The author explains two roles he believes Bitcoin may play in consumer portfolios.
By J.R. Robinson, Financial Planner
Before I begin, there are two important items I need to address. First, for those who are reading this in the Financial Planning Insights newsletter, you will notice that I have posted it as an op-ed commentary rather than placing it with my investments and portfolio management content. The reason for this is that the subject matter is still a concern to regulators and compliance departments. As such, while I will make known my opinions, nothing in this article should be construed as specific advice to purchase Bitcoin (or Ethereum). Second, I have been intentional in choosing the title of this article. You will notice that this discussion is not about cryptocurrency. My views pertain specifically to Bitcoin and, to a lesser extent, Ethereum.
I also know there is still a large segment of the population that is aware that the price of Bitcoin and Ethereum have soared in 2023 and 2024 but does not really know or understand what they are. If you are “Bitcoin Curious,” here are three resources that have shaped my thinking. The first two are from The Acquired Podcast. Even if you have zero interest in purchasing Bitcoin or Ethereum, the origin stories of each, as recounted by the Acquired hosts, are positively captivating. The third item is an enlightening and easy-to-read guide to the history of Bitcoin by the editorial staff at Cryptopedia.
Bitcoin: The Complete History and Strategy (Acquired Podcast)
Ethereum (Acquired Podcast)
How Many Bitcoins Are Left? BTC Supply and Mining Explained (Cryptopedia)
Bitcoin and the Investment/Financial Planning Industry
The first Bitcoin was mined on January 3, 2009. The first commercial transaction involving Bitcoin was a 10,000 Bitcoin purchase of two Papa John’s pizzas on May 22, 2010. Based upon a $25 valuation for the pizzas, this pegged the value of one Bitcoin at .0025 dollars (1/4 of 1 penny). As of this writing, the spot price of Bitcoin is around $95,000 per coin. Today’s market value of those original 10,000 is a staggering $950 million. As the Acquired hosts explain, it is fair to say that Bitcoin may be the best-performing investment of all time. Pick the best-performing stock you can think of, and its returns from start-up to trillion-dollar market cap company today will pale next to Bitcoin.
For its part, the investment industry – from the regulatory agencies all the way down to individual retail financial advisors – has persistently viewed Bitcoin and the broader cryptocurrency marketplace with extreme skepticism. Until this year, financial advisors were generally not permitted by their firms or their overseeing regulatory authorities to give advice to clients on purchasing or selling cryptocurrency, including Bitcoin. Despite the dramatic rise in the price of Bitcoin over the past two years, skepticism persists, but sentiment does appear to be shifting. Anecdotal support for this assertion is found in the following November 20, 2024, Barron’s article:
Bitcoin Just Hit a Record High. What Financial Advisors Think of Crypto Now.
For my part, as much as I enjoy pushing back against the conventional financial planning wisdom, with respect to Bitcoin, my views have largely been in line with my financial planning industry peers. In July, I shared a link to Allan Roth’s well-reasoned article in Advisor Perspectives entitled, “Does Crypto Belong in Your Portfolio?” In introducing this piece, I summarized the mantra I have shared with individual clients many times –
“I do not consider crypto to be an investment because there really are no fundamental underpinnings on which to gauge future return expectations…At the same time, I have never actively discouraged clients from purchasing crypto because it is such a wild card in the financial world, and I truly have no idea whether it will continue to be a wealth-building tool or a non-correlated store of value. The last thing I want to be is the person who kept someone from making a fortune by telling him/her/they to avoid crypto.”
With that as a longwinded introduction, in this article, I will share how my thinking has evolved over the past few months, specifically with respect to Bitcoin in the form of spot-Bitcoin ETFs. I now firmly believe that Bitcoin has achieved more than enough of a network effect to be accepted as a store of value. Whether it should be treated as a currency like the dollar or a commodity like gold is up for debate (it has characteristics of both), but it is becoming increasingly difficult to argue that it is not a legitimate asset. While ther are still unique variables and uncertainties involving Bitcoin, it could be appropriate for sophisticated investors or high net worth investors who are willing to tolerate high volatility.
In my opinion, Bitcoin’s most obvious potential role in traditional retail portfolios may be as an inflation hedge and/or a “disaster hedge.” Investors have traditionally filled this role with gold—either by stashing gold coins or bullion or by purchasing the iShares gold spot price ETF (Symbol GLD). As Allan Roth mentions in his piece, allocating as much as 5% of one’s portfolio to non-correlated (or negatively correlated) assets has some merit for hedging extreme stock and bond market volatility.
