Today we have a pretty unusual guest for WCI on the podcast. Readers and listeners have emailed requesting that we get him on the podcast, and we thought it would be an interesting conversation. Our guest is Jeffrey W. Ross, MD, MBA. He is the founder of Vailshire Capital Management and Vailshire Partners hedge fund. He was a speaker at the Bitcoin 2022 Conference, and he is a board-certified radiologist. He’s an interventional radiologist, fellowship-trained, and just retired last year in 2021. He has contributed to the Motley Fool as well as Seeking Alpha. We talk all about Bitcoin and cryptocurrency and why it is or is not a viable form of currency and if it is something we should buy into—or not. We know this is a controversial topic with the WCI audience, so we hope you find this conversation interesting.
Let’s talk about your upbringing and how it influenced your views on money. Obviously, at this point, you have a lot of interest in finance, but tell us about how that occurred.
You’re still young. I mean, you’re not that far out of residency since 2008. You spent a long time learning to be a doctor. Was there any reason you left medicine other than the fact that being a hedge fund manager pays a lot better?
Thanks for sharing that. I wonder how many docs listening to this podcast are thinking, “Wow, I wonder if I could be a hedge fund manager.” I bet there’s somebody that would be inspired to try something similarly. Do you have any advice to somebody that’s thinking about exiting medicine into the financial world?
Your fund has made a bit of a transition. When you started, it was primarily picking stocks, as you mentioned, healthcare and tech stocks. In more recent years, you’ve specialized a bit more in crypto assets. Tell us a little bit about that transition.
Let’s talk about this dramatic difference you see between Bitcoin and other crypto-assets and cryptocurrencies like Cardano, Solana, Ethereum, etc. Why is Bitcoin special?
You talk about Bitcoin as money. Back in, I don’t know the first time I heard about it, 2011 probably, people talked about Bitcoin being a currency. Now I talk to people and most of them admit, “OK, it’s really not working out as a currency. I’m justifying it by it being a store of value.” Or they just freely admit, “I’m speculating on it. I think I’ll be able to sell it later for more.” I feel like in the beginning, the idea was that it was a currency, a currency we’d actually be using in our day-to-day lives. Over the last decade-plus, that hasn’t really panned out. I’m still not using Bitcoin as currency. I’m not buying gas with it. I’m not buying pizza with it. I’m not using it to move money around between my accounts. Why aren’t we yet using Bitcoin as currency? What happened? How could so many people be so wrong about that?
We’re too early to judge that it’s not working out as a currency? You think we’ll overcome the speed issues, the energy use issues, the volatility of it as a currency? You think that’ll all be overcome and we’ll actually be using it as a currency to buy our gasoline and other daily products?
That’s certainly another barrier, the taxation of it. I haven’t run the numbers, but it seems to me the volatility isn’t decreasing. It’s been 10 or 12 years. It’s not getting less volatile yet, but you think at some point something’s going to happen that makes it less volatile?
But much more useful as a currency.
Let’s talk about your long-term predictions for Bitcoin performance, and let’s talk in terms of probabilities. Maybe each of the three following possibilities. The first is that 10 or 20 years from now, Bitcoin is worth dramatically more—let’s say $500,000, a million dollars or more per Bitcoin. A large amount, a big, huge gain. The second possibility is that it’s worth something similar to what it’s worth now in 10 or 20 years. It’s still worth a five-figure amount. And the third is that Bitcoin goes to zero. What probabilities would you assign to each of those possible outcomes?
Despite being a big proponent, I understand your fund was short Bitcoin earlier this year. Are you still short Bitcoin as we record this in mid-May 2022? I think it’s down 50% percent from its peak right now. Are you still short?
Let’s talk a little bit about the hedge funds space. Now, hedge funds typically charge 2 and 20—2% of assets under management per year, plus 20% of profits. And of course, index mutual fund investors view that as highway robbery, because they’re used to paying just a few basis points for management. I have a couple of questions—one about the industry in general and another about you in particular. About the industry in general, what’s the justification for charging those fees? About you in particular, you actually charge less. You don’t charge an annual fee. You charge 20% of profits above a high watermark. I’m curious why you chose not to do what the industry does.
