The Case for Bitcoin in Your Portfolio

Why it makes sense from ma and pa investors up to big funds

It’s a question I’m asked quite often via forums, webinars or events, usually by people who have been observing bitcoin from the sidelines and keep wondering about it — “Why would I have bitcoin in my portfolio?”

Recently, that rate of inquiry has started to increase, especially as Bitcoin is now finding itself more and more in the limelight through both specialist and mainstream media.

Much of that coverage has been in financial (rather than just technical) circles, and has been focusing on institutional activity that has suddenly started to ramp up noticeably.

Although some institutional interest has always been present, it has never been significant due to the reasons of uncertainty of longevity, volatility and lack of regularity clarity. But everything, it seems, is now happening at once.

Grayscale’s bitcoin fund, established way back in 2013, has been expanding aggressively, hoovering up huge amounts of the digital currency for warehousing.

MicroStrategy Incorporated (Nasdaq — MSTR) recently and suddenly announced the purchase of 21,454 bitcoin for reasons of “maximizing long-term value for our shareholders,” according to CEO Michael Saylor. It’s the first significant announcement of this type, but it’s unlikely to be the last.

Bakkt’s offering to the market, although not as significant in terms of physical bitcoin, has been helping normalize bitcoin trading for institutional investors since September 2019.

At the same time, whilst the usual crew of Bitcoin naysayers remain broadly static in number, including powerful names such as Warren Buffet, Peter Schiff and Nouriel Roubini, the list of advocates is growing rapidly.

Raoul Pal, CEO of Real Vision and former Goldman Sachs hedge fund manager, has recently started vocally promoting the orange coin, along with Robert Kiyosaki, famed author of “Rich Dad, Poor Dad” and Paul Tudor Jones, billionaire hedge fund manager.

These names join pro-Bitcoin power players such as The Winklevoss Twins, Michael Novogratz, Barry Silbert, Dan Morehead and a myriad other influencers in building awareness of the space.

At the same time, countries such as India have lifted cryptocurrency trading bans, U.S. banks have been given the go ahead to warehouse Bitcoin for clients and Visa, Mastercard and PayPal have all indicated their intention to work with cryptocurrencies in the near future.

And most of this happened in the last few months. Things are changing fast.

If you’re still on the sidelines, you might think it’s too late to add bitcoin to your portfolio, but you’d be wrong.

Now is the perfect time to buy and hold bitcoin. Here’s why.

Trading vs Holding

I should be clear that I’m talking about buying and holding rather than day trading, swing trading or, in fact, any other form of active trading.

It can be done on a small level through a private wallet, through a fund (where available) or even by mining and holding the proceeds.

Of course, there are all sort of fancy derivative products as well, such as contracts for difference (CFDs), futures, options and so on, which also solve the issue of storage, but you’re not usually owning the asset itself.

And, as we’re about to see, that’s an important factor to consider.

Reason 1 — Scarcity

Enthusiasts, like myself, always go on about Bitcoin’s fixed supply of 21,000,000 coins, which are released in a completely controlled way according to a pre-programmed disinflationary supply curve over time.

It might seem predictable and boring, but if it does, you’re missing a key point.

There is nothing else on the planet, as far as we know, that has a supply model like Bitcoin’s. It’s true that gold’s is pretty close, but even there we’re dealing with guesstimates and not absolutes —we really don’t know how much there actually is still in the ground.

With Bitcoin, we know it all, at every point, over the next 120 years, as those coins are released by the process of mining.

As I always say, if you think getting hold of a Bitcoin now is hard, wait until your kids have a go. Even assuming the rate of demand stays the same from this point forward, we know with mathematical certainty that supply becomes extremely restricted in the next decade alone.

Think of it this way:

The dollar note you hold in your hand has trillions of brothers and sisters in a family that is expanding at a rate never before seen in the history of the world. By the second, it is becoming less scarce, and, according to the laws of supply and demand, it is becoming less valuable.

We’re likely to see those effects play out in the form of inflation over the next few years.

Holding one bitcoin means you hold one bitcoin out of the 21,000,000 that will ever exist for all time for the entire planet; a supply of coins that is not even big enough for every millionaire on the planet to individually own one.

Bitcoin is incredibly scarce, and while it may not feel like it right now, there will come a time when holding an entire coin will be very hard to do. Most of us, in fact, will probably only ever deal in Satoshis, that is, fractions of a Bitcoin.

Better to hold then now rather than later.

