Personal prosperity is the core of financial planning and why we work with our clients. Our goal as an advisor encapsulates helping clients achieve sustainable income through job satisfaction or entrepreneurship, increasing savings to support financial goals and investing according to a client’s objectives and tolerance for risk.
In today’s world, the line between saving and investing has become increasingly blurred. Our job as the advisor is to encourage our clients to invest their money in stocks, bonds or real estate beyond a simple savings account. If our clients hold only inflationary currency, it will be impossible for them to reach the financial freedom they desire.
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Accordingly, it’s important for us as advisors to consider how clients should save and invest. Risk-adjusted returns, while not perfect, provide advisors with insights about asset classes, as well as their suitability for portfolios. We look at the Sharpe ratio and other risk-adjusted metrics to determine where an asset fits in a client’s allocation and how it can help them achieve their financial goals.
One asset to look at more closely, in my view, is bitcoin. While bitcoin has been incredibly volatile over the past decade, it is undeniable that it has the highest risk-adjusted returns.
Bitcoin, however, has no cash flow. Bitcoin has no underlying asset backing it, and it is not backed by any government. From an outsider or critic’s perspective, bitcoin was created out of thin air and therefore should have no value and not be considered for any client portfolio. Yet the market cap of bitcoin is over $800 billion and was over $1 trillion very recently. If bitcoin truly has no value, how can the market value it so substantially?
Let’s discover why bitcoin in particular has value, and subsequently why it should be included in your clients’ asset allocations.
First, bitcoin is money. As individuals, we value the ability and freedom to receive, hold and send money. There are characteristics of money that make sending, receiving and holding money possible, exceptional or cumbersome.
No form of money is going to score highly on every single characteristic. For example, while bitcoin is highly verifiable, it has a shorter history than most forms of money do.
Bitcoin’s high risk-adjusted returns over the past decade reflect its unique balance of the following characteristics:
Transferability
Bitcoin can be sent anywhere in the world within minutes (or instantly on the Lightning Network). You simply copy the recipient’s address or scan a QR code into the send field of your bitcoin wallet app and money can be sent, although admittedly, there is work to be done to make sending and receiving bitcoin easier for mainstream users.
Durability
Bitcoin’s durability is encouraging. Bitcoin’s private keys are just intangible pieces of information. Therefore, they can be stored without being destroyed through wear and tear in your wallet or in a fire. Furthermore, the decentralized network that backs bitcoin has global redundancy.
Portability
Bitcoin is the most portable of all currencies. If you had access to all the bitcoin in existence, you could theoretically put it all on one hardware wallet and take it to the moon (or simply move it to a new bitcoin address).
Fungibility
For the most part, one bitcoin equals one bitcoin. There have been instances of addresses being blacklisted by governments due to illegal activity, but that affects only regulated exchanges, not the peer-to-peer Bitcoin network itself.
Divisibility
Bitcoin is the most divisible form of money. The smallest unit on the Bitcoin network itself is a satoshi, which is 100 millionth of a bitcoin. On the Lightning Network, a satoshi can be further divided by 1,000, resulting in “millisatoshis.”
Verifiability
Bitcoin is easily verifiable. Bitcoin’s blockchain is a distributed ledger. Anyone can run and use a full node to verify that the bitcoin received is, in fact, real bitcoin. It’s desktop software like Microsoft Office, but free and open source.
Censorship-resistance
Bitcoin is designed to be permissionless at the network level. That means that no third-party meddler can get between you and your money. There are no capital controls and no gatekeepers preventing money transmission.
History
Bitcoin has existed for over a decade. During that time, it has increased in value as quickly as monetarily possible, with no sign of withering. The Lindy effect suggests that the longer a money or currency exists, the longer we can expect it to continue to exist.
Scarcity
Proponents of sound money describe bitcoin’s 21 million cap as its distinguishing feature. Because of bitcoin’s scarcity, its purchasing power is historically the most deflationary. Holding an asset that increases in value (deflationary) is better than holding an asset that decreases in value (inflationary) over time. As advisors, we are opposed to holding copious amounts of cash in savings accounts due to inflation causing a cash drag on the overall portfolio. Bitcoin is a savings technology.
In my view, we as advisors can finally abandon the idea that long-term saving is synonymous with investment. Bitcoin allows your clients to operate under the conditions our brains find most favorable: Make money working, spend some of that money, set aside the rest of the money under the mattress and never think about it again. Accordingly, bitcoin functions as your clients’ mattress money.
