Is Investing in Bitcoin a Safe Haven Like Gold?

“The market seems overheated but it may just be getting started – proceed with cautious optimism,” is the sort of shite you’ll often hear pundits say. These sorts of wishy-washy statements tell you absolutely nothing useful, but since the pundits need to say something, they try to avoid speaking with conviction so you can’t call them on it later.

Then there are those who are overly confident in their convictions. “I’m more bullish now than I was before,” Chamath Palihapitiya told TechCrunch in an article yesterday which announced his fourth SPAC vehicle. He believes that investors have no choice but to be in equities because the risk-free rate is nearing zero. Given he’s one of the main men behind all this SPAC nonsense, he kind of has to be bullish, but he does raise a good point.

If you’re sitting on a whole bunch of cash right now, where’s a good place to put it? The Fed just said they won’t be raising interest rates for another three years at least. Many of us don’t share Mr. Palihapitiya’s optimism because of things like an upcoming U.S. election, or the global impact of “the Rona” which remains to be seen. What’s a safe haven to park cash in?

Some of you may be thinking gold, or the Swiss Franc, but the world’s leading thematic ETF provider thinks that bitcoin – ” the most compelling monetary asset to emerge since gold ” – is a good place to park cash.

Bitcoin is Not Like ICOs

We have emphatically stated over the years that the crypto-initial-coin-offering-token garbage that was being touted by nearly everyone wasn’t an asset class, nor was it an IPO replacement. Why? Because none of those tokens gave you equity exposure. Essentially, you were buying coupons to spend on a product or service that hadn’t been built yet. It was about as bad an idea as it sounds.

Credit: We’re not sure who the genius was but we owe them a round

The same morons who couldn’t use common sense to figure out they were being fleeced by the whole ICO debacle have now moved on to their next money-making scheme – day trading over at Robinhood. If you decided to burn your money instead, the joules put off by the fire would be of more value than what you’d end up with as a “day trader.”

Then there’s bitcoin, the original gangster of cryptocurrencies.

Bitcoin – The New Gold

This is where some people immediately get turned off because they don’t understand how bitcoin works. It’s okay, we don’t either, but we do know the basics.

Blockchain is an infallible ledger that tracks who owns something of value. In the case of bitcoin, we use blockchain to track which wallets are holding bitcoins and how much. A bitcoin is simply digital money which holds value using the same illusion that gives paper money its value.

That’s about the extent we’re going to discuss the technical details. What we’re here to talk about are the two recently released white papers by ARK Invest analyst Yassine Elmandjra which make the case for investing in bitcoin. We’ve pored through all 48 pages of his research so you don’t have to. Here’s what we found.

ARK Invest’s Bitcoin Thesis

In 2009, the Internet birthed Bitcoin, the full ramifications of which are not well understood. Institutions have all the power and that can be bad. The idea of trust-based institutions is falling short. It gets pretty philosophical from there, and some of the usual arguments you hear from gold bugs are presented.

Credit: ARK Invest

In short, the first white paper pontificates about how the current financial systems around the globe have problems that bitcoin can solve. If you’re the type of person who enjoys reading about economics, you might give the first white paper a read, but we’re more interested in the second white paper – Bitcoin as an Investment.

Often informed by incorrect assumptions, mainstream media has cast doubt on Bitcoin’s viability during the last 10 years while institutional investors have begun to research it as the birth of a new asset class.

Credit” ARK Invest

Investing in Bitcoin

If bitcoin followed the path of any other emerging technology, then it would be slowly crawling up Gartner’s “slope of enlightenment” right now as institutions start to realize they missed out on a whole lot of returns. The below two charts show how earlier adopters created some serious wealth if they HODL’d, and yearly returns have been consistent thus far.

Credit: ARK Invest

While past performance is never an indicator of future performance, ARK believes there’s a whole lot more room for growth as institutions start to see bitcoin as an asset class. Consequently, they propose a $140,000 price target by 2025 – a return of about +1,200% based on today’s prices. Some use cases that could drive bitcoin to those price levels or even higher include:

  • Bitcoin as a global settlement network
  • Bitcoin as protection against the seizure of assets
  • Bitcoin as digital gold
  • Bitcoin as a catalyst for currency demonetization in emerging markets

In other words, there are many use cases for bitcoin that could drive the value up. Ultimately, ARK believes bitcoin should be seen as an alternative asset class, which means you should allocate some of your assets to it.

Bitcoin as an Asset Class

When a financial advisor tells you to allocate your wealth across property, fixed income, and stocks, that’s called “strategic asset allocation.” Real estate, bonds, stocks, gold, and cash are all asset classes. You decide what percentage of your wealth is allocated to each of them. ARK is suggesting that bitcoin is another asset class that you allocate some money towards.

ARK then goes on to talk about how bitcoin is negatively correlated to other popular asset classes, the same appeal that many other alternative asset classes offer. Frankly, it’s a whole lot more fun to invest in wine or art than it is in bitcoin, but point taken. The idea is that when all hell is breaking loose in the markets, and your 401K is down -30% in one week, alternative assets such as wine, art, or bitcoin remain unfazed. In the case of Vinovest, you can even choose to drink the wine, and temporarily forget about all those paper losses you shouldn’t be worrying about in the first place.

