(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
Ordinarily, the issuance and supply of the US Dollar has been relatively stable with a steady rate of growth and inflation that was averaging around 2% annually. Using emergency powers and taking temporary measures in response to the COVID-19 pandemic, the Federal Reserve System Board of Governors with Congress approved a flood of US Dollars into the traditional financial system. They simply marked up accounts on a central database of member banks and institutions, or in other words they created money from nothing. Fed governors went on parade over national television about their ability to do so infinitely.
The call to adventure was all of the bureaucrats and politicians on Capitol Hill who signed off on the stimulus packages relaying the same Keynesian economic canon and term calling it all “transitory.” Many Americans shared their concerns regarding rising inflation as consumers saw prices across the board go up double digits, while the cheerleaders and those who were responsible for the windfall of stimulus money reassuring them that it’s simply going to be “transitory.” It’d only be transitory if they stopped all of the “temporary” programs that are buying mortgage-backed securities including other securities on top of all of the US Treasuries and not just tapering them off over a series of years.
Refusing to take their prognostications, a bunch of clever individuals saw right through the phony rhetoric being used by both bureaucrats and politicians as pure nonsense. There could be no way that the total money supply could increase by 40% since the start of the pandemic without there being any sort of corresponding reaction. Investors who took their cash (or as I like to call them “infinity bucks”) and held on tight suffered from the largest increase in inflation since the 80’s and those that traded it for fixed assets like bitcoin with a total of 21,000,000 benefited from the largest expansion of our money supply in history.
Paul Tudor Jones, Michael Saylor, and Stanley Druckenmiller were good mentors. These individuals each in their own right have made incredibly large sums of money in their careers and ventures. Jones who advises the Fed took the reputation risk away from Bitcoin with his piece “The Great Monetary Inflation,” Saylor took the dive before anyone else putting bitcoin on his company’s balance sheet, and Druckenmiller a highly sophisticated investor with George Soros back in the day solidified bitcoin and crypto as an emerging asset class holding great potential.
Crossing the threshold, many companies and institutions have begun to follow the “smart money” by investing in bitcoin and crypto assets like Ethereum or Solana. Collectively, these corporations and humans were entering a new universe of digital assets with property rights unlike the traditional universe. Space and time almost seems to move differently since they are much more efficient than ordinary assets.
The newly initiated in bitcoin and crypto faced tests of their will to hold a digital asset that faces a more free market without circuit breakers or lenders of last resort. In the face of what seems like the early innings of mass adoption, both allies and enemies of bitcoin came out of the woodwork to criticize its energy consumption as well as volatility. China banned crypto mining and trading while Elon Musk was tweeting about DOGE and spreading fear, uncertainty, and doubt over bitcoin’s energy usage.
Approaching the abyss, bitcoin and the crypto market began to tank from their all time highs on the news that Elon announcing that Tesla had decided to stop transactions in bitcoin as well as selling some to “test its liquidity.” The fact that they were able to liquidate a nine figure position with moving the market until announcing afterward is truly an incredible feat. China historically had the most excess energy in the world and dedicated it towards bitcoin mining with the large output from their hydro power plants, but it’s a Communist nation and the decision was made from the top down to ban all crypto mining operations.
Over the summer, the bitcoin and crypto markets saw drawdowns of 50% or more in some cases. This is not the first time that has happened, nor will it be the last time because it is quite likely there will be a drawdown of this magnitude again. It is a free market and the price equates to truth in that it reflects what one person is willing to pay at that moment in time, and despite the multiple attempts from various parties to distort it as well as disrupt it (if not outright kill it) Bitcoin’s hashrate and price has since come back stronger!
After doing their own research, those aforementioned mentors took their hard earned dollars and feared what the bureaucrats as well as politicians were doing to their value and they risked a small yet meaningful allocation of it in bitcoin predominantly. Two hedge fund billionaires as well as another rocket scientist turned tech billionaire turned full-time bitcoin evangelist shared their strategy for any average citizen to copy in order to simplify it for them in hopes of trying to spare them from the ravages of inflation. Then in early Fall, the most amazing thing in bitcoin history happened when El Salvador adopted bitcoin as legal tender in tandem with the US Dollar.
As a third world country without much of the infrastructure that many developed and modern nations have today, Bitcoin has helped them find a way to bring them the benefits of a fixed asset that is non-sovereign with strong property rights as well as an efficient payment network without middlemen and rent-seekers. Bitcoin is their escape hatch out of a dollar debt-based relationship with the US Dollar that the IMF and World Bank have used to extract goods and resources from many underdeveloped countries by extending them unpayable loans denominated in dollars that get their value diluted, not to mention, ahead of an increasing interest rate environment (or so they say). Bitcoin additionally enables these people to access other crypto assets like ethereum and others that can also be used to own a piece of the network infrastructure and/or to participate in global collectives, commerce, elections, markets and more without fear of being censored or having funds in their custody being frozen by some authoritarian dictator or government.
In a world that sounds more bleak by the day, Bitcoin represents the resurrection of hope for a better future in many different regards and to many different peoples. Society is just waking up to the fact that it is both an asset and network like Facebook only it is larger and more private. BTC is the gateway to the cryptoverse, and crypto assets as well as non-fungible tokens are the keys to the emerging metaverse.
Keeping calm and routinely stacking sats (slang for “satoshis” the smallest unit of measurement of 1 BTC) by buying the dips with small purchases historically has been a foolproof strategy for starters. After getting comfortable sending small amounts and transacting with bitcoin, it will become easier once it is more familiar from knowing how it works and actually see funds moving across the network in real-time. As funds reach more significant amounts, it’s wise to look into cold storage solutions such as hardware wallets in order to take self-custody over them rather than trusting them with an exchange or third-party.
A small allocation into bitcoin and crypto assets has been a powerful way to amplify returns for traditional investment portfolios and they are useful tools to combat the value that is lost to inflation over time. Keeping one to five percent of an individual’s net worth in bitcoin and crypto seems to be the most conservative proportion, even being suggested by some of the world’s most successful money managers. Bitcoin and crypto assets add to a portfolio’s diversification without adding too much overall risk due to their asymmetrical and uncorrelated return profiles compared to traditional asset classes.
Bitcoin alone has been enough to keep up with inflation as well as the Federal Reserve’s total assets on its balance sheet, but ETH as well as a handful of other crypto assets outpacing it year-to-date are exhibiting how a diversified strategy is really optimal. Any average investor looking to move further out on the risk curve can do so by simply adding bitcoin and ether, but they can easily find themselves moving in the wrong direction by taking on positions in crypto assets with weaker fundamentals and technical factors. There is more than ten thousand crypto assets trading at any given moment around the world right now, and a large majority will probably fail to achieve their goals or gain mainstream adoption.
Do your own research. Be intellectually curious and open minded. Have a happy and healthy new year!