Bitcoin Boom Town
- sam00070
- Jul 10
- 9 min read
Updated: Jul 14
Observing the Herd
In my previous letter, I shared how traditional value-focused strategies often miss out on the largest and most significant returns in the market. This realization led me to question the fundamental approach I personally took as a previous value investor, particularly watching value managers who remain steadfast in their belief that they “know” what a company should be worth in a fluid market that they’re taking no control of or creating any value for. A friend of mine, who specializes in quantitative strategies, described value managers as sitting on the shore, simply hoping the tide will eventually come in. But, when it comes to excessive debt levels, value-minded individuals have typically won out. However, unfortunately, sometimes that unwind can take decades, leading them unable to profit from their forecast.
The doom of excessive leverage is something many have seen play out in many industries, including in my hometown of Oklahoma City, with the rise and fall of Chesapeake Energy. Chesapeake was once a beloved company, known for its natural gas production, lavish parties, sprawling campus with immaculate landscaping, and generous hospitality within the community. The state of Oklahoma held them in high regard. But for all their success, their business model was a mystery to many of their peers, particularly the way they paid seemingly unsustainable prices for assets—all while being fueled by excessive debt. Chesapeake’s aggressive approach encouraged others to follow suit, distorting energy markets along the way, forcing competition to overpay for assets, too.
It wasn’t until June 28, 2020—nearly 15 years after its peak—that Chesapeake filed for bankruptcy. In hindsight, we can point to the company’s tendency to “overpay” for assets, combined with the dramatic decline in natural gas prices, as key contributors to its downfall. However, the larger question here is this: what if natural gas prices had risen indefinitely instead of falling? Chesapeake’s management clearly believed that higher prices were more likely, but higher prices have a natural consequence—market forces adjust, and supply inevitably increases to meet demand. It wasn’t until the widespread adoption of horizontal drilling combined with hydraulic fracturing (fracking) that we saw a massive increase in natural gas supply, ultimately driving prices dramatically lower.
Bitcoin’s ascent is a stark reminder of the same risks inherent in excessive leverage. Instead of buying land or leases like Chesapeake, Bitcoin treasury companies are leveraging up solely to buy Bitcoin, which represents a financial experiment unlike anything the world has seen before. Early adopters of Bitcoin experienced extraordinary volatility and, ultimately, huge returns. But let’s be honest—if the price of Bitcoin hadn’t risen dramatically, would it have ever garnered the attention it has? Probably not. In fact, I remember being frustrated in my value days when mainstream financial outlets began treating Bitcoin as a legitimate investment—something I had previously seen as nothing more than lines of code. But by the fall of 2024, after mostly missing out on the initial $80,000 price surge, I had a change of heart.
It was then that I began to dig deeper into Strategy ($MSTR), a company that had been raising significant debt, primarily in the form of convertible notes, with the express purpose of acquiring more Bitcoin. What struck me during their earnings presentation was the elaborate, fictional language they used to justify their strategy; presentations that will be played in museums to display the insanity of mankind when it comes to greed if Bitcoin ever implodes. While this approach had been in place for some time, it wasn’t until late 2024 that the market began offering them highly favorable, almost unprecedented, terms, accelerating their ability to acquire more Bitcoin, which in turn drove the price higher. The offerings were even oversubscribed, forcing me to take a step back.
Since then, many companies have adopted similar strategies, with businesses now acquiring Bitcoin at an accelerating pace. As long as the market continues to fuel this cycle, it seems that no other buyers are needed other than these companies. I began to view this as a "money glitch," where one company raises capital to buy Bitcoin, causing its equity value to temporarily dip while simultaneously driving the price of Bitcoin up—a benefit to the company. Then, the next company can follow suit, rinsing and repeating. This creates a self-reinforcing cycle. Unfortunately, I believe these businesses have undermined Bitcoin’s original libertarian vision, turning it into a reflection of human greed. But, I digress.
Bitcoin has undoubtedly been one of the strongest-performing investments in history, although it remains one of the most volatile. In just the past 12 months alone, Bitcoin has returned nearly 100%, compared to roughly 12% for the S&P 500. But, what is the true global ownership or an average investor’s exposure to Bitcoin? Who benefits from these outsized returns? Some estimates suggest that around 15% of Americans own some form of cryptocurrency, but I remain focused solely on Bitcoin—and more recently, Ethereum, following Robinhood’s announcement on June 30th, which could disrupt the entire infrastructure of the financial system. I’ll save that topic for a later letter.
Despite the rise in Bitcoin’s popularity, ownership among institutional investors and financial advisors remains minimal, although growing. At a recent conference, when asked who owned Bitcoin, very few hands were raised. However, if the price continues to surge, advisors will inevitably feel the pressure to advise their clients to invest, especially as Bitcoin crosses new milestones—$10,000, $50,000, and now $100,000. What if it reaches $250,000 or even $500,000? The fear of missing out (FOMO) is a powerful force. And with the advent of Bitcoin ETFs, accessibility is no longer a barrier, making it easier for anyone with a brokerage account to invest with little to no expertise.
The Bitcoin treasury companies, like Strategy, continue raising capital to acquire more Bitcoin. Some argue that the debt will eventually come due and end the party, as I previously thought too, but if Bitcoin’s price keeps rising, these companies will be able to raise capital endlessly, no different than someone refinancing a loan against higher equity balances. So, it’s solely contingent on the future direction of its price and the market’s willingness to continue to lend for future acquisitions. Looking at the chart below, it’s staggering the amount held by these businesses with growth now moving exponentially.
So, how does this end? That’s the multi-trillion-dollar question, which I can only speculate into two of the most extreme scenarios: A) will Bitcoin fall to zero, or B) will it rise indefinitely?
