I’m a financial advisor, and my clients own bitcoin. A few of them remind me frequently about bitcoin’s price volatility, which they consider to be a problem.
I used to think that, too, but I was wrong. Bitcoin’s price volatility isn’t a bug – it’s a feature, and one that’s ultimately beneficial.
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Bitcoin is ‘digital gold’
To understand why, consider first that bitcoin is an Internet-native hard money asset – i.e., it’s “digital gold.” Real gold scores pretty well on the major characteristics of money. But bitcoin scores even better.
So bitcoin is real competition for the value of the gold market, which is roughly $10 trillion today. This means that bitcoin (current total value of roughly $1 trillion) has up to 10 times the potential upside based on taking market share from gold.
Bitcoin is an early-stage investment
But building gold-like trust among investors takes time. Even if bitcoin is a better hard money overall (which my analysis indicates), it may take decades for other investors to reach the same conclusion and position their portfolios accordingly. Although bitcoin is more than 12 years old, it’s still early days in this competition for hard-money market share.
So treating a bitcoin investment like venture capital or growth equity makes logical sense because it’s much younger than gold and needs to prove itself to be a worthy competitor over time.
Consider the following thought experiment. What if bitcoin didn’t trade every second of every day? What if, instead, you could only exit your bitcoin investment five years after you invested, and in the meantime you marked the value of the investment at cost?
This is somewhat akin to a venture capital or private growth equity investment. You are locked up for years and, although the investment’s value gets marked periodically, those marks aren’t especially meaningful unless and until you see a real exit.
In bitcoin’s 12-year price history, anyone who has treated an investment in bitcoin this way has seen the value of that investment rise by a lot. The average gain over any five-year period in bitcoin’s history has been significant.
Fine, you admit, it’s been a great investment over multi-year periods, but there can be shorter periods in which the price is down a lot. So maybe an investment in bitcoin is worth suffering the price volatility, but that doesn’t make the volatility beneficial, does it?
Actually, it does. That’s because the price volatility makes bitcoin “not money.”
Bitcoin is ‘not money’
How many times have you heard a central banker or high-profile economist say that bitcoin is “too volatile to be money”?
They’re right, of course, but they probably won’t be forever. That’s because bitcoin’s average price volatility has reduced over time. The bigger it gets (in terms of value), the harder it is to move the price. As this monetary “ship” grows bigger, the ocean can’t toss it around as violently.
So, for now, governments, regulators and bankers can allow bitcoin and the ecosystem being built around it to grow and take market share from gold largely unfettered. For them, bitcoin’s current volatility means it’s not a threat. The recent launch of an exchange-traded fund (ETF) based on bitcoin futures is just the latest evidence of this dynamic.
And by the time bitcoin’s price volatility is low enough for it to be used as a transactional money, so many people will own it (including the rich and powerful) that it will be impossible for governments to attack it.
This makes bitcoin a “heads we win, tails they lose” proposition. Governments won’t treat it like money until the volatility is lower, and the volatility won’t be lower until bitcoin is so valuable and widely held that it can’t be attacked by governments. By that point, the price volatility may be low enough that people actually use it for transactions.
And if bitcoin never becomes transactional money and instead just takes half the value out of the gold market, that’s fine, too. In that scenario, my clients will only make five times their investment from here.
But if bitcoin reaches its potential and takes share from gold, offshore assets, other stores of value (like real estate and stocks) and, ultimately, dollars, euros and yen, then bitcoin’s price will rise much higher than where it is today.
This is a process that could take decades.
Until then, in my opinion, bitcoin is the best risk-adjusted investment opportunity available today. And I tell my fellow financial advisors to embrace its price volatility because it is likely to be accompanied by attractive investment returns.
Just don’t call it money – at least not yet.
All opinions expressed by Andy Edstrom are solely Andy’s opinions and are unrelated to his employment as an investment advisor at WESCAP Group.
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