Paul Vs The Market

Bitcoin, and cryptocurrencies in general, were all the rage in 2017. Bitcoin went from around $1k to a peak of around $20k during 2017 before the bottom fell out and it proceeded to lose around 80% of its value in 2018. Entering 2019 it was above its 2018 lows but still hanging out below $4k and the past few months have seen another resurgence as bitcoin is currently sitting around $11k.

There’s little doubt in my mind that bitcoin and all cryptocurrencies were in a speculative bubble in 2017. However, I also don’t believe that is reason alone to dismiss bitcoin. If you had bought any bitcoin outside of a very narrow band of about a month in 2017 you are likely pretty happy right now. If you had bought (and made sure to “HODL“) a few years before that then you are likely very happy.

I haven’t spoken much about bitcoin here because Paul vs the Market is more focused on stocks as opposed to alternative investments. At the same time, I realize many people are interested in bitcoin, especially when they see articles about how fast it is going up in value.

As the headline spoiled, I do own some bitcoin through a few different vehicles. Because it feels more speculative, I don’t really consider my bitcoin holdings to be an investment for retirement on the same level as the positions in the Freedom Portfolio, which is why I’ve never counted it. If I did count it a part of the Freedom Portfolio, then it would be roughly a Serenity level holding at today’s roughly $11k per bitcoin price. Don’t let that be too misleading, though. The majority of my bitcoin holdings were purchased years ago when bitcoin was valued in the hundreds of dollars and not thousands, so the size of my holdings more represents the crazy price appreciation bitcoin has had and not necessarily my conviction in bitcoin.

That is a point that is definitely worth reiterating: bitcoin is very speculative and risky. I would be absolutely shocked if Amazon (AMZN) lost 90% of its value a year from now. I would be fairly surprised if one of my riskier stocks like KushCo (KSHB) or Jumia (JMIA) lost 90% of their value in a year. However, I wouldn’t at all be surprised to see bitcoin lose 90% of its value a year from now. The only money that I have put into bitcoin is money that I would be comfortable losing.

There are a number of reasons why I own bitcoin. Part of the reason is a fascination with the technology. Part of it is political. I consider myself to be a libertarian who would love to see an alternative digital currency that wasn’t controlled and manipulated by a central bank or government. There’s also a bit of a lottery ticket appeal to bitcoin. There is a chance, albeit an incredibly remote one, that bitcoin appreciates to a crazy high valuation. I very rarely buy lottery tickets, so holding a small amount of bitcoin helps to scratch that “irresponsible gambling” itch.

But the biggest reason by far that I own bitcoin is the diversification it provides. Although I try not to be overly focused on domestic companies and to look to international markets for diversification, the simple fact of the matter is that an incredibly high percentage of my net worth is tied up in the United States and the US dollar. I work for a US based company and am paid my salary in US dollars. My house (which a significant chunk of my net worth is tied up in) is in the US. The majority of my investments are in US-based companies and my emergency fund and CDs and savings accounts are all in US dollars. If there were to be some monetary disaster or hyper-inflation tied to the US dollar, I would be dangerously undiversified.

Maybe that sounds like a crazy unlikely scenario, but I’m not so sure. I don’t want to get too political, but there are a number of worrisome potential catalysts. The national debt of the United States has ballooned recently during a time of relative peace and economic expansion. What happens when one of those ends? We have a dysfunctional government that keeps shutting down and playing chicken with the debt ceiling before kicking the can down the road once again. The United States benefits from the dollar being the dominant reserve currency, but what if that changes? The Federal Reserve has maintained a low interest rate environment for years now. Does that hamper their ability to deal with future recessions?

Maybe I’m being paranoid. I hope I am. But to me, putting a tiny percentage of my net worth into bitcoin as a hedge is something that helps me sleep just a little bit better at night.

I’m willing to bet that sleeping better at night isn’t something that is often associated with owning bitcoin.