How much Bitcoin should you own?
There are a lot of moving parts here, some of them happening inside the brain and some in the big, wide world. Today I’ll talk about the world, and next week we jump in the head. The punchline is that if you don’t need a whiskey on a bad day, you’re too low – you’ve left money on the table. And if you consider hemlock on a bad day, you’re too high – you’re not gonna make it holding through the storms.
So what is the right amount of Bitcoin to own? There are 3 big-picture questions here.
First, the stage of Bitcoin. There’s a big difference between owning cash — which Bitcoin is destined to become but which is a lousy investment — and holding an extremely volatile and high-return asset on the road to hyperbitcoinization. Bitcoin itself is evolving, hence its risk-return bundle is also evolving.
Second, life gets in the way, and you should always pay your happiness first. One key of Austrian economics is value is subjective. Meaning stocks don’t just compete with bonds, they also compete with every other opportunity cost in life.
Third, your brain gets in the way – buying is only half the battle. Every old-school Bitcoiner knows that holding is the hard part. When an asset drops 80%, when you thought you were retired at 25 but suddenly need to update the resume, it’s very, very hard to hold. You have to prepare the roof before it rains and, like the Argonauts before the Sirens, you have to prepare your brain before the crash.
The Road to Hyperbitcoinization
First up is Bitcoin’s stage: where is it on path from geek-toy to store of value to currency. In the long run, Bitcoin will likely be a stable general-use currency. Meaning you’ll own about as much Bitcoin as you own US dollars right now – not very much. You’d probably want a month’s spend in it – let’s say $5,000 to $10,000 in today’s terms if you’re American — and keep the rest in something with yield. Those yield assets might be a business — either your own, or a publicly traded stock market. Of the other assets might be something non-financial — more on that below. Either way, investing in cash is never a long-term strategy.
But things are very different in this current stage of Bitcoin: for probably another decade or two Bitcoin is not yet a boring currency, it’s a very exciting speculation that has returned, so far, about 110% per year. In that context, you’re nuts to hold much in, say, equity or bonds – you’re setting 90 cents on the dollar on fire every year. The one traditional investment that comes close is housing, where government subsidies mean you can borrow 20x at negative real rates, but that’s a lot of moving parts so I’ll save it for another article. For all the rest, Bitcoin for now is a glorious package of potential 2,000%+ returns paired with possible 100% loss, which is a super gamble, and about which I’ve written here and here.
So, in short, for the next decade at least, Bitcoin beats just about any other financial investment on earth. Meaning you should cruelly neglect the rest of it – the stocks, the bonds and cash that financial advisors ridiculously advise. When the world does wake up, when Bitcoin replaces fiat, it’ll be a different picture, but one I’m very much looking forward to writing about when that time comes.
Side-note: a lot of money is psychologically locked on tax considerations, but even pensions or tax-advantaged savings (IRA’s, 401k’s) are losing propositions if they can’t go to Bitcoin. This is because stocks historically return 8% real, and even 8% tax-free doesn’t come close to a taxable 110%, and doesn’t come laughably close once you compound. To illustrate, over the past 10 years you’d have lost roughly 99.9998 cents on a dollar invested in equities instead of Bitcoin, and parking those equities in a tax-free account would’ve reduced the hit to only 99.9997 cents lost on the dollar.
Life Goals
And that brings us to question two: your life goals. After all, life is not made of investment returns alone; life is full of opportunities, and we’re only here for a few decades before we return to whence we came.
So even in these giddy days of 110% Bitcoin, life sometimes hands you a return on investment that’s even better. For example, building a business, learning a rewarding skill that lets you spend your days in blissful creation. Even prosaic things like attracting a happiness-generating wife by buying a nice car, wardrobe, gym membership, or tasteful decor. If you’ve got kids, you might want to buy things that make their lives better, or build their future, or deepens your connection with them. I met a New Zealand girl whose dad bought a sailboat and they went around the pacific for 3 months when she was a teenager — she said it was the highlight of her entire life. That’s an ROI that is very hard to beat.
So it’s smart to invest in your happiness. Indeed, this is a big reason why financial advisors lead with age and family status: they need to know your non-financial goals to advise on your financial goals. And Austrian economics very much values non-financial happiness the same as financial — it’s all utility, the stuff life’s made of.
All that age talk brings us to question 3: risk tolerance.
Risk tolerance
So you’ve got the wardrobe and sailboats covered, and your question now is what to do with what’s left -- your pot of savings. How much to gamble on each hand, and how much to salt away. Bitcoin, beautifully, does a bit of both: it’s overwhelmingly a risk asset during this hyperbitcoinization stage, then it flips to a safety asset once Bitcoin becomes currency. Alas, Bitcoin isn’t yet the widely-used currency, so it’s still firmly in the risk category.
So how much risk should you take on? Probably the first question is your personal stock-to-flow: how much you expect to earn in future vs how much you have today. If you’re 25 years old you’ve got a 50-year period to earn and your savings are probably a small fraction of your future earnings, but if you’re 75 the savings are the whole story.
Put differently, your future earnings are, effectively, an annuity paid in cash. It’s a probabilistic and variable annuity, yes, but an annuity nonetheless. This means young people are actually holding enormous amounts of cash, without realizing it, in those future earnings. To illustrate, a 25 year old with all his money in Bitcoin — $50,000, say — may appear to be risky on paper. But once you include his lifetime earnings, even at the median salary he’s probably 80-90% in cash annuity — ridiculously under-risked.
Conclusion
Wrapping up, because Bitcoin is likely to remain a very high-risk high-return asset for at least the next decade, if you believe in Bitcoin you should be draining all the other financials you own and concentrating in it. With those two large adjustments: remember to invest in your non-financial investments: pay your utility function first. And remember to include your future earnings, which almost certainly mean buying more than you expected to make up for all that future cash.
That all sets the stage for next week, when we’ll jump inside that brain of yours, that evolutionary psychology brew of quirks, habits, and compulsions. Some of it useful, but most of it useless yet hackable with various degrees of difficulty. Either way, I hope you’ll subscribe to get it in your inbox.
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How Much Bitcoin Should you Own?
Peter, have you thought to update this article recently? Do you still feel this way? Thank you.
Interesting! Thank you for the article from https://greenbe.pl