Let’s turn the subject a little bit. A lot of my listeners are sitting out there going, “Well, how much of my portfolio do I put into Bitcoin, into other crypto assets?” What percentage of a portfolio do you think is reasonable to allocate to these sorts of assets?
Now, you talk about speculative assets, speculation, etc. By definition, Bitcoin, as well, is a speculative asset. It doesn’t produce earnings. It doesn’t pay rents. It doesn’t pay dividends or interests. Any investment returns on it depend essentially on convincing someone else to pay more for it than you paid for it. That keeps a lot of us from investing in it. Do you think it should? And if not, why not?”
Let’s talk a little bit about valuing it. You had mentioned earlier some of the ways you value it. A lot of people, including me, find it difficult to value Bitcoin and thus hesitate to invest in it. For example, the only reasonable way I’ve really found a value is to look at the cost of producing a new one. Which is mostly an energy cost, something around $10,000, it’s been estimated at. Then maybe add on some infrastructure staffing and security costs, but even doing that and even after this most recent 50% drop in Bitcoin, it’s still dramatically overvalued. How do you decide when Bitcoin is overvalued or undervalued?
Of course, we haven’t seen the whole curve. We don’t know that it’s actually going to follow that curve. Does that bother you at all? That at some point it may drop off and not do that S-shaped curve?
Now, crypto-assets are notoriously difficult to understand compared to a lot of traditional investments. Some of its fans suggest you need to spend at least 1,000 hours studying it to understand it. Yet, the old investing adage is “Don’t invest in anything you don’t understand.” Should we avoid Bitcoin and these crypto-assets, if we’re not willing to spend 1,000 hours studying it?
Let me push back a little bit about this idea because I hear it a lot. That Bitcoin is this protection against inflation. We’re now in the most inflationary environment we’ve seen since the early 1980s. Inflation is measured by CPI at about 9% right now and has ramped up dramatically over the last six months. Meanwhile, Bitcoin has dropped 50% in value. It doesn’t feel, at least over this short time period, that it’s protecting me from inflation in any way, shape, or form. How would you respond to that?
Let’s talk a little bit about worldview. Crypto proponents, both online and in real life, have an almost religious conviction and sometimes a unique worldview. Not that different from gold bugs, not that different from preppers in some ways. For example, I had someone trying to convince me a couple of weeks ago that Bitcoin is going to eliminate war from the world. What are your thoughts on this semi-religious belief system about Bitcoin? What are the downsides and risks of it being out there? And are there any upsides, too, such as putting a floor under Bitcoin pricing because these folks will never abandon it no matter how low the price goes and how long it stays there?
Now, world governments have been a little slow in determining how to regulate this and how to tax it. What problems and what opportunities has that created? The fact that they’re still trying to figure this out.
Let’s talk about taxation. The US government has elected to treat cryptocurrency essentially as an investment, applying capital gains tax every time it’s bought and sold, short or long term, if you’ve held it for more than a year, as the case may be. It’s also allowed, interestingly, enough for tax-loss harvesting without the 30-day wash-sale rule, although recent legislation that didn’t pass would’ve changed that. Do you think the US government got it right? Do you think they chose the right way to tax this? How do you think it should be taxed? If it’s digital gold, why is it not taxed at the collectibles rate of up to 28%? If it’s a currency such as yen or euros, why is it not taxed as ordinary income tax rates like a Forex investment?
You alluded to some hacks and some problems in the space. The Wild West effect. Lots of investors fear losing their Bitcoin. They fear losing their Ethereum or Cardano or whatever due to hacks of exchanges or losing their keys. I mean, something like 20% of all the Bitcoin that’s ever been mined has been lost at this point. How realistic is this fear and what can be done to counter these security issues?
Let’s turn now back to your fund. Your fund has a pretty good track record since inception. Really, a very impressive one. You say it’s designed to produce Alpha in all conditions. When I look at your philosophy, the first rule is “Don’t lose money.” The second rule is “Remember the first rule.” But in the last year, you’ve lost 37%. What happened in the last year?
Now, our time is getting short, but you have…