The role of bitcoin in an asset allocation

This article is a summary of the conversation on this recent post. Credit to all the commentators - thank you.

Until BTC is actually used large scale for peer to peer internet payments (that is the name of SN’s 2008 paper after all) then it is 100% speculation. Bitcoin the term applies to money (eg. BTC, BSV) and Bitcoin the platform or blockchain for building apps. Until the Bitcoin the blockchain really scales to become the internet economy, without loss of decentralisation, then folks who hold it are just speculating. Yes level 2 like Lightning may be the answer as long as the trade off for internet scale is not loss of decentralisation. Or it may be BSV is needed to really scale, in which case you don’t want to hold BTC.

How much Bitcoin to hold?

As a newly retired person value is easy to define. In a word it is "income". I feel it is reckless to invest in speculative growth without interest or dividends. Reckless may prove to be highly successful of course. I have available 5% or so (today it is at 3%) in my asset allocation that can go to zero or to the moon. Today that is invested in UK start ups (VCT) but I could add a BTC position. Now I call that my speculative 5%. I can't plan my income in retirement based on that. I'll hold assets that I can value for the other 95%.

Global currency

BTC can only become a global currency for the internet economy if the politics are aligned for the fiat on/off ramps. Acceptance is political. For example, after the Arab conquest of Persia the conquerors had to use Persian money (re badged with the local Arab official) as no one would use Arab money. (note 1)

It was never a good idea to hold too much cash. I hold 11% which is high but it's been yielding me 5 to 6% which worked for me. I am reducing my cash as I lived through the 1970s inflation. Rather I want to hold assets that I can value like equity or property which have inflation protection or bonds that don't to reduce volatility. So one needs an asset allocation. The chart above is mine. BTC sits in alternatives.

Valuation

I still stumble on the first step which is - what is a sensible price to pay for BTC in fiat. The only way I can think of to answer that is to assume that the patterns of the past will project into the future. Now I call that reckless or speculative. And reckless doesn't mean bad - it just means super high risk.

One needs to speculate to accumulate. I don't mean to imply that speculation is at all bad. It's just that one has a responsibility not to be reckless. To buy a large holding in BTC at a high fiat price is one thing - to hold a position bought at low fiat price is another altogether. But just what is a high price and what is a low price? How do you value BTC without a discounted cash flow? Damned if I know. So therefore one speculates as one cannot value.

Bitcoin evolution as money

Bitcoin can be used by banks as collateral in reserves. This is the digital gold use case. Cash only has utility if you can use it in exchange for the things you actually need, with a digital experience e.g., I can now buy a fund inside 1 hours ( 11 AM to 12 PM midday) in terms of clearing - it still takes a week to settle. Not very digital. That's what I said. Clear and settle inside 10 minutes is where we need to go to revolutionise markets (buying and selling) in my view.

Also if BTC is not also a unit of account (used for pricing things we need to buy) then it is not money. Is gold money? Well it has been for many centuries but today it is collateral. BTC as digital gold/collateral alone is exactly what I said - pure speculation.

Continuation of this evolution is speculation. Now speculation is not a bad thing - just a very risky thing. And in the meantime with no cashflow (e.g, an interest rate or a forecast economic growth) we can't put a value on BTC. We don't know what it is worth. We can only speculate on what it would be worth if this evolution continues from digital gold to the internet of value.

Conclusions

1. One holds BTC as a speculative asset if unwilling to use it in exchange lest it rise in value.
2. It can only become money if used in exchange and pricing. That acceptance is political in nature
3. Technically the trade offs needed to solve the trilemma of decentralisation trade off "vs'" scalability/security indicates a dead end. I don't want to conclude that but it's now been 2024 to 2008 or 16 years - that's a long time. So it's a speculative hold meriting a small asset allocation. Unless you are very brave or very speculative.

Note 1: source "BBC Art of Persia" - Highly recommended! https://www.bbc.co.uk/iplayer/episode/m000kbnz/art-of-persia-series-1-episode-2