Scenario A: Bitcoin's Demise
While the outcome is most likely somewhere between the two scenarios, I find it difficult to imagine Bitcoin ever falling to zero, although a few years ago, I might have said the same. For Bitcoin to truly collapse, there would have to be a widespread issue within the network itself, not allowing for transactions to be validated. Such a collapse would likely lead to a black swan event, similar to the 2008 financial crisis. But, as long as the internet exists, I believe another preferred alternative would emerge if that day ever came.
Some point to quantum computing as being the cryptocurrency's end. Just as hydraulic fracturing revolutionized natural gas production by unlocking previously inaccessible supplies, quantum computing is hailed as the technological breakthrough that could disrupt the Bitcoin market. But unlike natural gas, Bitcoin’s supply will not increase with quantum computing; instead, it will make the process of mining Bitcoin more difficult. And frankly, if a bad actor gains access to stable, usable quantum computer, the world would have much bigger concerns—every password, from banking to personal accounts, could be decrypted by the end of the day.
Scenario B: Bitcoin to Infinity
On the other hand, if Bitcoin continues to rise, it could create increasing economic problems. For the economists out there, it should be easy to see an inevitable deflationary spiral. Over the past year, Bitcoin has doubled in value—how many investments have done that? If Bitcoin continues to produce similar returns, real estate investors, for example, may start viewing Bitcoin as a better alternative to high-leverage, high-risk investments. A farmer looking to invest $500,000 in farm equipment might instead choose to invest in Bitcoin, given its potential for massive returns with no production or work required on their behalf. After all, why do people invest? It's a belief in higher prices, a return, no matter their own personal justification as to why.
Another factor besides the market’s zealous lending to Bitcoin companies that solidified my change in perspective was the Trump Administration’s approach to cryptocurrency. While President Biden’s administration was seeming to crack down on the industry, including the seizure of Signature Bank for serving crypto clients, the Trump Administration has been more favorable. They appointed a "Crypto Czar" and proposed allowing financial institutions to collateralize loans against Bitcoin, moving the financial system much closer to Scenario B than a Scenario A.
Why? Consider that farmer who bought Bitcoin instead of farm equipment. Let’s pretend his Bitcoin is now worth $1 million. Instead of selling, he would be able to take out a loan against it, owing debt in fiat dollars. A year later, his Bitcoin is worth $2 million, and he takes out yet another loan, leading to more supply of dollars in the fiat system, further driving inflation. This is essentially the strategy employed by companies like MicroStrategy, but on a larger scale, raising capital in the public markets and choosing to use the proceeds to simply buy more Bitcoin.
As this scenario plays out across the economy, the world could become increasingly dependent on Bitcoin. With more people buying Bitcoin, those who don’t own any will undoubtedly look to acquire it, further fueling the cycle. There is no historical parallel to this situation, as technology has never before allowed for an asset to be so easily acquired and owned globally, empowerd by decentralization. Unlike physical assets like gold, which require storage and incur costs, or perishable goods with a finite shelf life like tulips, Bitcoin is just a line of code—easily transferable, without physical limitations. And, to my knowledge, a hoard of companies have never been able to issue multiple billions and counting in debt or securities to acquire a non-cash flow generating asset.
This extreme scenario hinges on Bitcoin continuing to deliver extraordinary returns. While it may face severe drawdowns along the way, its historical performance has also produced some of the greatest returns in financial history. With increasing participation from businesses, I believe the likelihood of a scenario more akin to Scenario B outweighs that of Scenario A. This outcome is especially concerning in a world burdened by excessive sovereign debt and rising spending, all occurring in an era when falling interest rates—once a key enabler for governments to bypass fiscal discipline—are no longer an option. In that setting sans Bitcoin, higher inflation is already the baseline expectation.
Coupled with a continuation of Bitcoin’s meteoric rise, it seems reasonable to believe that it could lead to a future economy that has no relation to fiat currencies, which many Bitcoin advocates prophecy. In this extreme case, governments would most likely demand the financial system stop lending on Bitcoin or dramatically hike reserves to stifle inflation and try to dampen the creation of dollars through the banking system. And if so, it could lead to the largest financial crisis in history. The US basically banned gold in the 1930s, so it doesn’t seem to be much of a stretch to speculate. However, we’re clearly not anywhere near that stage, yet, quite the opposite with the administratoin advancing crypto. Additionally, the acceleration currently occurring is beginning to create an entire financial system of its own, not dependent on central banks.
Ultimately, I believe the driving force behind Bitcoin is now human greed. If its price continues to rise with excessive returns fueled by the market lending to companies pumping the price further, investors will find themselves looking more foolish for not owning it, causing even greater demand for what is, essentially, a digital line of code. Unlike past bubbles, Bitcoin is decentralized with a finite supply, making it a unique demand story—one that markets have already figured out how to manipulate. This is not investment advice. While I do own Bitcoin, I cannot predict the future. However, I do see the potential for this financial experiment to spiral, eventually, leading to a severe crisis. I continue to struggle with when or how this ultimately unfolds—or whether we simply remain in this current limbo state indefinitely. But for the limbo to continue, returns for Bitcoin will undoubtedly need to normalize, otherwise it becomes a superior alternative to all other asset classes and leading to the latter scenario’s self-fulfilling prophecy.
Edit — July 14, 2025: The original article stated, “It wasn’t until the advent of hydraulic fracturing (fracking) that we saw a massive increase in natural gas supply, ultimately driving prices dramatically lower.” This has been updated to clarify: “It wasn’t until the widespread adoption of horizontal drilling combined with hydraulic fracturing (fracking) that we saw a massive increase in natural gas supply, ultimately driving prices dramatically lower.”