While explaining why we consider gold as a type of refuge for our wealth, I could not help naming Bitcoin under some confusion. Wasn’t this a speculative pyramid scheme? Wasn’t it a futuristic invention destined to fail? The truth is that Bitcoin and gold share more characteristics than many think, and most of the skepticism towards Bitcoin comes from not understanding what it is about. If we add that he barely has 10 years to live on top of that, it is normal that people do not want to start investigating right off the bat.
How could it be otherwise? It is necessary to clarify why this cryptocurrency is the only one that I buy and that many of us consider as a kind of “digital gold.” This topic could expand to unsuspected limits, so my ambition will only be to plant the seed of the most basic knowledge that we would need to understand whether or not it is worth allocating part of our assets to this crypto and why I incorporate it into my portfolio.
It is a new type of asset. The mainstay of long-term investing is diversification. This is clear to most of us. If we follow this to the letter, then our portfolio should theoretically include all types of assets that exist.
Why invest in bitcoin?
Well, because at different economic times, one or the other will be more profitable. In times of prosperity, stocks will rise. In deflation, it will be the bonds. In inflation and uncertainty, gold. Cash in recession. Bitcoin would be more similar to the time of inflation and uncertainty. That is, it would follow a little more the trend of gold than of other assets.
So why not just have more gold? Well, because the particularity of Bitcoin is that when it was created, another type of new asset was also created. Something that until now did not exist.
What does this percentage mean?
When another asset, for example, oil rises, there is very little chance that Bitcoin will follow the same trend. They are not tied down. There is a general uncertainty that we can see translated into volatility. That is sudden price fluctuations. More than anything because as I said, Bitcoin is barely 10 years old and this in monetary history is a very short time. Especially when we compare it to the 2,000 plus years of gold.
Improve portfolio returns
I repeat that it is a new asset class. Although it is more volatile, if we believe in diversification as a basis for long-term investing, it would make sense for it to be incorporated in theory. I’m not saying it, but the different studies and papers that have been done on this topic, and more specifically on Bitcoin.
One of the types of wallets that I like the most and that is very similar to mine is the All-Weather by Ray Dalio. With some tests that have been done, percentages of cryptocurrencies have been incorporated into the history of the results of this portfolio.
As volatility increased, so did earnings. The fact is that after incorporating 1% of cryptocurrencies in this portfolio, the profitability has already increased with the original. Later it was seen that at more than 5% of Bitcoin, the risk rose too much.
Logically, since it moves drastically up and down (that is, it is very volatile), then the percentage of Bitcoin that we will put in our portfolio will be directly proportional to the risk that we can take as investors. But as we can see in these examples that have been done in model portfolios, it has been concluded that between 1% and 5% of Bitcoin is an interesting option.
Again, remember that the reason is that it is a new type of asset that little follows the currents of the other investment instruments to which we are used, such as stocks, gold, etc. I am sure that as time progresses, these sharp fluctuations that Bitcoin has will reduce. I think of it that way because it will already be considered something normal and new, and as this happens, the percentages in the investment portfolios will go up.
It is a refuge
But I repeat that if we have to compare it with any of the assets that we call a refuge, it would undoubtedly be gold. When we talked about gold as one of the values that make a refuge, we learned why this precious metal is. So that this concept can be extrapolated to other investment assets, we are going to see what “refuge” means in a more general way.
Instead of defining it directly, it will be easier for us to put it in perspective. For this, first of all, we will see what makes an asset class not a refuge.
What would be a bad shelter?
Well, all that which cannot be conserved for long periods. Therefore, a good shelter, first of all, has to be durable. The most obvious example would be food. A kiwi has intrinsic value, which means that we value it for its value for itself, and we do not compare it to others.
In other words, we value this kiwi for the number of calories, energy and vitamin C it provides, and we do not compare it to apples for example. When we buy it at the greengrocer, we buy it for the kiwi because we only want kiwi.
But let’s imagine that suddenly this fruit or any other begins to be scarce in the store. As we need them to live without a doubt, they would go up in price as they begin to empty out of the store.
Still, as I say, we value them for this immediate value but kiwis would not be a good shelter because if we kept them in a strong box for years, we would open the door … Even the worms that had consumed them would have died. We would no longer have the food nor the money spent to buy it.
