Applying Ray Dalio’s Bitcoin analysis to fine wine

Legendary investor Ray Dalio published an illuminating review on bitcoin (and cryptocurrency in general). The review is comprehensive, and discussing it is beyond the scope of this post. Here I will only try to apply Dalio's Bitcoin discussion to fine wine as an alternative asset - comparing and contrasting Bitcoin and fine wine based on what Dalio has identified as key advantages and risks of Bitcoin.

Ray Dalio's "What I Think of Bitcoin" can be accessed here, and is (obviously) highly recommended.

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Dalio writes: “There aren’t many alternative gold-like assets at this time of rising need for them (because of all the debt and money creations that are underway and will happen in the future). Because of what is going on in the world, besides there being a growing need for money or storehold of wealth assets that are limited in supply, there is also a growing need for assets that can be privately held. Because there aren’t many of these gold-like storehold of wealth assets that can be held in privacy and because the sizes of their markets are relatively small, there exists the possibility that Bitcoin and its competitors can fill that growing need.”

The above paragraph could have just as well been written on investment grade wine, as it shares the key characteristics Dalio has identified in bitcoin: storehold of wealth asset that is limited in supply, and an asset that can be privately held. Investment-grade wine possesses the rare ability to improve with age and increase in price. This means that only a very small fraction of global wine production qualifies as investment-grade wine.

Moreover, wine's ability to age is a prerequisite to be characterized as investment-grade wine, but it is not sufficient. High scores by leading wine critics, the producer's brand (sometimes built over hundreds of years, e.g. Bordeaux's First Growths such as Mouton Rothschild or Chateau Latour) and winemaking knowhow further narrow the total available supply of investment-grade wine. And by definition, supply of fine wine is not only limited, but also decreasing over time, as the wines in their drinking window are being consumed.

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These are not just the similarities to bitcoin that illustrate the attractive characteristics of fine wine as an alternative asset. Dalio mentions three key risks as it relates to bitcoin, that in fact strengthen the investment merit in fine wine:

• Supply: Dalio writes: “Although Bitcoin is limited in supply, digital currencies are not limited in supply because new ones have come along and will continue to come along to compete so the supply of Bitcoin-like assets should, and competition will, play a role in determining Bitcoin and other cryptocurrency prices. In fact I assume that better ones will come along and displace this one because that is the way the evolution of everything works… Since the way Bitcoin works is fixed, it won’t be able to evolve and I presume that a better alternative will be invented and pass it by. I see it as a risk. For those reasons the ‘limited supply’ arguments isn’t as true as it might appear.”

Fine wine, on the other hand, will not be “displaced” and the supply is indeed limited. Most investment-grade wine comes from highly regulated regions that limit production, mainly France (Bordeaux, Burgundy, Champagne, Rhone), Italy (Piemonte, Tuscany) and the United States (California).

Indeed, over the past few decades there has been (very) marginal supply growth of fine wine by new world producers. This addition has been slow, mostly with old world top estates / producers / houses forming JVs with local players, bringing unique knowledge and brand equity to a few additional territories. However, an offsetting factor to fine wine supply growth has been a continuous increased focus on quality at the expense of quantity. High end producers have realized that the economics favor the tradeoff of higher quality and lower yields.

• Cyber security: Dalio writes: “to one holding digital/cyber assets at a time when cyber offense is much more powerful than cyber defense, the cyber risk is a risk that I can’t ignore. When the Department of Defense can’t protect its systems from being hacked it would be naïve to be totally comfortable that digital assets can’t be hacked, which is one of the advantages of gold-like assets and is one of the risks of all financial asset. In fact I think that there is a good chance that someday we will see the financial system, which consists mostly of digits, be shown to be more vulnerable to disruption and/or to cyber blackmail than is now recognized. By the way, these things are now happening at a growing rate and can threated the value of traditional financial assets… While I recognize that Bitcoin can be held offline via “cold storage”, I understand it is difficult to do and that very few people actually do it. So, by and large, my understanding is that, by Bitcoin being digital and connected, it is not protected against cyber risks to my satisfaction.”

Fine wine, on the other hand, is a physical asset that is (literally) held in cold storage. The relative value of assets that are resilient to cyber security threats will increase as the rate of cyber attacks grows.

• Government reaction: Dalio writes: “it appears to me that if the government wanted to get rid of its use, most of those who are using it wouldn’t be able to use it so the demand for it would plunge. Rather than it being far-fetched that the government would invade the privacy and/or prevent the use of Bitcoin (and its competitors) it seems to me that the more successful it is the more likely these possibilities would be. Starting with the formation of the first central bank (the Bank of England in 1694), for good logical reasons governments wanted control over money and they protected their abilities to have the only monies and credit within their borders… I suspect that Bitcoin’s biggest risk is being successful, because if it’s successful, the government will try to kill it and they have a lot of power to succeed”.

Needless to say, at the end of the day, fine wine is a consumption good, and as such does not pose a threat of competing with the traditional monetary system.

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While Dalio ends his analysis by determining that “Bitcoin looks like a long-duration option on a highly unknown future that I could put an amount of money in that I wouldn’t mind losing about 80% of”, he still emphasizes: “believe me when I tell you that I and my colleagues at Bridgewater are intently focusing on alternative storehold of wealth assets”.

Fine wine is such an asset.