Should I Own Bitcoin?
In the last few months I have been asked by many friends, “What do you think of Bitcoin?” The real question I think these people are asking is, “Should I own Bitcoin?” When I delve deeper, these friends are mostly concerned about all the mind-boggling US federal government spending that has occurred in 2020-2021. They are looking for a way, possibly Bitcoin, to preserve the value of some of their financial assets from inflationary forces that seem to be imminent in the future.
Frankly, I do not know what the answer to this question is. In my opinion, like most things in financial planning, there is no one correct answer to this question that applies to everyone. So, in this post, I will give you my opinion about how Bitcoin will be used. I will also discuss holding precious metals (gold/silver bullion) and how it relates to Bitcoin.
Bitcoin as a currency
First off, let me say that I do not think, in the foreseeable future, Bitcoin will become a currency the way the US dollar is used today. A whole book could be written on this subject, but right now, my opinion is I do not think this will happen. I see two main reasons why. First, Bitcoin is a decentralized asset that has no single entity or individual that controls it. It is essentially controlled by computer code. In my opinion the US government is not going to give up control over the currency used in circulation in the US economy. This control, for better or worse, allows the federal government to control almost everything else in our country.
The second reason is a more practical one. Right now, Bitcoin has an extremely volatile market value in US dollars terms. It has risen from about US$10,000 per coin last summer (2020) to nearly US$60,000 at this writing (April 2021). And since it hit first $60,000 last month, it has dropped to nearly US$50,000, almost a 20% drop in less than one month, before bouncing back. I believe it will be difficult to use something as a currency in daily business transactions that has a value that changes significantly over short periods of time.
Even though I do not think Bitcoin will serve as a currency, I do think we are headed toward many new digital currencies in the world over the next few years. However, these new digital currencies will be controlled by their respective country’s central bank. The new currencies will be just a digital form of each country’s current paper fiat currency. These digital currencies will all be different from Bitcoin in one crucial aspect. Unlike Bitcoin these new digital currencies will not have a fixed supply. The available supply of each country’s new digital currency can and will be increased at each respective government’s whim.
Even supposing Bitcoin may not serve as a currency, this does not mean that Bitcoin cannot be used in some business transactions. I think this likely will happen at some point, but the transacting parties will have to accept that day’s Bitcoin value, and, more importantly, accept that the value may be significantly different the next month or even the next day.
Bitcoin as an asset
My personal opinion is that Bitcoin will most likely be viewed and used by most people as an asset just like owning a stock, real estate, or gold. And, in my opinion, this is where Bitcoin has utility. When Bitcoin was created back in 2008-2009, it was created with a specific limit on the number of coins that will ever be in existence, 21 million. Therefore, since Bitcoin has a fixed supply, it can serve as a “store of value” in much the same way as gold bullion does. In fact, I think of Bitcoin as “digital gold.”
However, there is a big difference between Bitcoin and gold bullion. Bitcoin is a relatively new asset with only ten years of history. It was just created out of ether. Gold, on the other hand, is a physical hard asset and, more importantly, has proven to be a store of value for thousands of years. For this reason alone, I think, gold should be your first choice if you are looking for a “store of value” or an inflation hedge for your financial portfolio.
A quick note about gold’s role in your Portfolio
Many people have complained to me recently that their gold bullion holdings have gone down in value the last few months. These complaints tell me that these people are not viewing gold in the proper manner. They are viewing gold as an investment. Let me be clear, owning gold/silver bullion is not an investment, it is a portfolio hedge. Another way to view your gold holdings is as an insurance policy.
What are you insuring against? You are insuring against significant dollar value debasement via inflation or some kind of future financial crisis. Gold always increases in value when the country or the world is experiencing economic chaos. Throughout most of the history of the stock market, the value of gold in US dollars has an inverse relationship to the value of stocks. That is, when stocks go up in value, gold tends to go down. The opposite is also true. That is why gold is considered a hedge asset. So, in truth, we should all be hoping our gold holdings continue to go down in value as that likely means your stock/bond investments are going up in value.
