Everyone wants to find the next Amazon or the Apple. The kind of investment that can change
your life and contain an almost unbelievable amount of upside. That is, if the holder can HODL.
Let’s talk about Bitcoin as an asymmetric bet.
The State of Bitcoin Today
Bitcoin holders witnessed a euphoric 2020, followed up by a white-hot start to 2021, then crashing 50% at the middle of the year, then achieving and surpassing its all-time high again in the fall, only to start to downtrend very soon afterwards. In 2022, the price action has been quite bleak, as Bitcoin is down more than 50% year-to-date.
The funny thing is you wouldn’t know it was a bear market if you didn’t know about the price action as the Bitcoin community remains staunchly confident and views this massive correction as a gift from the investing gods.
Many bitcoiners, though their egos may be a tad bruised, are doing just fine. If you didn’t overextend yourself in the bull market by taking on leverage or sinking every single penny of your net worth into bitcoin, this has been one of the best times in bitcoin’s history to acquire more coin.
But let’s forget about the price for a moment. The network and the ecosystem around it continue to develop.
- Another country has decided to declare bitcoin legal tender.
- Jack Mallers teamed up with NCR POS and Shopify to enable bitcoin payments
- Bitcoin’s hashrate, AKA the amount of energy dedicated to maintaining Bitcoin’s security, is just off all-time highs.
In short, there is plenty to be optimistic about.
Bitcoiners have a common saying that bear markets are the best time to BUIDL. That’s right. HODL your stack and BUIDL in bear markets. Spelling may not be their strong suit, but you get the point.
OK, Back to Price and Some Hopium
First of all: what do I mean by asymmetric bet?
In the world of finance and investing, the best opportunity you can find is one that has an asymmetric relationship between its upside and its downside. Another way to frame it: the investment’s downside is limited, while its upside is nearly unlimited. The price can go down, but it can also go way, way up.
These bets are the sort of investment that can accomplish a myriad of investment goals. Depending on where you are in your financial journey, these goals could include:
- Buying your first (or second) home
- Sending your kids to college with no debt
- Retiring early
- Creating a dynasty
I’m not here to say Bitcoin is going up or down tomorrow, next week, or even next year. Bitcoin-related investments should be viewed as a long term. Ideally, you treat your bitcoin stack the same way you view your retirement account: something you don’t plan on touching for multiple years, maybe decades. Bitcoin-related investments may be asymmetric opportunities.
“Get Off You Ath Lets Do Some Math”
I’ll know this piece is directed to the right audience if you recognize that quote from School of Rock. Thanks, Jack Black.
But don’t worry, I’ll do all the number-crunching for you. Just follow along.
Let’s assume you have been thinking about buying Bitcoin for a while, maybe a year. You were hesitant to buy-in due to all the euphoria a year ago and you thought the market was frothy. Today, you may be wondering if the Bitcoin price has further to drop.
A popular strategy many people utilize to begin their bitcoin investment journey would be a relatively small allocation of their overall asset allocation. 5% is what we will start with today.
Let’s now assume you did the same, and your assets are worth $100,000 today. Your beginning bitcoin allocation would be approximately $5,000.
Today, August 24, 2022, $5,000 would get you 0.23 bitcoin, or 23 million sats. You can check out the current exchange rate here.
If bitcoin went to $0 – which, remarkably, many blue-check journos still think is a certainty – you would be out $5,000. Anything is possible, and since bitcoin is an “exotic” asset to many, we will assume the worst. All else remaining equal, your remaining portfolio would decrease to a value of $95,000.
There are multiple reputable investment firms with extremely interesting price targets for Bitcoin:
- JP Morgan: $100,000+
- Scott Minerd of Guggenheim: $400,000
- Ark Investment Management: $500,000
If the price of Bitcoin hit the JP Morgan target of $100,000 your 5% / $5,000 investment would be worth approximately $23,000 and make up more than 18% of your portfolio’s value.
Keep in mind: you only risked 5% of your portfolio.
These sorts of potential returns are what asymmetric investments bring to an individual. “Risking” a small amount of a portfolio for an outsized, drastic overall return.
It’s possible you’re saying, “But Trent, aren’t all investments technically asymmetrical?”
Technically speaking, yes. Any investment has a limited downside of $0 and a potential unlimited upside.
Let’s talk about what makes bitcoin different.
The Stage is Set for Bitcoin
There are dozens of features that make bitcoin unique. For its potential as an asymmetric bet, we’re going to focus on two of them.
- It’s a brand-new asset class.
- Bitcoin re-introduces hard money in a world of easy money. This will change our relationship with saving and investing.
What’s the last brand-new asset class to come into existence? One may argue tech stocks in the 1980s, or even more specifically electric vehicle manufacturers in the late 2000s. But these are sectors or even niches of investing, not an entire asset class – having an entire new asset class appear is extremely rare.
Additionally, bitcoin is the hardest money known to man, meaning that units of bitcoin are hard to produce. Producing a new unit – or solving a new block – requires capital investment and energy expenditures.
On top of that, there is a hard-capped supply to bitcoin of 21 million. There will never be more than 21 million bitcoin to ever exist.
This is a stark contrast to the ever-increasing amount of fiat in our world today. Our fiat culture incentivizes users to risk their money in investments to beat inflation, and at the same time punishes those that attempt to save their money over long periods of time by holding the currency itself.
Bitcoin flips our relationship with investing and saving on its head. And it’s wonderful.
There’s a high chance that if you’re reading this, you aren’t an investment professional. Yet to live a comfortable life in retirement, you either have to be a professional or hire one to make sure you don’t run out of money before you die.
If bitcoin were to become becomes the world’s reserve currency, regular people will not have to tie up most of their wealth in investments hoping to outpace inflation. Regular people would be able to hold on to the currency itself and not have to worry about purchasing power degradation. This realization could lead to a massive re-pricing of assets.
Bitcoin’s total addressable market could be considered any asset used for investment purposes. That market is more than $500 trillion by some conservative estimates. In that scenario, assets will be priced in sats, and asset prices will not have the benefit of monetary premiums, either. Bitcoin introduces an opportunity cost that traditional investments have not had to compete with in over 100 years.
These two unique reasons are just a few of the reasons why bitcoin-related investments may represent an asymmetric investment opportunity. The asymmetry doesn’t last forever, though.
I encourage readers to take a step back and look at the world we find ourselves in today:
- Money printers, although cooled down for now, have been working overtime for more than a decade.
- There is global unrest from rising prices and poor central planning.
- Property rights are being infringed upon to degrees many of us have never seen.
- A group of U.S. lawmakers are calling to conjure money up out of thin air to literally fix the earth’s climate, yet we have a staggering amount of homeless citizens.
Bitcoin fixes this. You should find out how.
Trent is a CERTIFIED FINANCIAL PLANNER™ at Watchdog Capital. He has a passion for traditional finance and Bitcoin, and is eager to see how the two worlds interact with each other.