The real risk is not owning Bitcoin.

With bitcoin breaking into new all times again, my well-known advocacy for the digital commodity means questions are beginning to flow in. I expect this to continue as the price continues to rise. To answer these people, here a few broad thoughts. ?

Bitcoin or Crypto?

We must begin by understanding what we mean by “bitcoin” and “crypto”. Once, a pretty senior finance guy told me bitcoin will fail because there’s 15,000 different types of bitcoin. Here, he was confusing and conflating what the industry calls ‘altcoins’ with bitcoin itself. A fatal error. Unlike the altcoins, bitcoin is a commodity. And this has very important implications. Bitcoin is a commodity because it is sufficiently decentralised (decentralisation is a spectrum, ‘full decentralisation’ isn’t really possible), and thus bitcoin is not controlled by a single party. And it is this which means it is a whole category error to conflate bitcoin with the altcoins, which are securities (controlled by a single entity, launched with pre-mines in initial coin offerings (ICOs) and so on). A security cannot be money. If the monetary system is corruptible, it will be corrupted (See: all of economic history). True, bitcoin is technically a ‘cryptocurrency’, but the term is much too easily conflated with the altcoins, which are simply casino games in cyberspace for reasons I do not have the space to get into here. In short, as is so often heard in the industry, “Bitcoin, not crypto.”

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The Thesis

And this brings us to the second point. What is bitcoin actually for? Even a light read of monetary and economic history will garner one the insight that for 3000 years humanity has been plagued by inflations and currency crashes that cause economic pathologies like recessions, stagnation and wealth inequality – sometimes in doses so great where it causes civilisation breakdown (Ancient Rome, for example). Bitcoin’s creator, Satoshi Nakamoto, designed a money that is absolutely scarce (that is, totally non-inflationary, a mesmerizing discovery/invention in itself) to end this boom-and-bust cycle that is caused by government overstep into the monetary system.

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We can use anything as money, as we have done in history: be it salt, shells, beads, wampum, cattle etc. But over time, like in any market, the commodity which performs the demanded service/function best is the one that is chosen by the market. The rest are discarded. For example, we no longer burn whale blubber to light our homes. In the realm of the monetary, the commodity that becomes money is the commodity which best fulfils the 5 characteristics of money: scarcity, divisibility, durability, homogeneity and recognisability. Bitcoin perfects these 5, and gold seriously underperforms in comparison. Fiat currencies perfect all but scarcity, which serves to be a fatal flaw. Every single attempt humanity has made to adopt a fiat currency standard has ended in hyperinflation, apart from the fiat currency experiment, began in 1914, that we are currently undertaking. My forthcoming book aims to explain why is it impossible for a fiat currency to not hyperinflate, however good our knowledge of history of economics is. In short, it creates a Gordian knot, and backs even the most intelligent individuals (Central Bankers) into a corner from which they cannot escape. So, yes, I do believe that one day bitcoin will be world’s store of value, unit of account and medium of exchange. But we are still a long way off from that. For now, then, bitcoin should be seen as an option contract priced on the likelihood of this eventuality coming into fruition. Determining the likelihood of this is your task, and the more likely you believe it to be, the more bitcoin you should own. I myself am very convinced.

By owning bitcoin today, you are planting your immutable flag on an absolutely scarce section of this new digital world. As Michael Saylor says, you are buying a block in Manhattan for a dime in 1600. Buy, hold, and watch a vibrant economy grow up around you. We turned music digital. Work digital. Medicine is becoming digital. The cinema digital. Calculators digital. We entertain ourselves increasingly in digital worlds. Money, too, will become digital. And in this new digital monetary technology, your money cannot be debased or confiscated, quite an important thing when governments get fiscally hard pressed, as they are increasingly are now.

