The Bitcoin Counterargument

Taylor Schulte: Welcome to the Stay Wealthy podcast. I'm your host, Taylor Schulte, and today I'm sharing my thoughts and takeaways from last week's Bitcoin episode. A special guest also drops in to share his point of view, including why Bitcoin should not be used as a store of value.

So if you enjoyed last week's interview and you're craving to hear a different perspective, today's episode is for you. For the links and resources mentioned, head over to youstaywealthy.com/108.

On December 6th, 1999, Amazon stock closed at a record high of $106 per share. Just seven weeks later, on January 24th, 2000, the stock tumbled to $61 and the trend continued on July 24th. Six months later, Amazon tumbled to $30 per share, and the bleeding didn't stop. On September 24th, 2001, Amazon stock closed at $5 and 90 cents.

So after reaching its all-time hive of $106, the stock was nearly cut in half, in less than two months time, and then in less than six months, it was down 70%. And in less than two years, Amazon had dropped 95% from its all-time high. And what most investors forget is that there was actually another 50% plus crash in 2005, 2006, and the stock, it wasn't in the green until 2009.

Today, as most of you know, Amazon is trading at just over $3,000 per share. A 50000% increase from its low in 1999, and Amazon's story is not unique. Microsoft fell nearly 75% following the.com bubble, and it took 17 years to get back to even Netflix in 2012, dropped 82%. And these are the lucky ones.

Since 1980, 40% of all companies in the US stock market have experienced a decline of 70% or worse without ever recovering all of this. To say that investing is hard, investing in individual securities is very risky. And even some of the greatest companies in the world have taken investors on a wild ride.

As Ben Carlson put it, if you would've put $10,000 into Amazon's IPO in 1997, you wouldn't hold it anymore because you would've panicked and sold when it fell 95% in the .com crash. And in case you're wondering if you did in fact put $10,000 into the Amazon IPO and you did still hold it, it would be worth over 15 million today.

Like many of you, when I read about people making life-changing amounts of money investing in Bitcoin or Dogecoin or NFTs or even these digital plots of land, I can't help but feel like I missed out. I could have paid off my mortgage, I could have funded my kid's education. Heck, I could finally take my wife to stay in one of those over the hut bungalows in Bora Bora without feeling any guilt or any financial pressure.

I also start to question my decision-making abilities, like, how did I miss this? Why didn't I just put $5,000 or, or $10,000 into Bitcoin when a friend first texted me about it? What's my wife going to think when she starts hearing about her friends retiring early because they bought Ethereum at a hundred dollars? You know, did I let my family down? Did I miss out on a once-in-a-lifetime opportunity?

And it sounds crazy. Maybe you can relate, maybe you can't, but those are real thoughts that go through my head. And thankfully they don't last long, and I snap out of it and I remind myself that Ben was right. If I put $10,000 into Bitcoin in 2012, there's exactly a 0% chance that I would still own it today.

I would've either tripled my money overnight and cashed out and celebrated that easy win, or I would've panicked and sold after the first deep correction. In reality, there are very few people that have the stomach for the crypto success stories that we're reading and talking about right now.

And while I'm fearful that these investors will eventually lose it all, and I beg those that I know personally to just take the money and run, I can't help but root for everyone who's made life-changing amounts of money on these speculative investments. Knowing that I wouldn't have the stomach for it actually makes it much easier for me to be happy for them. And it helps to alleviate these short spells of regret and, and even envy.

But like many of you, I'm still sitting here wondering, what did, what do I do right now? Bitcoin and other cryptocurrencies continue to gain attention, and while most are not expecting 50000% returns going forward, there are strong bullish cases to be made about the future performance like we heard last week from Isaiah Douglass.

But that's just one side of the story and just one person's perspective. I heard from a number of you after last week's episode aired asking to hear my thoughts and to share counter-arguments to the bullish case. I've got some specific comments and takeaways that I'm gonna share with you today.

But first, I mentioned that a special guest was dropping in to share his perspective. you've heard him on the show before a couple of times. Actually. His name is Peter Lazaroff and he's the CIO for Plan Corp, a fee-only wealth management firm out in St. Louis, Missouri.

I'll link to all of Peter's information in the show notes, including a recent blog post that he wrote on Bitcoin. But for now, here's Peter and his thinking about this asset class and how to decide if Bitcoin belongs in your investment portfolio or not.

Peter Lazaroff: The value of Bitcoin in cryptocurrencies has risen sharply in the past months, but that's just it. We're looking at past performance. So if you wanna invest in Bitcoin or any cryptocurrency, you should really be asking about the future and prices of Bitcoin. And, let's just stick with Bitcoin. So I don't have to say Bitcoin and cryptocurrency over and over and over again.

