This piece explains investor John Pfeffer's view that most cryptocurrencies like Ethereum are "circulation currencies" rather than equity, making it hard to capture value, while Bitcoin is the only true digital store of value. He believes traditional index investing (e.g., S&P 500) may stop working because new tech value flows to private markets and users, not public stocks. His top pick is Bitcoin (85% of his crypto portfolio), he is cautious on Ethereum (good tech but poor value capture), and mentions Uniswap (has fees but faces fork risk).
This episode of Invest Like the Best features John Pfeffer, former KKR partner and founder of Pfeffer Capital, who discusses the distinction between value creation and wealth creation, the logic behind technology investing, and the rationale for making a concentrated bet on a single asset—Bitcoin. T
John Pfeffer, former KKR partner and founder of Pfeffer Capital, brings a unique perspective shaped by experience across 10 countries and 5 industries. This episode’s core themes: the logic behind technology investing, the case for Bitcoin as a core allocation, and the prediction that traditional index investing may break down. The most impactful takeaway: Pfeffer argues that most Layer 1 smart contract platform native tokens (e.g., ETH) function as "circulating currency" rather than "equity," with value capture far weaker than market consensus suggests, while Bitcoin occupies the premium "digital store of value" niche with virtually no competition.
John Pfeffer argues that in an era of accelerating technological change, adaptability has replaced conformity as the dominant survival strategy.
Pfeffer points out that historically, the pace of technological progress was far slower than the human lifespan, making "conformity and collaboration" a rational strategy. But today, "we are on the steep part of the exponential curve, where change is extremely fast relative to the human lifespan." As a result, "the dominant survival strategy shifts to adaptability. Collaboration remains important, but adaptability matters more than conformity."
He uses his own experience as evidence: each time he switched industries (video → technology → private equity → retail), people from his old circles "typically took 5 to 10 years" to realize his original judgment was correct, while his new circles had no prior awareness of him. "I never understood why people anchor their lives to their first job — that is almost entirely a random event."
Pfeffer directly links adaptability to investment methodology: "The way I think about improving is — how can I update my probability judgments faster? At one extreme is never updating (dogmatism), and at the other is updating on everything (always following the crowd). I believe I am still on the margin where 'faster updating benefits me.'"
Pfeffer defines a "good business" as one with growth, a sustainable moat, market concentration, immunity to frequent technological disruption, high margins, low capital intensity, and pricing power. A "bad business" is the opposite of these traits.
He points out a seemingly paradoxical phenomenon: the technology sector inherently carries disruption risk, yet one characteristic of a good business is "immunity to technological disruption." His solution is: first eliminate businesses that are "clearly vulnerable to technological disruption" (e.g., private equity acquisitions of Yellow Pages companies in the 2000s), and then screen within the technology sector itself.
Pfeffer emphasizes that the fundamental driver of technology investing is Wright's Law (the experience curve) — "with each cumulative doubling of production, production costs decline exponentially." Software goes a step further, exhibiting the "crazy economics of zero marginal cost." He believes this force "overwhelms any other potential investment driver."
> "With a sufficiently long investment horizon, risk is essentially limited to 'being forced to exit.' You only need to worry about blowing up — don't use leverage, don't short. Then things become simple: find what maximizes returns, because I don't care about volatility. This makes me inclined to be a convexity enthusiast."
Pfeffer argues that Bitcoin exclusively occupies the high-quality "digital store of value" track, while other Layer 1 native tokens (such as ETH) represent a "bad business" — promising technology but extremely poor value capture capability.
The core argument Pfeffer made in his 2017 paper remains unchanged: Tokens like ETH are "currency" rather than "equity" — "Owning ETH gives you no more ownership of the Ethereum network than owning USD gives you of the U.S. economy."
Currency follows the Fisher equation of exchange (MV=PQ). Pfeffer explains: "If velocity increases, with a fixed money supply, prices must rise — this is effectively inflation, which erodes the asset's value relative to other currencies." Therefore, unless people hold it long-term (i.e., as a store of value), high velocity destroys token value.
| Dimension | Bitcoin | Other Layer 1 (e.g., ETH) |
|---|---|---|
| Core Function | Store of value (focused) | Smart contract platform (multi-purpose) |
| Technical Risk | Extremely low (stable protocol) | High (frequent upgrades, roadmap changes) |
| Security | Hash rate (PoW) far exceeds others | PoS security remains controversial |
| Competitive Landscape | No real competitors | Numerous L1 competitors, forkable, interoperable |
| Value Capture Mechanism | Fixed supply + holding | Currency + EIP-1559 burn (effectiveness questionable) |
Pfeffer believes the ETH community has an inherent contradiction: "On one hand, they want to be the decentralized software backbone of the global economy — which means being cheap and high-performance to attract new users. On the other hand, they want to reward existing holders through rent extraction (the 'ultra-sound money' narrative). I think these two things are contradictory."
Pfeffer draws a parallel with the telecom stock bubble: "In 1998-1999, everyone thought 'all internet traffic has to go through pipes, so the companies owning the pipes are infinitely valuable.' As a result, Deutsche Telekom is still 78% below its 2000 peak." He believes Layer 1 tokens face a similar problem — "The reasons are different here (currency + forkability + shallow moats), but the outcome may be similar."
Pfeffer argues that the magnitude of value created by crypto technology is comparable to the internet, but value capture may be an order of magnitude lower, with more flowing to users rather than investors.