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Gaining Exposure

The fantastic possibilities of bitcoin, paired with its still small market capitalisation in comparison, mean that, yes, bitcoin is extremely volatile. But extreme volatility doesn’t mean one should turn away. Instead, it means one should adjust their position sizing to ensure that eye-popping 70% drawdowns in bitcoin (which are common) do not impact your overall portfolio to an unacceptable degree. Moreover, it’s volatility is a sign of the amount of energy that the network is harnessing. Rivers are volatile, full of energy, potentially dangerous; but we have harnessed them to power cities. We will do similar with bitcoin. Over time, however, as bitcoins market cap rises into the 10s of trillions of dollars (it is currently about $2t), the volatility will subside.

For UK investors, buying and owning ‘straight’ bitcoin in traditional avenues (in your pension or ISA) isn’t possible. I am not an expert on the regulatory picture, but in the US and rest of world, unlike in the UK, the easiest way of gaining exposure would be through the host of ETFs, with the largest being run by BlackRock’s iSHARES BITCOIN TRUST ETF (IBIT). The UK currently has a ban on buying this ETF and one’s similar. Alternatively, to gain exposure to bitcoin through your traditional channels, one can buy shares in the US listed company MicroStrategy (MSTR). MicroStrategy is an enterprise software company that converted its entire treasury into bitcoin in 2020. It then went on to borrow billions of dollars to buy more bitcoin. It is now described by its CEO as basically a leveraged bitcoin play. Again, however, like bitcoin, MicroStrategy is extremely volatile. In fact, is it the most volatile stock in the entire SP500. One could also buy Bitcoin Miners, like Riot Platforms (RIOT) or Marathon digital holdings (MARA), but these – just like traditional commodity mining stocks – are much more risky. With that said, the best way to buy and own bitcoin is to do it yourself with a cold-storage wallet, although this exists completely outside traditional investment channels. To help you, there are many ‘how to’ guides online.

Insurance and Sovereign Debt/Currency crises

I will conclude by returning to the macroeconomic story that is the beating heart of the bitcoin phenomenon, and this is the reason why not owning bitcoin is the real risk. Nakamoto simply thought that he’d had enough with all the inflation, seigniorage, and booms and busts, so he created bitcoin (which I think will go down in history as an invention/discovery akin to fire, electricity and nuclear energy). Bitcoin, then, as the cure to all the inflation and booms and busts that we have seen in the world since 1914, is toxic to the current monetary system.

Some brief monetary economics is necessary here: The way money works, and has 'monetary value', is that people demand to hold a cash balance in that money. This cash balance demand upholds the money’s exchange value and function as a global medium of exchange. With bitcoin being clearly a better monetary commodity than the dollar and gold, and with a powerful cultural tailwind behind it, much of this ‘money-demand’ or ‘cash-balance demand’ will flow into bitcoin and out of legacy fiat currencies. Moreover, the precarious sovereign debt loads of today means an increasing outflow of monetary value from the dollar and traditional assets and into bitcoin will mean higher interest rates and lower security and asset values. The governments of the world cannot afford for this to occur. Central Banks will thus create money to fund this black hole and keep asset prices buoyant (see the book titled The Rise of Carry for a good exploration of why), only further blowing wind into the sails of bitcoin adoption.

You may think this macroeconomic picture is far-out, apocalyptic even, and fair enough. But as Optimus Prime said to some annoying government official in Transformers: “What if your wrong?” For the traditional investor, Bitcoin can best be viewed as an insurance policy against more inflation, more financial crises and more recessions. Moreover, due to Bitcoin’s toxicity toward the legacy monetary system that is failing, bitcoin can be viewed as an insurance policy against its own success. Even if you do not agree with my macroeconomic outlook, bitcoin can still become money because it is a better money, and the worldwide monetary system will subsequently undergo a significant change. The likelihood you give that this eventuality occurs should be a good gauge for the amount of bitcoin you should own (in other words, the size of the insurance policy you take out). Indeed that is exactly how insurance is priced. But here’s the kicker: the more people that buy bitcoin as an insurance policy against its own success, the stronger and larger the network becomes, and, following, the more likely it then is that bitcoin will one day be successful in becoming money. The more likely it is that bitcoin will be successful in becoming money, the more you need to own. In other words, incentive systems and feedback loops will drive bitcoin’s monetisation. I repeat: the real risk is not owning bitcoin.