Prices of Bitcoin are really driven by about speculation of adoption and use, and there is no doubt that the adoption of Bitcoin has gone up. But what is your return expectation of Bitcoin over the next 10 years or 20 years? Do you think Bitcoin will have an average annual return of 10%? And with, so what type of volatility do you have to sit through to realize that? Because 10 percent's not that good, it's not that interesting.

And in general, when I'm thinking about building a portfolio, I'm more concerned about implementing a bad idea than missing out on a good one. Now, I'm not saying Bitcoin is definitively a bad idea. I just, I hear the arguments for why advisors want their clients to invest in Bitcoin at this stage, and there's a lot of holes in them.

I think, you know, treating Bitcoin as a currency, I think is arguably one of the worst cases at this point. I mean, that was for much of the past decade, that was the primary case for owning Bitcoin. But it's just unrealistic, you know, traditional currencies, they should either be a media, they should probably fulfill all three of either medium of exchange, unit of account, and store of value.

So the medium of exchange Bitcoin fails miserably. And I think back to the guy who bought two pizzas for 10,000 Bitcoin in 2010, because now it'd be worth over half a billion dollars. And this guy gets made fun of on the internet all the time, but using him, any type of medium of exchange shouldn't really cause any potential for regret.

So my family, we get pizza delivered every Friday and we use US dollars. And never once have I worried about whether using my currency would be a mistake. And even worse, exchanging Bitcoin for goods or services triggers taxes because the IRS treats Bitcoin as property subject to short and long-term capital gains.

So if you buy a pizza with Bitcoin that appreciated in value, you're gonna own capital gains tax. Look, to me, that's not what a medium of exchange does. That's not a real currency. If you're gonna realize taxes every time you transact in it, and it's not a viable unit of account. So unit of account is really like what you would expect to see on a balance sheet or an income statement or cash flow statement.

No companies, no governments, no individuals are quoting their entire set of financial statements in Bitcoin. So not really a unit of account. the store of value, this is the interesting one because I hear so many people call it a store of value. And it really contradicts the idea that this is a high-return potential asset because a store of value, by definition has an expected real rate of return equal to zero.

So just to say that again, a store of value means after inflation, the returns should be zero and there shouldn't be very much volatility. By the way, in Bitcoin, I think we all can agree has a ton of volatility. So calling it a store value, that's a really tough investment thesis for me to get behind today. So could Bitcoin double in the next year? Sure, but what is it gonna do over the next 10 years, 20 years? Could it double in the next year and still have a real rate of return of zero over the next 20?

Yeah, it definitely could. Is it going to, I don't know. Nobody knows. But again, I'm more concerned with implementing a bad idea than missing out on a good one because most investing success comes down to minimizing mistakes. And the people who call Bitcoin a form of digital gold.

I mean, I guess that makes sense if you're saying it's a diversifier kind of digital gold. I mean, gold has a physical use, you can make stuff outta gold, you cannot make stuff outta Bitcoin. And you know, I don't think gold is a great investment again, to begin with personally, I can maybe buy into the case for diversification if you're gonna put 10 to 20% of your portfolio into gold, but even then you're not actually moving the needle that much because every additional exposure that you add to a portfolio has a diminishing marginal benefit.

And so you'd be surprised when you look at a portfolio with 10 or 20% gold, even in the years of higher inflation in the seventies, eighties, you had inflation averaging 7.6%, adding a 10% allocation of gold barely improved returns, barely. So for me, when I look at Bitcoin, the thing that most aligns with for me in my head is more of a collectible, like fine art or baseball cards or beanie babies, you know, something that has aesthetic and emotional value, but derives their pricing from scarcity and supply and level of demand.

So I think the challenge that I have when people talk about others should invest in Bitcoin today for the first time, it's fine, I can get behind it, but what's the expectation? How long are you gonna hold this? What's your time horizon? What's your return objective? How does it fit into your financial plan? What is your thesis for making this investment? And how will you determine if you're right or wrong?

These are questions you need to ask yourself. You need to ask yourself what's the expected range of outcomes and what probability would you assign to each? Because in late 2017, I wrote about Bitcoin and I felt like the two highest probability outcomes were Bitcoin would be worth zero or a ton.

I thought, you know, that probably made up 98% of the pot possible outcomes in my mind, whereas today I don't think that Bitcoin is worth zero. There's some very small probability of that in my mind. Again, just my opinion, but I think we've seen a lot of the adoption. Yes, more institutions might adopt it or accept it in payment and as a result have to buy some to have on their balance sheet. Because if you're going to accept this payment, you have to have it on your balance sheet to offset.

