While explaining why we consider gold as a type of refuge for our wealth, I could not help naming Bitcoin under the confusion of some.
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 on top of that we add that he barely has 10 years to live , it is normal that people do not want to start investigating right off the bat.
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.
Let’s see why it is profitable to invest in Bitcoin in the long term .
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.
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?
Well, when another asset, for example, oil rises, there is very little chance that Bitcoin will follow the same trend. They are not tied down.
However. There is a general uncertainty that we can see translated into volatility. That is, sharp fluctuations in price.
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, and although it is more volatile, if we really believe in diversification as a basis for long-term investing, then in theory it would make sense for it to be incorporated.
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. Well, 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 accustomed, 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 then it will already be considered as 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 serve as 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 trying to define 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 that cannot be conserved in long periods of time . Therefore, a good shelter first of all has to be durable.
The most obvious example would be food.
A kiwi has an intrinsic value, which means that we value it for the value it has for itself, and we do not compare it to others.
That is, we value this kiwi for the amount 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, which is 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, in order 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 and 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 in exchange for offering more speed or improving the user experience.
And while these foundations have been secured, the good news is that now we can continue to work on improving the technology that will improve over time without sacrificing any of the above.
Personally, I don’t understand their technology too much, 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, but on the other hand with Bitcoin this 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 dramatically than Bitcoin.
But Bitcoin is not decentralized from governments. It also has an 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 comes out saying 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 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 there is no one at a higher point who benefits from those who have this cryptocurrency.
But it is true that pyramid scams are 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.
What I suppose is that there is more rise 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.
But as I say who creates these scams are the creators of certain platforms, not Bitcoin.
Just by reading the 9 pages of Satoshi’s White Paper, we see what exactly it is and why it cannot be a ponzi scheme.
In short, a pyramid scheme is a totally opaque box where we can never know what is happening on the other side. By contrast, Bitcoin itself makes us see that:
- There are no levels.
- We are all the same, both the miners (those people who “discover Bitcoin”) and the nodes (each computer that connects to the Bitcoin network).
- It does what it does without further ado.
- It is transparent (open software) and we can all see what is being done.
What is true is that there are some wallets that have millions in Bitcoin, and this could potentially cause the price to fluctuate. But again, if we go into the theory of efficient markets, this uncertainty is already reflected in the price of Bitcoin and also its volatility.
But not only is it reliable because of this, it is also because it cannot be hacked or banned .
Of course. Bitcoin is dependent on technology and we cannot currently imagine a world without innovation, phones and computers. But this is a doubt that if he assaulted me.
What would happen to a geomagnetic storm ? The solar storms are really interesting and I know it is an almost impossible long shot indeed, but it is not impossible .
A crudely this would cause us to stay no option to use the technology. Not only as payment methods but even not being able to use electricity.
Going back to the stone age seems unlikely, but not entirely impossible, in fact it has already passed a couple of hundred years ago. And although there are teams of engineers who take care that this does not happen, the possibility is there and Bitcoin at that time would not work.
Oh well. We can even use Bitcoin with smoke signals, and if this happened some other way to pay we would find. Although Bitcoin did not exist, if 3% of the world’s cash is real and the rest is digital, we still couldn’t pay with a card so …
Yes. I like to put myself in all possible scenarios.
Protects us from other currencies
And since we have made it clear that it is a safe haven for the monetary system, this implies that it is also a refuge for other currencies. Another scenario that is not as “imaginary” as solar storms, if not much more real and in my opinion imminent.
Most citizens consider fiat currencies (which we also call fiat or money by fiat) a good way to “save value” in the long run.
But we already commented that at some point the saver starts investing when he learns the realities of the monetary system that we used a few decades ago.
If we put a few dozen years in the perspective of history, within the passage of time it is virtually nothing . This is why many of us believe that after the departure of the gold standard, we end up with a much worse monetary system.
As we saw, currently only having money in the bank or in cash in any of the currencies of the countries of the world, is a very bad idea to take refuge and save the value of our heritage.
As time goes by, the value of each of these coins has been going down and down, until at some point it will end up being worth zero .
It is very clear when we see that purchasing power drops dramatically over time as central banks “create” money out of thin air, just like with the rice in our example from earlier.
I can take all my life savings, put them under the mattress and let our inflation friend work for 30 years, and a baby tooth that we put under the pillow during this same period of time would be more valuable. At least that way we can exchange it after 30 years.
Shortly before I was born in 1990, my parents bought a flat for just under € 20,000 near the center of town.
To this day, this amount does not even buy you a garage space.
We already knew all this, but it was necessary to highlight it to see why Bitcoin is also a refuge. Because it has a deflationary nature .
How, how? As Bitcoin’s adaptation spreads, demand drives up the price. Therefore, each Bitcoin offers the owner more purchasing power.
The fact that Bitcoin has a finite supply (the 21 million we discussed earlier) ensures that our purchasing power increases as long as demand is stable or expanding.
The purchasing power of euros and all fiat currencies is eroded by the continued creation of new dollars and euros by governments.
Well. From central banks, but we already know that banks and governments casually get along well.
So is it profitable to invest in Bitcoin? It can be said that it is, but only in the long term. Due to its high volatility it is a bad idea to use capital that is going to be needed imminently, but as some studies have shown, in the long term the profitability of the portfolios improves by incorporating between 3-5% of Bitcoin.