So why am I, a self proclaimed bitcoin skeptic, putting up a post on why bitcoin has a place in a modern portfolio? No I have not changed my mind on bitcoin. There is still significant evidence that it was created by those who do not have economic freedom in mind. That said researching and writing my last piece on the commonly held belief among financial commentators and advisers that the correct allocation to precious metals is 0% forced me to take a second look at bitcoin. An absolute claim like, you should not own ANY precious metals, rubbed me the wrong way, but because of my research into bitcoin I had no exposure to the crypto-currency. If there is anything I hate itâ€™s a hypocrite, so lets take a look at the proâ€™s and cons, risks and rewards of putting some money into bitcoin.
Among alternative financial commentators there are two very distinct groups, those who believe in and love bitcoin, and those who donâ€™t, and never the twain shall meet. I am part of the latter but humility and knowing that I donâ€™t know or understand everything has pushed me into taking this second look.
No matter how much evidence you put in front of a bitcoin believer their faith will not bend. To one I laid out how it was very likely that the NSA had been involved in the creation of bitcoin which makes it very suspect. He actually thought that the government had been involved in its creation but felt that they no longer had control of it. Similar to the development of the internet by the department of defense, the government didn't know the implications of their crypto-currency creation and once society got a hold of that technology they had no control over it. He felt that like the internet, bitcoin would eventually change the world and take over commerce.
I put the chances of a monetary takeover by bitcoin at slim to none, but as we have outlined, our monetary system is very sick and headed toward failure. Something will have to replace it, and while that could be any number of options, bitcoin does have a lot of aspects going for it that could see it used at least in some capacity if there is a monetary meltdown. The possibility of bitcoin being a fallback as a result of a crisis is evidenced by the statements made by the Greek finance minister Yanis Varoufakis who essentially said that Greece will resort to using bitcoin if they were forced out of the Euro.
There were clear upward reactions in bitcoin price during the most recent crisis in Greece as well as during the Russian Ruble crisis last year and the Cyprus bail-in before that. It would be foolish to ignore these recent trends and the reaction of people to gravitate to bitcoin during crisis.
The slight possibility of bitcoin being one of the fallback currencies in a crisis makes having some exposure to the crypto-currency logical. The bitcoin market is relatively small. The total value of bitcoin at current price stands at around $3 billion, and even once all the bitcoin have been mined, at current prices, they would be valued at a little over $5 billion. If bitcoin were ever adopted by even a small economy, let alone if it took over world commerce, the value of bitcoin would skyrocket, and this brings me to the risk side of the equation. Even a very small allocation to bitcoin of say .05-.5% of a portfolio would be sufficient to make you very well off if it were ever adopted on a large scale. So depending on the size of your portfolio the risk you would have to take to be protected by bitcoin would likely be measured in hundreds of dollars, not thousands.
Now for the risk of not getting some exposure to bitcoin. Letâ€™s say that you make all the right calls. You say that the monetary system is doomed and will fail, and it does. In preparation for this failure you stock up on gold and cash. In response to the crisis the government bans both cash and gold, and despite your best efforts the government manages to confiscate both. Your preparations do little to protect your family. Though the government sets up a new monetary system, bitcoin takes on a much larger role in the economy and increases in value significantly. It is certainly possible, as I have outlined, that the government could effectively ban the use of bitcoin as well, but how would you feel if you made all the right predictions on the economy crashing, but did not buy the one thing that offered the most protection. I would have difficult time dealing with making all the right calls except how to protect my wealth and family.
I will not pretend that I have now become a bitcoin convert but I do believe a small exposure makes sense. Bitcoin has gone through its first bubble phase and has dropped significantly, but it has stabilized nicely. These prices seem reasonable for an entry point to start to get some exposure.