But the thesis, I keep waiting to hear somebody give me a reason to think that there is some sort of premium for owning this. And look, I think my view may change over time. I may learn more about it. The way that it people end up adopting it using it might change. I mean, it's already changed a lot since 2017 and certainly changed a lot since the coin first came out in what I believe is 2010.

But if you insist on adding Bitcoin to your portfolio, what I tend to think about is how big of a position should the conversation start at? And if I look at the global stock and bond markets together, they have a combined market cap of roughly 200 trillion, whereas Bitcoin's market value is nearly 1 trillion. So if I divide 1 trillion by 201 trillion, then we got about half a percent.

And so I would say you cap out your allocation to something like this at half a percent, acknowledging that this is highly speculative, and it recently, it lost 20% on a Saturday night. and it's lost half its value in a couple days. not all that long ago, it's certainly lost 85% of its value a handful of times. If you have this set aside in a separate account that's for more expressing yourself or something that's more of a hobby or a play account as we call fine.

And to me this is like buying an individual stock. You're not necessarily getting compensated for the type of risk that you are taking on, but you're putting in an amount that isn't harmful. And look, if you have a thoughtfully crafted financial plan, it's unlikely. I mean, it's, it's basically impossible that anywhere in your plan does it say you required to hold an asset that goes absolutely bonkers in order to meet your goals.

So a lot of this may come off as if I am anti Bitcoin or anti-cryptocurrency. I don't really think that's the case. I just really question the expectations people have for the ownership from today going forward, as well as the reasons that they're giving for those expectations.

Taylor Schulte: Okay, big thanks to Peter for coming on the show today and sharing his thoughts there. There are three things that Peter said that really stuck out to me.

Number one, he said that he's more concerned about implementing a bad investment versus missing out on a good one. As we all know, in investing in financial planning, the goal is to minimize the mistakes that we make.

And this comment is an attempt to minimize what's known as type one error. The tricky part is that minimizing one error leads to a higher chance of realizing the other error. So you kind of have to find this balance between type one and type two errors, and that balance might look different for every one of us.

Number two, Bitcoin as a store of value seems to be the most common investment thesis for Bitcoin optimists these days. However, as Peter notes, a store of value should technically have an after-inflation return of zero and also contain little to no volatility.

The technical definition for a store of value actually says that quote, a store value is the function of an asset that can be saved, retrieved, and exchanged at a later time. It should retain purchasing power into the future end quote. And, you know, based on that and based on Peter's comments, it's, it is really tough to fit Bitcoin into that box.

And then lastly, with something as narrative-driven as Bitcoin, Peter shares some very important questions to answer before you go and, and race to invest your hard-earned money into this asset class. And these questions apply to any investment including stocks, bonds, cash, gold, real estate, whatever you name it.

Questions like, what's your return objective? How does this investment fit into your financial plan? How will you determine if the investment is successful or not? And then my favorite, what are your expected range of outcomes? And what probability would you assign to each scenario?

By determining your why behind an investment, you're able to set proper expectations and minimize regret and find success with investing. And as you might imagine, your answers to those questions are going to look a lot different than mine there.

There's no one-size-fits-all when it comes to investing and financial planning. Like I always say, there's the textbook answer and then there's your answer. And your answer might be to put your life savings into Bitcoin, or it might be to put everything under the mattress. And as long as you are not putting your retirement plan in jeopardy, I can get behind both.

So to bring us home today, there are here are some of my, my current thoughts on Bitcoin, some of which are a result of last week's interview. And some are, you know, I've held onto for a long time now.

So first light gold Bitcoin doesn't produce income there no dividends or cash flow or even the likelihood of cash flow in the future and without cash flow. The assets value is essentially dependent on what a future buyer might pay for it, which to me means it's speculative in the words of how are mark's referencing gold here, he says, quote, you can buy it out of superstition or ignore it because you're an atheist, but you can't buy it with an analytical foundation.

Next, and sticking with gold here, as Peter alluded to, gold has really never been a great investment, especially after you adjust it for inflation. So the investment case for it being digital gold still doesn't really interest me or even resonate with me. You know, at least with physical gold, I can touch it, I can feel it, I can use it, I can gift it.

There are physical use cases for it. And as for Bitcoin as a currency, I don't see this one either. You know, for example, would you ever want to buy a new car with your Tesla stock that's gone up in value in which you have unrealized capital gains? Have you ever seen an advertisement that said, now accepting mutual funds is a form of payment. Like, no, but that's what we're seeing.

And, we've seen for a long time now with Bitcoin from the pizza order story that Peter had shared to PayPal and other payment platforms hitting you with ads and popups telling you that Bitcoin is now an accepted form of payment. And, you know, just like my small value stocks in my portfolio are not a currency, I just struggle to see Bitcoin as a currency either every time I use Bitcoin to purchase something or stocks to purchase something, it's a taxable event.