If people are using gold and Bitcoin in this role, a case can be made that you almost want the value of these positions to go down after your purchase because it may signal that the threat level of extreme inflation or extreme market shocks may be perceived to be lower.
However, many investors are wondering, “Does Bitcoin potentially merit consideration as a traditional investment in a portfolio (i.e., an investment that you hope will go up)?” In the Barron’s article, most of the financial advisors interviewed seemed receptive to the inclusion of Bitcoin, but a few expressed concern over buying it at the current spot price of around $95,000.
In my previously cited commentary, I stated that “there are no fundamental underpinnings to gauge future return expectations.” I fully retract that statement. As I will explain in this essay, I now believe there really are fundamental reasons why Bitcoin prices could continue to rise significantly higher over the next decade. I regard Bitcoin the same way I view companies like Apple or Nvidia. Both of these companies have a market cap of more than three trillion dollars, but investors are still willing to pay current all-time high market prices with the expectation that those valuations will rise significantly from here. I view Bitcoin in the same light.
My thinking has evolved based on three events: the Crypto Winter, the SEC’s approval of Bitcoin and Ethereum spot-price ETFs, and the outcome of the November elections.
The Crypto Winter
I imagine some readers may think, “Financial advisors always tell investors to stay away from investing when the price is low, but after it shoots way up they climb on the bandwagon.” I can see how they might think that, but I completely reject that perspective.
I submit that the fears and skepticism the regulators and the financial advice community had about the legitimacy of cryptocurrencies were entirely borne out by the “crypto winter.”
The crypto winter was an extreme down market period in cryptocurrency similar in magnitude to the bursting of the dot-com bubble. In the dot-com crash, the Nasdaq index declined 78% from its March 10, 2000 peak to its trough on October 4, 2002.
As depicted in the chart above, the Crypto Winter began on November 13, 2021, at which time Bitcoin reached its then-all-time high of $64,402. During that time, Bitcoin was just the “OG” in a crowded sea of “digital assets” that included Doge and Shiba Inu coins, celebrity tokens, and NFTs. Stablecoins were all the rage and were viewed as, well, stable. As you can see from the chart, Bitcoin plummeted 73% to a low of $16,884 on December 3, 2022, and its recovery did not begin in earnest until late 2023. It took 2 ½ years for Bitcoin to recover to its previous high. [Note: As a point of reference, it took 15 years for the Nasdaq Index to eclipse its March 10, 2000 peak of 5,048.62.]
The causes of the 2021-2023 Crypto Winter are chronicled in the following two articles:
Crypto Winter (TechTarget)
Crypto peaked a year ago — investors have lost more than $2 trillion since (CNBC)
Loosely summarized, the massive and, in many cases, permanent evaporation of investor capital in cryptocurrency was caused by exactly the factors that regulators and financial advisors had feared and had cautioned investors about all along. The following is a quote from the November 2021 CNBC article link –
“Speaking for the bitcoiners, we feel like we’re trapped in a dysfunctional relationship with crypto and we want out,” said Michael Saylor, executive chairman of MicroStrategy, a technology company that owns 130,000 bitcoins. “The industry needs to grow up and the regulators are coming into this space. The future of the industry is registered digital assets traded on regulated exchanges, where everyone has the investor protections they need.”
Mr. Saylor’s assessment could not have been more eloquent. The crypto winter needed to happen to separate the wheat from the chaff, bring regulatory oversight to the scene to root out fraud, provide investor protections, and distinguish Bitcoin from the other cryptocurrencies.
SEC Approval of Bitcoin and Ethereum ETFs
By mid-2023 cryptocurrency landscape was much less crowded, but while much of the fraudulent element had been removed, enthusiasm for Bitcoin was slow to rebound. A part of the reason for this is that cryptocurrency was not regulated as a security, which meant that the only way investors could purchase spot-Bitcoin was by creating digital wallets through an exchange such as Coinbase or Gemini in the U.S. As a practical matter, there is a large segment of the investing public that is wary both of crypto exchanges and of the idea of being forever locked out of their digital wallets if they forget or lose their passwords.
