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By Aleks Svetski, posted on October 2, 2018

Bitcoin as a new Asset Class

Warren Buffet has called it “Rat Poison”.

Jordan Belfort called it a “Bubble”.

Jamie Dimon called it a “Fraud”.

 

 

And despite all of their claims, Bitcoin has been the best performing asset in the world, since its inception post GFC, during one of the greatest bull runs just about every other broadly accessible asset class has ever seen. Ever.

 

Investing in just about any equity, index, mutual fund or has resulted in incredible gains over the last 9yrs.

 

*The Nasdaq is up 780%

*Apple is up 1600%

*Amazon is up 5700%

*Netflix is up 13,000% !!!

NFLX Share price 2009 – October 2018

 

If you put $1000 into Netflix at the bottom of the market in 2009, you’d have about $130,000 right now. We’ve not seen anything like this. Not in our lifetimes, and not before us.

 

And again, despite this, Bitcoin has still out performed.

 

Why?

 

Because Bitcoin is much more than it seems, especially at first sight. It’s more than just internet funny money, and in fact; it’s more than just “money”.

 

Bitcoin represents a new way for our slightly-advanced-ape-of-a-species to come to agreement on something, on a global level, in a digital form. The agreement it just so happens to come to is a shared “state” of transactions.

 

This makes it a prime candidate for an unstoppable, global, censorship resistant digital store of value.

 

The internet made the most fundamental of human attributes, ie; complex communication, global & anti-fragile.

 

Bitcoin is a way to do that with the next most fundamental aspect of our societal fabric: Value transfer & exchange.

 

It may well be replaced with something better, but for the foreseeable future, it is the closest thing we have to a “digital gold”. More here:

 

So what does this have to do with Investing?

A few things:

 

  1. Capital Flow
  2. Correlation
  3. Portfolio efficiency and risk/reward.

 

Before we explore those, remember those numbers I gave you before about how much you’d have if you invested in Netflix?

Here’s the Bitcoin alternative:

 

*$1000 in 2009  ? $900 million today.

 

No, that’s not a typo.

 

 

 

And yes, that does account for the so called “bubble popping” this year and Bitcoin falling 60%.

 

So now that I really have your attention, let’s explore why it’s going up and why it makes for an incredible alternative investment opportunity.

 

 

1. Capital Flow

Bitcoin, as mentioned above, is much like Digital Gold. There is a finite amount, and because of its decentralised, censorship resistant nature, it cannot be manipulated, changed or controlled.

 

As a result, it makes for a great digital store of value, which becomes more trusted each year that it hangs around. The more it’s trusted, the more secure the network becomes, the more capital that flows into it, and the more it’s trusted again.

 

As this recursive cycle continues, more and more capital will flow into it, more infrastructure will be built around it, and because of its finite amount, it will continue to appreciate in value.

 

2. Correlation

Adding Bitcoin to a diversified portfolio (1%?—?5% of the value) has been proven to lower the risk profile of the entire portfolio because it’s an inherently uncorrelated asset.

 

These days, the Dow Jones sneezes, and Europe, Asia and Australia all get a cold. The correlation across the broadly accessible asset classes is high.

 

Bitcoin doesn’t care what any of these assets do. It’s running its own race.

 

 

3. Portfolio Efficiency

There is a concept in modern portfolio theory called the “efficient frontier”.

 

In simple terms, it’s a ratio derived from analyzing the correlation of different asset classes, their volatility and their historic returns in order to make a judgement on how best to structure a portfolio.

 

Similar to the above, adding a small allocation of the overall portfolio to Bitcoin makes a censorship-resistant positive impact on the risk / reward profile, and the efficient frontier.

 

 

So there you have it.

 

Jamie Dimon is great at Banking.

 

Jordan Belfort is great at Selling.

 

Warren Buffet is the king of Value Investing (I’m a huge, huge fan)

 

And Bitcoin? Well…It’s none of the above.

 

 

When you combine the fact that it’s a nascent, uncorrelated asset class, with a finite supply, that more global capital is flowing into every year — it actually makes for an intelligent, an investment opportunity for a modern portfolio, and for the modern HNW investor.

 

 

Aleks

CEO & Co Founder @ Amber Labs


To learn more about Bitcoin, Digital Currencies and other alternative asset classes, you can follow Aleks Svetski on:

 

LinkedIn: https://www.linkedin.com/in/alekssvetski/ @AleksSvetski

 

Medium: https://medium.com/@AleksandarSvetski @AleksandarSvetski

 

Twitter: https://twitter.com/AleksSvetski @AleksSvetski

 

*All figures are rounded averages