It's really not an efficient use of a currency. The store of value argument is certainly interesting and it's common, but I'm still struggling here too. I just can't wrap my head around using Bitcoin as a short-term saving mechanism similar to cash. Just like I don't view the stock market as a short-term saving mechanism.

If I plan to buy a house in five years, I'm not putting that money into the S&P 500 to store the value of my savings, knowing that my money could get cut in half at any time. We could have another pandemic around the corner and it could drop, you know, 30, 40, 50%. And I'm not putting you know, my savings, my short-term savings into Bitcoin for the same reason. And in fact, I personally have more of a reason not to put my short-term savings into Bitcoin.

It's more volatile than the stock market, and it's known to go through even more extreme downturns. And this is just my personal opinion, I'm not bashing anybody else. I love how passionate some people are about it being a store of value. I just personally, I can't get behind it yet.

And then as discussed last week, combating inflation is, is certainly an interesting topic here. Putting our money in cash or under the mattress is certainly not going to keep pace with inflation. But again, I'm not putting my house savings money in cash to necessarily fight inflation.

Going back to some of Peter's great questions, like what's your objective? What's your goal of this investment? I'm not putting my savings money into cash to fight inflation. I'm putting it there for security and stability. I want to know that it's gonna be there when I actually need it.

Investing in risky assets like stocks has historically been a prudent way to outpace inflation when compared to things like bonds, cash, and even gold. And perhaps Bitcoin remains in that camp as well, and it does pro you know, prove to, to fight inflation over long periods of time. But still, it's still a long-term risky investment and it is not a short-term store of value.

Maybe it's a quote, you know, emerging store of value and I'll be eating my words five or 10 years from now. I'm okay with that right now.

And then lastly, the increasing money supply has also been a, a big topic of discussion and it's complex, but you know, it says that adding money to the monetary system devalues the dollar.

In other words, increasing the money supply will cause hyperinflation and erode your purchasing power even more than it is today. And while some hold this belief strongly, I don't. Colin Roche, who has been on the show last year actually has done a ton of writing and research on this topic, and I'm more in his camp here.

In short, it's important to be aware of money supply levels that don't reflect broader money supply. it's important that the quantity of reserves in the banking system have little to no bearing on the quantity of loans that can be made by private banks.

And then lastly, hyperinflation just in general is poorly understood by modern economists. In fact, hyperinflation historically, and based on a lot of Colin’s research is not a result of money printing or an expansion of money supply. It tends to occur around very severe external shocks that lead, that actually lead to the increase in money supply, which ultimately lead to hyperinflation.

So examples would include rampant government contr corruption regime changes or regime collapse loss of a war or collapse in production. So I'm not so sure that increasing the money supply as it's like traditionally spoken about, is gonna actually lead to hyperinflation. And that's been dispelled a number of different times. Not saying that it's right, you know, we're all making our best educated informed decisions here, but just kind of where I stand on money, supply and inflation right now.

So in summary, I continue to view Bitcoin and other cryptocurrencies and altcoins as speculative assets. In other words, I'm gonna invest what I'm willing to lose. And for me, that equals less than 1% of my investible assets. And to be clear this doesn't have anything to do with, with the blockchain and the use cases for some of the underlying crypto technology.

Crypto is here to stay, period. I'm just simply referring to investing in Bitcoin with the goal of someone paying me more than what I paid for it. You know, sometime in the future, I truly admire the conviction and optimism that some Bitcoin investors have and I'm rooting for them. I really am.

I just personally have not found a thesis that I can really latch onto that convinces me that Bitcoin should be a meaningful part of my global asset allocation. It doesn't mean I'm right and the bulls are wrong, that's just my own conclusion and where I stand today. And it might change.

In fact, I hope it does. My goal is to always challenge my thinking and continue to evolve as an investor, as a financial advisor and as a person.

To wrap up, Meb Faber recently went to Twitter asking everyone what could kill Bitcoin. And since the purpose of today's episode was to just provide another perspective to the Bitcoin argument here are the three most popular answers from that, from that tweet.

The first is Bitcoin gets replaced with a better 2.0 version of crypto, just like AOL and Yahoo lost to Google in that search engine race.

The second was that the US government launches their own digital currency and taxes Bitcoin to a point that makes it prohibitive to own or even makes it illegal.

And then lastly, Bitcoin is hacked. the point was made that, look, Bitcoin is created by humans. It's a technology and therefore it's possible it has vulnerabilities or even holes that could develop as technology evolves. In other words, if it can be created, it can be destroyed.

I'll link to the tweet and everything else discussed today in the show notes, which again can be found by going to youstaywealthy.com/108.

Thank you as always for listening, and I will see you back here next week.

Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.