After years of being a massive skeptic on Bitcoin and cryptocurrencies in general, I took the plunge last week.
And by plunge, I bought Bitcoin in $10 increments over the course of seven days.
Over that period, Bitcoin jumped from around $22,500 when I first purchased to a record high of $28,000 on Sunday (27-Dec). Including Square's ~2% fee for my purchases and 2% to sell, I ended up making 6.4% over the course of the week. Not terrible (if only it were on a base of more than $70).
My rationale for buying? Pretty much to learn. I wouldn't ever in any other situation jump into something sitting at all-time highs (I feel like I'm generally an optimist, but cynical enough to avoid FOMO). I conceptually understand the appeal of Bitcoin. I just don't think a lot of the arguments around its appeal matter in real life. So what better way to try to understand than put some (very limited) skin in the game.
Did my experience allay my doubts about Bitcoin?
In fact, it really brought to light that the arguments in favor of Bitcoin are fuzzier than ever. If you want to convince yourself, or your wife (because it's still mostly dudes buying Bitcoin), or the board of directors of a public to put some money into Bitcoin, you need to come up with a better argument than "it's just valuable."
Myles Udland recently pointed to the pro-Bitcoin argument that the lack of a central function or raison d'être is a feature, not a bug. But what good is a store of value if the reasons for storage are so scattered?
Second, if you ask around for a pro-Bitcoin arguments, it won't take long for you to hear about M3.
You know, money printer go brr...
The only problem is that there's basically no link between inflation and money supply. That hasn't been a relevant economic theory for a long time (and something that I'll write more about in the future). If you're going to hedge against inflation driven by printing dollars, is Bitcoin really the best tool?
The only reason the dollar has value and the Fed has sway across the globe is because people believe that to be true. Yes, people could lose confidence in central banks at any given time, throwing the whole system into disarray. We've heard that before, though. It's hard to throw around "This time it's different..."
Bitcoin has value because people believe it has value. The dollar has value because people believe it has value. Any projection beyond that is almost certain to be subject to biases and previously-held opinions that are unlikely to be swayed by facts and figures.
Sure, the printing presses have been humming along, but the Fed has a pretty powerful mechanism in its hands in raising rates. A couple of rate hikes - or even just a pullback in the Fed's asset purchase program - would probably do a lot to throw the Bitcoin narrative off course, at least somewhat. Just ask gold.
Finally, one of the most important concepts in finance and investing is survivorship bias. Crypto is still a baby. Are we ready to think somebody won't build a better crypto mousetrap? And I haven't even mentioned the regulatory overhang.
Trust the process
My investing strategy forever has been to buy low-fee passive ETFs. Basically, the exact opposite of buying something with high transaction costs, that is speculative purchases, and pays no dividend or coupon.*
And if I want to hedge against inflation, my best bet is... to own more stocks.**
Earlier this year, the Buttonwood column in the Economist wrote about the link between inflation and equity returns:
Start with the evidence that stocks beat inflation over the long haul. In the most recent Credit Suisse global investment returns yearbook, a long-running survey, Elroy Dimson, Paul Marsh and Mike Staunton show that global equities have returned an average 5.2% a year above inflation since 1900. You may quibble that the survey covers the sorts of stable places that have had a long run of stock prices in the first place, such as Britain and America. Even so, the finding fits with intuition. When you buy the equity market, you buy a cross-section of a country’s real assets.
Buttonwood also said that inflation could hit short- to medium-range equity returns, but to be honest, that doesn't matter to me - I don't plan on selling a single slice of my ETF pie for decades. Why muck up that formula with something as speculative as Bitcoin?
And not only that, but because some of the upside recently has been driven by the idea that companies will start putting Bitcoin into their balance sheets, wouldn't holding a broad basket of stocks give you some (but not outsized) exposure to Bitcoin? If companies do take the plunge and swap out dollars and euros and yen for Bitcoin, you'll see some nice upside from an appreciating Bitcoin in your stock portfolio. If companies don't do that, then Bitcoin loses one of its key narratives, and no harm to you.
Basically, despite the up-and-to-the-right Bitcoin chart, it's time more than ever to trust the process. There's probably some room for Bitcoin in the portfolios of some individuals, investment funds, and for institutional investors. I'm almost - though still not 100% - certain it isn't for me. And I'm even more certain it isn't for most other people.
*Sure, you can argue that the built-in cap of 21M Bitcoin is a de facto coupon payment, but that seems to be more theoritical than anything, especially if the ultimate goal is for Bitcoin to replace the dollar as something to transact in. There's a reason deflation is more of a threat to economic growth than inflation.
**Yes, I understand there are a lot more pro-Bitcoin arguments than using it as an inflation hedge, but I haven't ever heard somebody make those arguments without also qualifying it with a screed against the threat of inflation.