How much gold or Bitcoin should I own?
Now to the salient point of this blog post. Should I own gold or Bitcoin? If so, how much?
In regards to holding gold/silver bullion as an insurance policy, the amount you should own depends on your view of the future of the US (or the global) economy. If you think all the federal Reserve’s recent money-printing actions to prop up just about every financial asset is not a problem, will not cause inflation, and everything will work out just fine, then, perhaps, you may think you do not need any gold bullion as portfolio insurance.
On the other hand, if you see things the way I do; that all this Federal Reserve money-printing of US dollars to support all the profligate government spending is destined to end badly, then you likely believe that owning some gold or silver bullion is a prudent move.
Regarding Bitcoin, I have read a lot of commentary about Bitcoin by Wall Street professionals over the last couple years. Their thoughts are all over the map. Many think Bitcoin is an asset that will change the financial world. But, despite the big headlines about so-and-so big executive is buying lots of Bitcoin, there are many knowledgeable people who believe Bitcoin is just another mania like the Tulip mania in the 1600s or the Dotcom mania in the 1990s with Bitcoin ultimately reaching its true intrinsic value of ZERO!
I subscribe to about half-a-dozen “subscriber-pay only” investor newsletters (i.e., no advertising) which often talk about gold and Bitcoin. After assimilating all the information about these two assets from those sources and elsewhere, I think the range of advice I get from my investor newsletters is probably the best. These analysts do believe that another financial crisis is definitely coming and it will be much bigger and more damaging to investors than the 2008-2009 financial crisis. They believe the only question is when it will come.
They all say holding gold/silver bullion is a must, as an insurance policy/hedge asset. The different newsletters vary somewhat in their recommended amount. They range from 5% to 20% of your financial portfolio. Since gold bullion is an insurance policy, they say your gold assets should be stored away and forgotten about. In other words, do not consider it part of your spendable portfolio. I think the editors mean your bullion should only be brought out if/when we actually experience a global financial Armageddon where US dollars are no longer accepted as currency and you need the gold bullion to survive. Otherwise, the bullion should go into your estate to be left to your heirs.
With one exception, the newsletters also recommend holding a little Bitcoin; the recommended range is 1% to 5% of your financial portfolio. The one editor who does not recommend owning Bitcoin thinks it is still just too risky. The other newsletter editors believe owning some Bitcoin is worth the risk. They think it is a very good “asymmetrical bet,” which means the upside potential of Bitcoin is much greater than the downside risk. Even so, these editors are all quick to point out that you should not invest a lot of money in Bitcoin. Unlike gold or silver bullion, they acknowledge that Bitcoin can still go back to ZERO!
So, what have I done? I pretty much took the middle ground of all my newsletter recommendations. I have about 10% of our financial assets in gold/silver bullion tucked away as our insurance policy. I will never sell these holdings regardless of their price. I have about another 4%-5% invested in gold/silver mining stocks. But I treat these mining stocks like any other high risk small-cap stocks. I have stop-losses in place for these stocks if they fall too much.
Despite its recent rise, I am still a Bitcoin skeptic, but my investor newsletters convinced me to buy a little bit last summer. So I decided I would risk the money to buy one Bitcoin. I view it as a pure speculation. I would not be surprised to see Bitcoin go to zero sometime in the future. Then why do I own Bitcoin? Frankly, I bought it “just in case” it becomes fully adopted in the global economy. If this happens, Bitcoin’s value will likely rise much higher. But, even if it does not, as one analyst opinion I read recently wrote, “Bitcoin will ultimately return to its intrinsic value, which is 0. But that does not mean Bitcoin’s value cannot go to US$300,000 first, before people wake up to it true intrinsic value.”
In my opinion the bottom line is, if you want to risk a little money on Bitcoin, go ahead. I would keep it to no more than 1% of my financial portfolio. But always remember the old adage, “Don’t invest anymore than you can afford to lose.”
Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.
Comments
No comments yet.
Sorry, the comment form is closed at this time.