With the price of bitcoin shooting up, you may have started hearing a new round of hype about “digital gold,” as Wall Street calls it.
Are you skeptical? Do you buy into the hype?
Like it or not, bitcoin deserves a place in this new, post-COVID-19, post-stimulus investment landscape. Not because you can make a fortune buying and selling it, but because governments and central banks have given you no other option.
In this new investment paradigm, bitcoin is the perfect fit.
Yield, where are ye?
In the spring of 2020, the global financial system almost fell apart. In response, the world’s governments flooded the markets with money and cut interest rates.
Time will tell whether these massive, coordinated, unprecedented intervention saved the system or delayed its inevitable collapse. One consequence is clear:
Central banks and governments destroyed the value of safe, low-risk assets.
Where can your money earn any money anymore? Cash gives you zero interest (and sometimes costs you money). Savings accounts do barely any better.
Most bonds can’t cover inflation. Bonds that do cover inflation come with a high risk of default.
Corporations have slashed dividends. P/E ratios have skyrocketed. IPOs now fetch outlandish valuations they can’t possibly sustain over the long term.
Gold offers no yield, you never know if it’s real, and it’s expensive to buy and sell.
When you account for risk, every asset has a poor expected return on investment.
True, if the dollar continues to fall, you can make good risk-adjusted returns in emerging market debt and commodities. And investment properties always deliver great returns if you know how to manage real estate.
But few people have access to those investments or know how to use them. Also, I’m not sure you ever want to bet against the U.S. dollar over the long term.
All dressed up and nowhere to grow
On the flip side, U.S. investment firms have $26 trillion in assets under management and, based on U.S. Federal Reserve data, U.S. households have more than $19 trillion in cash, savings, and money market accounts.
A similar situation exists in other countries, too, albeit on a smaller scale.
On top of that, global funds, foreign investors, and offshore accounts hold upwards of $40 trillion. Nobody knows how much sits in corporate treasuries and business reserves.
That money wants to grow, but investors have no good place to put it.
So far, that money has mostly NOT gone into bitcoin. Of the $10 trillion in new money governments printed earlier this year, less than .2% ended up in bitcoin investment funds and personal wallets.
Guess what’s changed since then?
Except bitcoin’s price has gone up for a while.
And that has made all the difference
For months, bitcoin’s returns have far outpaced those of every other asset class.
No wonder institutional investors, rich people, and a few corporations have started putting some money into it. Nobody has the patience and discipline to continue losing money with cash, stocks, gold, and bonds while bitcoin’s price explodes.
At some point, once altcoins get large and liquid enough for big money to buy in any substantial amount, these same investors will add some exposure to some non-bitcoin cryptocurrencies. S&P Dow Jones is creating an indexing service for cryptocurrencies. Once complete, this will mean every traditional financial institution can create crypto investment funds.
It’s amazing how people’s perspectives change when prices go up.
While Google Searches for Cryptocurrency suggest normal people haven’t noticed yet, that will change soon, too. Rich people and insiders have made it seem safe, entrepreneurs have made it easy to access, governments have made it regulated and legitimate, and bitcoin’s price has made new highs.
We have all the ingredients for a massive boom.
Traditional assets have more risks and less upside than ever before, while cryptocurrency has fewer risks and more upside than ever before.
Where do you think people will put their money?
Wrong! Fraud, ponzi, rat poison squared!
Ok, good point. In the short-run, any asset’s price can go up, sometimes for much longer than you expect.
That doesn’t mean it’s a good investment or a good time to buy.
What about over 12 years? Is that long enough for an asset’s price to go up before you consider it a decent investment?
How many people need to build businesses on and around bitcoin before you take it seriously? How high does price need to go before you feel like you’re missing out on a big thing? At what point does your financial advisor decide it’s a fiduciary duty to put some of your money into the best-performing asset of the past decade?
No “real” investor thinks that way
True, but most people are not real investors.
Real investors always have an investment thesis, a fact-based reason to expect prices will go up in the future.
For example, my investment thesis for bitcoin is simple: price always goes up and it works when the financial system doesn’t. Factually correct, easy to prove, easy to understand.
If that seems too simple, you’re probably right. When you have compelling evidence, facts, data, and history on an asset and its technology, you don’t need to complicate things.
Does it really matter, anyway? If everybody makes the same decisions as real investors, you can expect the same result. Money is money.
They don’t need to have a thesis. They just need to act like they do.
(And they will.)
But COVID-19, Lockdowns, and Socialists!
People forget that the global economic recovery is fragile. In some countries—e.g., the U.S.—government support programs will expire soon, potentially sending the economy reeling. While a $900 billion stimulus package might help, at some point you need real economic growth.
We have a COVID-19 vaccine but probably 1/3 of people will refuse to take it. Even if they do, we have a long way to go before we get back to normal.
Unemployment remains higher than normal and businesses remain strained.
Meanwhile, lockdowns make like unbearable for too many. And, some worry socialists will destroy the world’s economies, and impose draconian, liberty-crushing regulations.
While that’s really bad, none of it seems to matter for crypto.
This spring, during global lockdowns and civil unrest, the entire crypto market doubled in size and big money gobbled up bitcoins by the ton.
Now, prices continue to rise despite COVID-19 cases and deaths going up and economic growth stalling.
Facts don’t lie
Meanwhile, we have seen bitcoin repeat the same patterns and correlations we’ve seen for 12 years, regardless of the global financial, economic, or political situation at any given time. I have covered this extensively in my newsletter, Crypto is Easy.
Researchers from Fidelity, Morgan Stanley, Yale, and smaller institutions have shown a small allocation to bitcoin yields better returns with less portfolio risk. Bitcoin still keeps making new highs, with the usual pullbacks along the way.
We can’t predict the future, but we can use this data to prepare for the most realistic outcomes. For bitcoin’s price, that outcome is clear:
See with your mind, not your eyes
In the long run, certain patterns and trends always play out the same way. Often, they’re so compelling, you can’t deny them—even though others will.
Today, we have the highest bitcoin price in years, continuous growth in altcoins (prices and technology), a positive macroeconomic environment, a traditional financial system increasingly unable to deliver the returns people expect, tons of money sitting in bank accounts and underperforming investment funds, and COVID-19 vaccines.
Fundamentally, bitcoin hasn’t changed in the past six months. Same risks, same technology, same opportunities. It sure feels different, though—doesn’t it?
It’s amazing how people’s perspectives change when prices goes up.
Maybe you don’t see bitcoin as a portfolio asset, but governments and central banks have essentially compelled you to do so.
Mark Helfman publishes the Crypto is Easy newsletter. He is also a top bitcoin writer on Medium and Hacker Noon. His books, Consensusland and Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency, explore the social, cultural, and business challenges of cryptocurrency. Learn more about him in his bio.
Originally published on Voice.com.