This all changed on January 10th, 2024, when the U.S. Securities and Exchange Commission (SEC) approved the launch of twelve Bitcoin spot-price exchange-traded funds (ETFs). By making Bitcoin accessible to the masses as a security, the SEC’s approval action signaled that it acknowledges that Bitcoin has achieved sufficient scale and demand to be made available to the public as a regulated security. Ordinary investors could now purchase Bitcoin ETFs in a brokerage account in exactly the same way they might purchase Gold ETFs for an S&P 500 ETF. Within two months, the price of Bitcoin shot from $40,000 to $68,000.
The SEC’s approval of the launch of eight Ethereum spot-price ETFs on July 23 and the approval of options trading on Blackrock’s iShares Bitcoin Trust on November 19th further signal that the market space has reformed and matured in the manner Mr. Saylor pleaded for in 2022.
Spot Bitcoin ETFs: What Are They, And How Do They Work? (Forbes)
12 Spot Bitcoin ETFs and Their Fees, Promotions, and Holdings (Nerd Wallet)
8 Spot Ethereum ETFs and Their Fees, Promotions, and Holdings (Nerd Wallet)
The U.S. Elections in November 2024 – The Case for Bitcoin as Risk Hedge
The price of Bitcoin spiked significantly in the days leading up to the election, rising from around $70,000 to its current plateau at around $95,000. There were two primary drivers for the spike: (1) purchases by people who expect an accommodating, Bitcoin-friendly regulatory environment, and (2) people purchasing out of fear of the effects of Trump policy changes. It is difficult to parse how much of each of these ironically opposing reasons for purchasing Bitcoin contributed to the price increase, but it is interesting to note that the spot price of Gold – an asset that has historically been considered an inflation hedge declined following the election. This led some pundits to consider whether Bitcoin might be crowding out Gold in that space. Below are four articles supporting that view:
Paul Tudor Jones On Why Gold and Bitcoin Are Smart Investments (October 2024)
Bitcoin or Gold? Why Not Own Both (Barron’s, October 2024)
Is Bitcoin a Better Inflation Hedge Than Gold? Institutions Think So, According to JP Morgan. (March 2023)
Blackrock CEO, Larry Fink Says Bitcoin is the New Gold (June 2023)
Similarly, there seems to be growing mainstream acceptance of Bitcoin as a tool to try to hedge against extreme economic and geopolitical risk as well:
BlackRock Report: Hedge With Bitcoin Against Fed’s $35T Debt Dilemma(Sep,2024)
Worsening U.S. Debt Outlook Seen More in Gold and Bitcoin Than in Bonds (Apr 2024)
Bitcoin: A Unique Risk-Off Asset?(April 2024)
My purpose in sharing these articles is not to sway readers to the idea that Bitcoin may be an effective inflation hedge or economic disaster hedge. I could easily find a bunch of articles taking the opposite position. Instead, my intent is simply to demonstrate that there is credible, mainstream recognition of Bitcoin in the public media discourse.
Since the elections, a significant segment of the population is concerned about the potential inflationary effects of tariffs, the impact tax cuts may have on the National Debt, the threat of a global war with China, Russia, and Iran, etc. When clients ask me for possible ways to protect their wealth if their fears over such issues are realized, I believe I would be remiss if I did not include Bitcoin in the discussion.
A Case for Bitcoin as An Investment for Wealth Accumulation
Anyone who is looking at Bitcoin as a wealth-building opportunity would do well to truly understand just how volatile this investment has been over its 15-year lifespan. It might be easy to conclude that the crypto winter of 2021-2023 cleared out the unsavory market elements and paved the way for Bitcoins bright future. While that may be true, potential investors should be aware that there were four equally scary crypto winters for Bitcoin before the most recent one.
Source: Perplexity AI
That level of volatility should cause potential investors to consider Bitcoin in the same vein as an investment in any stock. The possibility still exists from threats we may not yet have conceived to lose all the money you invest.
On the other hand, two factors that could lead to continued growth in the demand for Bitcoin are scarcity and scale through the network effect. The following table helps quantify Bitcoin’s scarcity.
Source: BiTBO
The total number of Bitcoins that can ever be mined was pre-set by the creation algorithm at 21 million. Meanwhile, the global supply of gold increases nominally each year from mining, and the United States can increase the money supply by literally printing money; the number of Bitcoins is immutably capped at $21,000. Further, it has been estimated that as much as 3.8 million Bitcoin have been permanently lost due to lost pass keys to Crypto Wallets. (Source: Bankrate.com) It is not clear whether this figure includes the estimated 600,000 – 1.1 million tokens that were first mined by Bitcoin’s pseudonymous creator Satoshi Nakamoto. The total maximum number of tokens may ultimately be only 17-18 million. That seems like an extraordinarily limited supply for an asset with global demand.