Reason 2 — Timing

Traders, particularly wise ones, always refer back to the old adage:

Time in the market is always better than timing in the market

No matter when you discovered bitcoin, it always seems the best time to buy it was five years ago. That may be true, but the second best time is now.

This all about psychology. This is the idea that because you didn’t buy it when it was a few cents and get those unprecedented returns that the OGs got, it’s all too late to get involved now, even if you see where the growth is heading. However, there’s something worth considering here.

Just how likely was it that you would have parted with some money on this thing in the early days? Apart from the fact this was damned hard to physically buy, it took the conviction of a true fanatic to put money into something so small, speculative, unregulated and downright dangerous.

The odds were very high that you’d walk away with nothing, and that would have applied for any of the first few years, especially after the Mt. Gox debacle in 2014.

Right now, with growing adoption in terms of individual users, institutional interest and technological developments along with relative ease and safety of buying and storing Bitcoin, the combination creates an environment that is better than ever to take your first steps with the digital currency.

It is, in my view, the Golden Age of Bitcoin Accumulation.

Of course, you’ll pay a higher price now than would have five years ago, but that comes with assurance that, although still far from guaranteed, Bitcoin’s chances of success are much higher now than they ever have been, and increase as each day passes.

And that in itself has value worth paying a premium for.

Reason 3 — Optionality

Optionality — in this context — is the idea that an investment has a high potential upside compared to a low potential downside.

Some people, for example, argue that a lottery ticket has high optionality because your $1 could become $1,000,000 and, if not, your cost is negligible at only $1. However, since the odds of winning are also negligible, this is more a technically correct, rather fair, use of the word.

Let’s say that as an individual investor, you were to convert $500 worth of fiat currency into bitcoin, effectively swapping one currency for another. This is not an insignificant amount of money for many people, but it might be manageable.

Depending on whose predictions you believe, that $500 could become $1,500 based on historical trends, $12,000 (for PlanB’s Stock to flow model) or even $45,000, according to Raoul Pal’s more optimistic forecasts, over the next few years. That’s a significant return on a relatively small amount of money.

On the other hand, Warren Buffet’s anti-Bitcoin crew could be right in their “zero” prediction, in which case your $500 would be lost forever. The point is your loss is fixed at that $500, your upside is technically unlimited. That’s a lot of optionality.

For a fund, an allocation of 1% is justifiable in my view. So, on a $10 million fund, you might allocate $100,000 to bitcoin. If it fails in the next 3 to 5 years, most funds are capable of absorbing that sort of loss. But if Bitcoin succeeds, that 1% allocation could be worth more than the fund was originally.

Reason 4 —A Defensive position

It’s easy to focus on ROI, but there is more to this equation. The financial world is irreversibly changing, and in a way that makes it more important than ever for every individual to take action to protect their own position.

Bitcoin can, and should in my view, be used as a hedge against not only the coming fiat devaluation, but against the entire system.

It’s a moot point whether governments around the world had any real choice but to print money at the rate they have when dealing with the recent pandemic.

It has happened, it’s still happening and the effects will last decades. Keeping wealth in fiat form is clearly not a sensible move going forward. But where do you go?

Equities are likely to be unpredictable until economic impacts are really understood, bonds offer low returns and, arguably, have slightly higher risk than before, and other instruments are subject to the fluctuations of an uncertain market.

Gold is the classic “go-to” safe haven in times like these, but that’s not so easy for the man on street and, in any case, gold is still entrenched in the existing financial system.

Bitcoin, however, can be immediately accessed by anyone, anywhere at anytime with only a smart device. It sits entirely outside of the system, and easy gateways allow for switching between the two in real time.

The average man in the street finally has a real alternative, and for the first time in human history. It would seem illogical not to take advantage of that position, especially in times like this.

The Bottom Line

For many, bitcoin carries more risk than most other assets or stores of value since it is still young and proving itself. This is fair, but there are those, including myself, who consider it the right asset at the right time — a digital way of storing and protecting wealth in a digital age with an uncertain financial backdrop.

Each individual, of course, must balance that risk with the potential outcomes. Whereas before this was just about ROI for many, the narrative has changed as quickly as the financial crisis has unfolded. Now, Bitcoin’s role is also changing.

Corporations are taking reserve positions in Bitcoin, large banking institutions actively seeking ways to work with it, and a general softening of regulations was unheard of, even as recently as six months ago.

And I suspect this is just the beginning.

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Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics. This article was first published on voice.com

Disclaimer: Investing in any asset class is risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.