ARK’s analyst then goes on to talk about how institutions are still kicking the tires with bitcoin. The sell-side wants to make bitcoin products, and the buy-side wants to invest in bitcoin, but is there enough trading volume to support the whole thing? He then uses the term “de minimis,” and we quickly add it to our own vocabulary of words that make us sound more knowledgeable than we actually are.

In order to gauge how much bitcoin we ought to allocate our wealth to, he then whips out some Modern Portfolio Theory, sprinkles it with a bit of Sharpe Ratio, and finishes the whole thing off some Efficient Frontier charts. The verdict? Depending on your tolerance for risk, allocate anywhere between 0.03% and 25.78% of your wealth to bitcoin. He then moves on to talk about what’s on our minds most these days – risk.

Bitcoin Risks

The first risk involves custody. How do you go about buying bitcoin, and how can you make sure your investment is secure? While this isn’t really a problem for retail investors, institutions are subject to different rules. Then there’s regulation, the exact same thing that makes bitcoin so appealing. Rules can change. Finally, institutions could step in and muck things up.

There’s also another piece ARK put out which addresses concerns raised by investors. For example, we never liked the fact that whenever the bitcoin community disagrees on something, they “fork” it, creating another instance of bitcoin.

  • Bitcoin is too volatile – You don’t understand bitcoin. Its volatility actually highlights its credibility. Besides, it will become less volatile over time.
  • Bitcoin is a bubble – It has a potential to play the role of global money so you could argue it’s only getting started.
  • Bitcoin will lose value to “forks” and copycats – The value can’t be replicated by software alone.
  • Bitcoin is for criminals – It’s also censorship-resistant.
  • Bitcoin wastes too much energy – No more than gold or the entire banking system.

What To Do?

ARK’s influence needs to be taken into account here. They have the ears of everyone on Wall Street right now as their marketing prowess and a certain amount of serendipity have resulted in their leadership position in thematic ETFs. If ARK tells institutions that bitcoin is where they need to be, it almost becomes a self-fulfilling prophecy.

For retail investors or small family offices without the resources to research this domain any further than what ARK has already provided, you need to decide if you want exposure to this asset class. If ultra-high net worth individuals allocate 4% of their assets to art, there’s no reason not to do the same with bitcoin. It just becomes another uncorrelated alternative asset class to consider, albeit one that’s liquid and transparent.

While our dividend growth stock portfolio gives us an income stream that grows every year to outpace inflation, alternative assets such as gold, wine, and art, don’t produce any income streams. These are all asset classes that you should allocate money to as a defensive maneuver with a five-year (at least) time horizon.

So, is bitcoin better than gold? Gold bugs will argue that holding physical gold is the safest way to protect wealth as opposed to buying a gold ETF like GLD. True, but you need to consider things like storage and liquidity. Since gold and bitcoin have a correlation of 0.24, they’re nothing like each other when it comes to returns. The similarity is that one of these asset classes is used by institutional investors right now as a flight to quality while the other isn’t – at least not yet.

Credit: ARK Invest

Conclusion

The full ramifications of bitcoin are not well understood, and Buffett tells us to not invest in things we don’t understand. The institutions that would be responsible for driving the bull cases for bitcoin are still kicking the tires. ARK believes that you can front-run their eventual capitulation to bitcoin.

If you’re thinking about allocating a small percentage of your assets to bitcoin, there’s a right and a wrong way to do that. In a coming piece, we’ll look at the best way to invest in bitcoin, no matter how much you decide to allocate.

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3 thoughts on “Is Investing in Bitcoin a Safe Haven Like Gold?

    1. Thank you for the comment Stan!

      ARK’s thesis is that Tesla will dominate the $7 trillion autonomous vehicle industry because they have all the data. It’s a very respectable thesis, but it’s far from being proven right. The Robinhood weekday warriors who drive the price of Tesla through the roof are the same folks who think a $300 stock is cheaper than a $1,200 stock. Tesla is an extremely volatile stock and its price movement right now is not a rational reflection of available information.

      Then there’s bitcoin. When you say they “might be right” about bitcoin, that assumes it hits the $140,000 price target. Will you sell then? What if it dips to $100,000? 80,000? Buy more or sell your position?

      Controlling emotions when investing is extremely difficult, and the problem with bitcoin is that its hard to hold and forget about for most people. Ark thinks it will become less volatile over time. Let’s hope they’re right about that.

      1. $140,000 price target seems ridiculous and normally I would not treat that seriously. But coming that from ARK makes it a bit more credible. We see US dollar is being heavily printed after 2008 financial crisis and now even more during C-19 pandemic. That will destroy dollar value long term. So dollar is not a good store of value long term. People desperately need something that holds value long term. Bitcoin may be the answer but it will take time. To become more accepted it needs to be less volatile. You don’t want to put larger amount of money in bitcoin knowing tomorrow it might lose half of the value.

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