Satoshi Nakamoto’s Bitcoin Stash Could Be Worth $106 Billion (Forbes)
The network effect is an attribute that arises from the ability of an asset to achieve such widespread adoption that it eclipses the ability of other assets to compete. As of this writing, the market cap of Bitcoin is $1.90 trillion. Ethereum sits at $441.3 billion. (Source: Forbes Digital Assets) By comparsion, the current total value of U.S. currency in circulation is approximately $2.3 trillion (Source: YCharts ) The total estimated market global market cap of gold is estimated to be $17.8 trillion (Source: CompaniesMarketCap.com). The total market cap of the U.S. stock market is $54 trillion. Given that Bitcoin has only been available as a publicly traded security for less than a year does not seem unreasonable to believe demand growth could continue to fuel additional price appreciation.
Conclusion
This treatise is intended to provide a cogent explanation of why my perception of Bitcoin has evolved to the point where I not only believe that it is a legitimate asset but one which should not be ignored in portfolio construction in the form of a spot-price ETF. In my opinion, Bitcoin ETFs may be suitable for inclusion in the portfolios of clients who are seeking ways to hedge against inflation or extreme economic risk. I also believe it may be suitable for aggressively inclined investors as a growth investment, and it should be regarded with the same risk/volatility characteristics as large-cap growth stock.
In closing, I recently completed a fee-only planning review for a client in his early 50s. His retirement portfolio is comprised of roughly 60% total stock market index funds and 40% Bitcoin and Ethereum. He began investing in Bitcoin in mid-2021 and shifted his exposure from his Coinbase wallet to ETFs when they became available earlier this year.
When I asked him what the reasoning was for his apparent outsized weighting in Bitcoin, he pointed out that part of the allocation was attributable to the appreciation of Bitcoin over the past year but that he was also making an intentional bet on Bitcoin as a path to early retirement. He added that he was aware of Bitcoin’s volatility but that he was comfortable with the risk because he has job security and a high income, so he can work longer to recoup his losses if the Bitcoin bet fails.
He then asked me what I thought of his allocation strategy. I thought about it for a moment and replied, “I don’t know that you’re wrong.” I am unsure how I would have answered that question even a few months ago, but I am comfortable with my response today.
John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software maker Nest Egg Guru and the new personal finance website NestEggPF.com.
ADDENDUM
Excerpt:
Bitcoin derives its value in the same way any currency does: by fulfilling the six characteristics of money. Those characteristics are: durability, portability, divisibility, fungibility, scarcity, and acceptability.
Excerpt:
How Bitcoin Stacks Up
Analyzing Bitcoin through the lens of the six characteristics of sound money shows that it is quite possibly the best currency ever created:
- Durability – Bitcoin cannot be destroyed. So long as the blockchain is maintained on even a single computer, Bitcoin exists. Since its inception, the network’s uptime has been a remarkable 99.99%, and it has gone more than 3,200 days without an outage. For a point of comparison, the Federal Reserve’s money transfer system went offline for several hours in February 2021.2
- Portability – Bitcoin can be sent anywhere there’s an internet connection in seconds with probabilistic final settlement within an hour. A bitcoin user who has memorized their private key literally carries their bitcoin with them wherever they go.
- Divisibility – A single bitcoin consists of 100 million smaller units known as satoshis.
- Fungibility – Bitcoins are all the same. No coin is any more valuable than the next one. Unlike with gold or paper currency, counterfeiting is impossible.
- Scarcity – Bitcoin is the first provably scarce object. There will only ever be 21 million bitcoins. Anyone can check the protocol’s code to confirm this limit. A vast majority of nodes, the enforcers of Bitcoin’s rules, would have to act against their own economic self-interest for the limit to be altered.
- Acceptability – While estimates for the number of bitcoin holders vary, some peg adoption as high as 114 million people.3 This number grows each day as knowledge of the protocol spreads and bitcoin becomes easier to buy, spend, and store.
Bitcoin combines the hardness of gold with the portability and fungibility of fiat and comes built for the digital age. Its supply is strictly regulated by its code and enforced by those who use it. Bitcoin can be sent anywhere in the world in seconds without incurring the prohibitive costs so often charged in the traditional financial system.
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