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Will moonshot investors and bitcoin true believers change investing?

The surprisingly good festive film, Christmas Chronicles, revolves around the idea of true believers, as Santa Claus-obsessed 11-year-old Kate and her doubting cynical older brother Teddy get involved in an adventure to save Christmas.

‘It’s not about the presents, or the sleigh or the reindeer, it’s about Christmas spirit and making people believe,’ says Kurt Russell as Santa Claus.

Speak to a dedicated cryptocurrency investor and the subject may be different but the sentiment is similar, so much so that the term true believers is often bandied about in bitcoin and crypto world.

For the true believers, it’s not about cashing in your gains when the price is rising, or panicking and selling up as it crashes, it’s about bitcoin being the future and that whatever happens you believe and hodl (hold on for dear life).

Kurt Russell in the Christmas Chronicles says ‘it’s about making people believe’ – a sentiment it seems is shared by many bitcoin  true believers on a very different subject

Bitcoin true believers' faith has been tested again as the price has fallen 40% from its peak

Bitcoin true believers’ faith has been tested again as the price has fallen 40% from its peak

Bitcoin and crypto true believers’ faith is being tested again: at the time of writing, the bitcoin price was down 40 per cent from its mid-April high at $37,600 (although who knows where it could be when you read this).

Importantly for the trading world, bitcoin’s price fell below its 200 day moving average – a key indicator used by traders to decide whether to be in or out.

That came as big falls in recent days saw a chunk of the hot money in bitcoin hammered, with the greatest impact felt by those who have taken leveraged trading positions that were automatically closed at a loss by providers after they fell too far.

Why has bitcoin tumbled?

There are various theories, ranging from blaming Elon Musk for his tweets about bitcoin’s environmental cost, to the mounting concerns about ransomware and the digital currency’s part in criminals demanding payments, and China introducing fresh cryptocurrency curbs.

Alternatively, it might just be that things go down as well as up – especially things like bitcoin that saw their price rise almost 500 per cent in six months.

Yet for the true believers, the bitcoin price falls don’t matter – nor are they particularly concerned about the known knowns of Elon, the environment or disapproving regulators – they are thinking way into the future and believe that bitcoin and crypto is that future.

For all the mockery of cryptoland, it has shaken up the world of investing, where on there are a lot of professional investors watching on the sidelines with great interest and a dollop of envy over the profits reaped.

The announcement by Tesla founder Elon Musk last week that it would not accept bitcoin as payment for cars - only months after saying it would - coincided with it plunging

The announcement by Tesla founder Elon Musk last week that it would not accept bitcoin as payment for cars – only months after saying it would – coincided with it plunging

Similarly, another source of big gains in recent years has also been turning the investing world on its head: moonshot investing.

This is a strategy that involves backing disruptive companies, which, if they get it right, will succeed spectacularly and deliver outsized gains.

The star names need no introduction, think Amazon, Facebook, Google, Tesla, Tencent, Alibaba and friends.

The best-performing 4% of companies explain the net gain for the entire U.S. stock market since 1926 

The work of a US academic at Arizona State University, Hendrik Bessembinder, underpins the argument for this style of investing, in 2017 he published a paper Do Stocks Outperform Treasury Bills? that showed over 100 years most shares didn’t make money.

Instead, the gains came from a small proportion of winners. The study said: ‘The best-performing four per cent of listed companies explain the net gain for the entire U.S. stock market since 1926’.

This sentiment was echoed last week by the most famous UK investor who can be shoehorned into the moonshot investing bracket, Baillie Gifford’s James Anderson.

As one of the managers of Scottish Mortgage investment trust, Anderson has been responsible for backing disruptive companies that scored great success. He is leaving the trust next year and in a forthright fund manager’s note in Scottish Mortgage’s annual results, fired a shot at the investment world.

I’ll admit it’s not as entertaining as watching Kurt Russell get into scrapes as Santa Claus, but for investors it is well worth a read whether you agree with his thoughts or not.

Outgoing Scottish Mortgage manager James Anderson urged the trust to be eccentric and radical and investors to back extraordinary disruptive companies.

Outgoing Scottish Mortgage manager James Anderson urged the trust to be eccentric and radical and investors to back extraordinary disruptive companies.

Anderson argues that old-fashioned Warren Buffett and Ben Graham-style value investing has had its day and instead urges investors to embrace radical change and extraordinary companies, ‘with the characteristics that might enable extreme and compounding success that is central to investing’.

He adds: ‘But distraction through seeking minor opportunities in banal companies over short periods is the perennial temptation. It must be resisted. This requires conviction. The share price drawdowns will be regular and severe. 40 per cent is common. 

‘The stock charts that look like remorseless bottom left to top right graphs are never as smooth and easy as they subsequently appear*.’

There is a Venn diagram overlap between the bitcoin and crypto true believers and moonshot investing, but they should not be confused with each other 

That asterisk references another paper by Bessembinder, Extreme Stock Market Performers, which highlights how even the best long-term investments suffer deep short-term pain. 

It looked at each of the seven decades since 1950 and said: ‘Even within the highly successful decade, shareholders experienced draw-downs that lasted an average of 10 months and involved an average loss of 32.5 per cent. During the immediately preceding decade, draw-downs for these highly successful stocks lasted an average of 22 months and involved an average cumulative loss of 51.6 per cent.’

Scottish Mortgage, Ark Invest and their disruptive growth investing ilk are willing to take those heavy hits in the quest for long-term gains.

There may be a Venn diagram overlap between the bitcoin and crypto true believers and moonshot investing, but they should not be confused with each other.

The former have a narrow and very high risk commitment to just one asset, while the latter involves a diversified portfolio approach that includes committing to high risk investments.

What they share is a willingness to tolerate high volatility and rollercoaster double-digit share price falls along the way to eventual success.

Cryptocurrencies and moonshot investing – with their tolerance for 40 per cent price drops – have delivered the most high profile gains of recent years and crucially shaped the outlook of a new cohort of investors.

The question now is will their impact change the psychology of investing for years to come?

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