But what if, instead of fruit, we talk about rice or canned food? It is certainly better in the long run, but this does not mean that it will hold its value.
Rice is produced very cheaply and is not exactly in short supply. In practically any country we can buy it and if we want to buy a little, we just need to go to the market or even hit the buy button on our computer. Therefore, for it to maintain its value, it also has to be scarce.
Is it the case of Bitcoin?
When the Bitcoin system was created, it was stipulated that there would be a maximum of 21 million available in circulation. And no. No more can be created.
So there is a limited amount, but the peculiarity that it has, unlike gold, is that it is much more likely that some investors will die with their stored Bitcoin. These will be lost forever, thus creating even more scarcity because they will not have access.
What I do recognize is that transactions like this are slow. It is one of the arguments I hear the most about using Bitcoin as a payment system. I suppose this is another point in favor of Bitcoin as a refuge rather than to pay.
And here we enter the main point of Bitcoin. If you are a techie, you will want to know how it works or if it is really worth being more cumbersome than other ways of paying. And the truth is that all new technology has a poor user experience. Bitcoin, too but on purpose.
Bitcoin does not intentionally sacrifice any of the principles of privacy, security, and freedom to offer more speed or improve user experience. And while these foundations have been secured, the good news is that now we can continue to improve the technology that will improve over time without sacrificing any of the above.
Personally, I don’t really understand its technology, but just as I don’t know how the Internet works, I still use it for other non-technical reasons.
What is valued in Bitcoin is not so much its technology to pay (which also, because it makes this privacy, security and freedom possible), but its value as hard money.
- Store of value
Bitcoin and gold fulfill all these characteristics while euros or dollars do not. We also have more:
Security against inflation because there will only be 21,000,000 Bitcoin in the world and no more can be created. Security against confiscation because each Wallet has private keys. Besides, that Bitcoin cannot be banned. Privacy in payments using pseudonyms. Freedom from censorship using a peer-to-peer network. But there is still more.
It cannot be forbidden
The person who created Bitcoin is and will remain a mystery. It is sure to appear in monetary history books and museums depicting it with a large question mark. His nickname was (or is) Satoshi Nakamoto. He published some papers in which the entire project was explained from top to bottom.
Who was this man (or woman) and why did he decide not to become famous?
Because the purpose of Bitcoin is not to depend on anyone 100% and this is something that cannot be achieved in its entirety if there is a face behind the project.
Because then it would be like a kind of company. If there are managers or a CEO behind it, governments could potentially ban it. A State could deny the function of any company and its products. Still, on the other hand, Bitcoin is impossible because even with the Internet, Bitcoin continues to function at 100%.
Something that we have seen in Venezuela, where the US dollar or Bitcoin are prohibited, but its citizens have continued to use it to pay and save themselves from hyperinflation while the bolivar, the official currency of the South American country, has been falling in value by one way much more dramatic than Bitcoin.
But Bitcoin is not decentralized from governments. It also has independence from the good or bad decisions that a management team could potentially make if they were the creative officers managing it.
Let’s see it in perspective
The second cryptocurrency right now in the ranking is Ethereum. Its creator Vitalik Buterin is well known, but now let’s imagine that suddenly a news item says that this man has killed his entire family.
Without a doubt, the price of Ethereum will suffer. It will go downhill and you could even lose faith in this cryptocurrency. Something that can not happen with Bitcoin because there is no one behind it to represent it.
The mysterious Satoshi undoubtedly had it all figured out, and to this day, it has not yet been found that he left any rope untied.
It is totally reliable
For me, this is the main reason why Bitcoin cannot be a pyramid scheme. Because no one at a higher point benefits from those, who have this cryptocurrency. But pyramid scams are indeed created using Bitcoin or other cryptocurrencies as a payment system. But is that Bitcoin’s fault? Not much less. Pyramid schemes existed long before the invention of crypto.
As we said, being a new asset, some crooks take advantage of the ignorance of some of us. This is why we see platforms that act like “banks” promising stratospheric interests in which you have to invite others. They use Bitcoin or other cryptos, yes, but they could also make their victims send carrots, thus promising even more carrots.
I suppose there is more risk of this type of scams promising stratospheric returns in cryptocurrencies because scammers could escape the justification more quickly without leaving a trace than if they had euros in a bank.