The Value Of Bitcoin Most People Can’t See
Through what lens are you looking at Bitcoin?
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Dear Friend, Subscriber, and fellow Category Pirate,
What is Bitcoin?
If you ask Warren Buffet, Bitcoin is “rat poison squared.” If you ask Tyler or Cameron Winklevoss, Bitcoin is “the sunlight that shines through the darkness of centralized money.” If you ask the 2017 version of Jamie Dimon, Bitcoin is “worse than tulip bulbs” and anyone who buys it is “stupid.” And if you ask the 2020 version of Jamie Dimon, Bitcoin is “not [my] cup of tea,” while J.P. Morgan’s Global Markets Strategy group calls Bitcoin “an emergence as an alternative to gold among millennials.”
So, which one is it?
In order to answer this question, we need to examine Bitcoin through a category lens.
A category lens is what we call examining a company, an asset, or an idea in the world not as it is, but in the context of its category.
For example, was Blockbuster a valuable company in 2007? Well, it depends on whether you are looking at the company through a category lens or not.
Through a category lens, Blockbuster was a financially successful company (9,000 stores and $5.5 billion in revenue) operating in a vulnerable and declining category (VHS movie rental). Which begs the question, was Netflix a valuable company in 2007? Again, it depends on whether you are looking at the company through a category lens or not. And through a category lens, Netflix was a booming startup ($1.25 billion in revenue and 7.5 million subscribers) with the leadership position in an exponentially more scalable, profitable, and quickly expanding category (digital streaming video).
Through a brand or P&L lens, Blockbuster was “more valuable on paper” that year.
But through a category lens, Netflix was massively undervalued and Blockbuster was a bloated, drunk incumbent asleep at the wheel. Not just because it was a superior business model via streaming and no late fees, but because it unlocked entirely new categories of video consumption. Blockbuster was just for movie night. Netflix, on the other hand, had massive category potential. It was on the cusp of unlocking weekend binge-watching for superconsumers and boredom relief during commuting.
Netflix was far more than just a substitute for Blockbuster.
When investors started looking at the company in the context of this new category, Netflix’s stock took off.
As we have written about in other Category Pirates letters, there is a business case to be made for becoming a category creator.
Category creators capture two-thirds (76%) of the economics of the new category.
For category creators, $1 of revenue growth = $4.82 of market cap growth (3x higher than non-category creators, where $1 of revenue growth = $1.77 market cap growth).
Category creators inevitably create new subcategories, which they are best positioned to further capitalize on (assuming their data flywheel is pointing them in the right direction and keeping them ahead of the curve).
It’s important to start with this “Winner Takes All” reality to business because it provides important context for how to look at Bitcoin.
When you bet on category creators and category designers, you are not just betting on the company or the asset or the idea. What you are betting on is the leadership position that company or asset or idea holds in the context of the emerging category.
This is how a venture capital firm like Andreesen Horowitz decides to inject $100 million into a new social app called Clubhouse with a valuation of a billion dollars. That valuation is not based on the P&L of the startup, or the “uniqueness of the brand.” That valuation is based on the category Clubhouse named & claimed they were creating—Drop-In, Spontaneous Audio—and their leadership position in it.
If Andreesen Horowitz is right, and Drop-In, Spontaneous Audio as a category becomes as big as they believe (worth tens, or maybe even hundreds of billions of dollars), the brand/company best positioned to capture two-thirds of the category’s economics is Clubhouse.
The flip side, of course, is that if the opposite happens—if people end up viewing Clubhouse as little more than a webinar hosting platform with forced appointment viewing just without the video—then the category will collapse and take Clubhouse with it.
Categories make companies. Not the other way around.
Which means the best way (for investors) to capture the economic growth of that category is to own as much equity as possible in the company that holds the leadership position in that emerging category.
Savvy VCs know this. Which is why (in part) there has been an explosion in startup unicorns. Lots of investors have been schooled to the game of winner-takes-all, and will do whatever it takes to get their piece of an emerging category king or queen with massive category potential.