investment Corporation hedge fund) are also bullish on Bitcoin.