There is this strange idea that with each new financial crisis, it becomes clearer that the naked emperor is, in fact, naked. In 2020, when world leaders unveiled, yet again, trillions of dollars of quantitative easing (QE)—just like after the 2008 global financial crisis—to avert the impending economic disaster, people were reminded once again how the centuries-old money-printing banking apparatus works. There is nothing new about monetization of debt—the first among central banks, the Bank of England, was founded by institutionalizing it—but it is not necessarily obvious, nor easy to understand, to a regular Joe.
Until it is.
The growing realization that the global financial system is somewhat illusory, in combination with lockdown boredom and stimulus checks, has propelled the price of Bitcoin to all-time highs and fueled the meme-stock crypto craze. And despite its large pullback this year, Bitcoin has attained a new place in the public consciousness: the perfect inflation protection, the denominator of all fiat currencies. If you get nervous about the realization that all money is made up or get suspicious that the U.S. can print as much debt as it likes because virtually all foreign trade is in U.S. dollars, meaning all importers and exporters have to hold it to trade, then you might like the idea of a digital currency with limited supply.
As the price of Bitcoin kept spiraling upwards over 2020 and the beginning of 2021, the world’s most celebrated investors from Paul Tudor Jones to Ray Dalio publicly broadcasted that they are invested in Bitcoin. It can mean two things: Either they have only now, after 10+ years, realized that Bitcoin is really, really great, or the system is broken enough that 60-plus-year-old billionaires feel the need to invest in a line of code with limited supply. Perhaps both are true. Bitcoin is like Pandora’s Box—it cannot be stopped once it is released. Every new Chinese crackdown is just a blip on Bitcoin’s timeline. The fact that it cannot be controlled and has an upper limit is what makes it a perfect hedge against monetary debasement.
Of course, there is a third less naive reason for the big hedge funders to endorse Bitcoin: Since it is a complete black box for trading, you can essentially buy and sell it through OTC desks at-will without saying anything to anyone. Singing praise of Bitcoin, only to sell it on the other side, is exactly what a hedge funder might do. Bill Ackman’s “hell is coming” speech on CNBC in March 2020, when markets feared the worst, earned him billions, first by betting against the market through the purchase of credit protection products, then, shortly after the markets tumbled, by buying stocks, some of which he previously said could be headed to zero.
Still the argument for Bitcoin is strong. From a purely technological perspective, Bitcoin is a “version 1,” and in technology, “version 1” rarely succeeds. But Bitcoin is unlikely to be replaced. It performs its function well. It is a common denominator of value detached from human control, a bancor-like instrument as envisioned by economist John Maynard Keynes. If you believe that like other empires of the past, the U.S. is inflating its currency—with a notable exception that it can push things much further because the global monetary system is stacked in favor of the U.S. dollar—and that if anything could give it a system reset, it is Bitcoin, then Bitcoin is also a great long-term investment. Or to put it more bluntly, in the words of Cameron Winklevoss, “If you own a Bitcoin today, you will become a millionaire in the future. For sure. Congratulations…”
Of course, this is nothing new, and by now, you may have read or heard this story hundreds of times, in which case I apologize. But it is striking how few investment products cater to this long-term investment thesis. Investing in Bitcoin has shifted from the domain of pure technologists in the early 2010s to the domain of the digitally native. Opening an account on a crypto exchange is easy, as is buying Bitcoin through a PayPal app, but it still requires some digital literacy as well as a willingness to manage your own money.
Coinbase has recently signed an agreement with a 401(k) provider that will allow workers to invest a small percentage of their 401(k) contributions in Bitcoin and several other cryptocurrencies. This makes sense. If Bitcoin is a long-term hedge, then there should be more savings and pension-like programs for passive investing in it. Most crypto savings products today cater to the digitally native demographic and involve less intuitive concepts like staking, wrapping, harvesting, etc., which require attention and can lead to a loss, both due to a user’s missteps and/or an error in the underlying technology. Add to this that the onboarding into the DeFi (decentralized finance) world is still too overwhelming for the average user; it involves creating a wallet, moving fiat funds to various on-ramps and having to suffer uncompetitively high processor fees. Even after this is done, wallet management by the user can be intimidating, as it is very distant from everything we know from the traditional financial world.
Research shows that people are bad at managing their money, and this is increasingly dangerous as the financial markets become more accessible to small investors across a multitude of options and products. If buying Bitcoin on a crypto exchange is easy, so is panic-selling it the next time it tumbles, leading to unnecessary short-term losses or painful tax hits at the end of the year.
A quick look at a Bitcoin graph tells us that over the last 10+ years, the best investment strategy was to passively buy Bitcoin. Bets are that with its limited supply and its bancor-like potential to fulfill the role of denominator of all fiat currencies, Bitcoin will remain an important long-term investment. Its strong cyclicality does mean, however, that dollar-cost averaging may be the best investment approach.
George Juraj Salapa is the cofounder of finstora, which provides a simple and safe Bitcoin savings plan.