1. Value Creation: Comparable to the internet in scale (and potentially faster, due to greater composability and open-source nature)
2. Value Capture: Potentially an order of magnitude lower (shallow moats caused by open-source, interoperability, and forkability)
3. Required Resources: Possibly another order of magnitude lower (developer hours far fewer than Web2 equivalents)
"This implies returns may be higher, despite worse value capture—because the resources deployed are far smaller."
Pfeffer believes public market investors will be at a disadvantage: "I saw a hedge fund article whose basic thesis was 'this is very negative for equities overall.' I would add: negative for public market equities overall."
He predicts a massive transfer of value from traditional financial intermediaries (banks, brokerages), and while DeFi will greatly enhance capital efficiency and expand the economic pie, "the destruction of equity value in traditional financial companies will far exceed the value captured by new players like Coinbase."
> "As an investor, you may simply want to be a user—enjoying the benefits as a member of the economy. If you want to invest, you must make venture-capital-level early-stage investments, or invest in tokens with clear fee claims. In the middle ground (other liquid crypto assets), 'the risk complexity increases exponentially, but returns may not be any better.'"
Pfeffer uses Bitcoin as a benchmark for evaluating other investment opportunities and argues that traditional index investing (SPY) may no longer be a safe choice.
Pfeffer's crypto portfolio is approximately 85% Bitcoin, with the remainder in crypto VC. The rationale:
1. Bitcoin is a "no-brainer investment": It has achieved product-market fit, has simple technology, and faces limited competition.
2. Natural reduction after success: "If Bitcoin succeeds, it will transition from a risk asset to a more stable store of value, and its return rate will decline. At that point, we will naturally shift capital toward higher-return assets."
3. Sell condition is not a price target, but a better opportunity: "I would only sell Bitcoin to pursue a more attractive investment."
Pfeffer believes the middle ground (liquid crypto assets that are neither Bitcoin nor VC) offers poor risk-reward: "From 2017 to now, ETH/BTC has fallen from 0.09-0.15 to about 0.075—a loss in Bitcoin terms. Of the other assets on CoinMarketCap in 2017, the vast majority either significantly underperformed Bitcoin or have disappeared."
Pfeffer questions traditional index investing: "Putting retirement savings into SPY or Vanguard's total market index was the right answer in the 20th and 21st centuries. But there are strong reasons to believe this will no longer work." The reason: the value of new technologies will not accumulate substantially in the form of public market stocks, but will instead flow to private markets (VC) and users.
> "The question now is 'is it too risky not to hold Bitcoin,' not 'is it too risky to hold Bitcoin.'"
| Position | Guest Stance | Key Data |
|---|---|---|
| Bitcoin | Strongly bullish (core holding, ~85% of crypto assets) | Core thesis unchanged since 2017 paper; ETH/BTC fell from 0.09-0.15 to ~0.075 |
| Ethereum (ETH) | Technically bullish, cautious on asset level | Views ETH as "circulating currency" not equity; EIP-1559 is an improvement but may be insufficient to solve value capture issues |
| Solana (SOL) | No clear stance | Mentioned as an "alt L1" competitive case, noted for making different trade-offs in decentralization/security/performance |
| Uniswap | Neutral (has fee claim rights, but faces fork risk) | Mentioned as a case of "vampire fork" (SushiSwap) |
| Dapper Labs | Early-stage investment (current stance not disclosed) | Mentioned as an NFT application layer case |
| Coinbase | Neutral to cautious | Believes the equity value it captures is "far less than the traditional financial equity value it destroys" |
| Binance | Neutral (mentions founder CZ's holdings) | CZ personally holds only Bitcoin and BNB |
| OpenSea | No clear stance | Mentioned as an NFT platform case |
1. Adaptability is the "survival strategy" of modern investing (Pfeffer): "When change is extremely fast relative to human lifespan, adapting is more advantageous than conforming." — He cites his own experience of switching across 10 countries and 5 industries; each time, his old circles thought he was "crazy," only to realize he was right 5–10 years later.
2. ETH is not Ethereum's "stock" (Pfeffer): "Owning ETH gives you no more ownership of the Ethereum network than owning dollars does. It is a circulating currency, not equity." — Circulating currencies follow the Fisher equation, and high velocity erodes value.
3. Layer 1 tokens may replay the telecom stock bubble (Pfeffer): "In 1999, everyone said 'all internet traffic must pass through pipes, so pipe companies have infinite value.' Deutsche Telekom is still 78% below its peak." — Layer 1 faces different but equally fatal issues: forkability, shallow moats, and circulating currency attributes.
4. Bitcoin's sell condition is not a price target, but a better opportunity (Pfeffer): "I would only sell Bitcoin to make a more attractive investment. If successful, it will transition from a risk asset to a stable store of value, with declining returns, and I will naturally reduce holdings then."
5. The value created by crypto technology is on par with the internet, but value capture may be an order of magnitude lower (Pfeffer): A three-layer framework: value creation ≈ internet, value capture ≈ 1/10, resources required ≈ 1/100 — "This means returns could be higher, even though value capture is worse."
6. Traditional index investing (SPY) may no longer be a safe choice (Pfeffer): "The value of new technologies will not accumulate heavily in the form of public market stocks, but will flow to private markets and users. There is a strong case that the SPY strategy no longer works."
7. "Don't ask where people come from; ask where they are going" (Pfeffer): "Knowing what a person cannot control (birthplace) is the least informative. What I want to know are the choices they make and the direction they take."
8. Marriage is like a "three-legged race" — requiring constant re-synchronization (Pfeffer): "Two people each have one leg tied together in the same sack. You will fall out of sync, then must re-sync, or you will fall. We've been married 28 years, and this metaphor has always held true."