Ep. 30 - The Opportunity Cost of Bitcoin

Matt Tompkins -

I must sound like a broken record. I’ve been hounding family, friends, my partner, and basically anyone that will listen to me about the benefits and need for personal Bitcoin accumulation.

However, I won't stop. Even if you think you have enough Bitcoin, you likely don't.

Last month I wrote a robust article on the benefits, implications, and potential price action of Bitcoin in episode 24, "Asymmetric bets & the erosion of fiat". I indirectly told all of you that purchasing Bitcoin will prove to be the best financial decision of our generation. If you did indeed follow this advice, you would now be up ~50% on your investment. In one month.

This time though, I won’t say it indirectly, I’ll say it directly - buy more Bitcoin. And buy it now. This is financial advice.

In this article I will lay out a few compelling arguments as to why Bitcoin is the ultimate store of value, and why we're still very, very early.

Compound Annual Growth Rate (CAGR)

CAGR is simply the mean annual growth rate of your investment over a specified time period. CAGR is widely used in the investment industry as it provides a 'smoothed' out rate of return. The target rate of return in the investment industry is 7 - 8% annually. This is the holy grail of the S&P 500, and what every Charlatan (err... mutual fund advisor) considers a great return. But as we know 7 - 8% annually won't get you rich and it will barely preserve your wealth with inflation creeping towards this coveted rate of return (September CPI was 5+%, but CPI is a joke and true inflation is closer to 8-12%). Thus, investors are seeking higher returns and every individual should be looking to preserve their purchasing power.

So, what's the best way to protect your purchasing power? Bitcoin. Bitcoin's CAGR over the last 10 years is an astounding 196.7%. This is the ultimate hedge against inflation.

To put it a different way, your money would have nearly tripled every year for ten years... that's a 5,200,000% return... Is that good!?

For sake of comparison, and to demonstrate the superiority of Bitcoin as a store of wealth, let's look at the following: Gold, the S&P 500, the NASDAQ, and Amazon.

Even if you think this is an arbitrary time period because Bitcoin's price was low in those beginning years it still outperforms all these comparisons on 1-to-10-year basis. It doesn't matter the time period, Bitcoin has outperformed.

But wait! Are we too late?

Simple answer? No, not even close.

Let's look at a few simple stats to analyze where we're currently at in terms of adoption, price, and stock to flow modelling. First, there are 100m people who use crypto wallets globally. However, this number is likely inflated as the majority of people have more than one wallet (I have two, for example). But let's just make it easy and say it's indeed 100m people. Well, that is only 1.28% of the global population. Even a slight increase in this adoption rate would send the price much, much higher. There are only 21m Bitcoin that will ever be mined. The supply never changes, but the adoption rate will continue to increase. This is the simplest supply and demand curve ever...

Second, there has only been ONE nation state and ONE company on the S&P 500 that have adopted Bitcoin. This is El Salvador and Tesla. El Salvadorians are up ~25% on their holdings since adoption and Tesla has made over $1 billion on their Bitcoin holdings. What happens when other nation states and companies begin adopting Bitcoin in the same fashion? The price will go parabolic...

I can hear the commentary on the other side of this already - "it's so volatile!", "people don't understand it!", etc., etc. A couple things on this front:

Firstly, yes it's volatile. However, Bitcoin embodies a low-time preference, and when you buy your first Satoshi, you too will understand this. Adopt a 10 year investment horizon. Don't worry about day-to-day, or month-to-month fluctuations. To succeed as an investor you must have the ability to zoom out and keep your emotions at bay.

Second, the volatility doesn't really matter because investing in Bitcoin now is like investing in Apple and Amazon in the early 2000's. Amazon lost 93% of its value in 16 months from 1999 to 2001. In that short time horizon I'm sure investors were panicking. But if you held for 5, 10, or 20 years, that decrease is literally a blip on the screen.

Third, if you don't bet the farm or trade with insane leverage, then you radically decrease your blow-up potential. To be a long-term investor, you must stay in the game. Trading with 25x leverage is a recipe for a wipe-out. Invest what you can, don't use leverage, adopt a low-time preference, and you will succeed.

Lastly, don't search for the 'next bitcoin' because there will never be a "New Bitcoin". Bitcoin was an accident, and a beautiful one. Bitcoin solved the Byzantine Principle, which was once considered impossible to crack. There is only one Bitcoin, and there will only ever be 21m in circulation. It's the first true sound money the world has ever seen.

Am I too bullish?

Sometimes I must catch myself and wonder - am I too bullish? To ensure I'm not being too outlandish; I've continually been seeking differing opinions on the matter. I want to hear what people's arguments are against Bitcoin. I want someone to prove the thesis wrong. It's healthy to have differing opinions and theories.

However, thus far I have yet to hear one that has changed my mind. Here are a couple common arguments I hear:

  • "It uses too much energy." Ah this is one of my favourites. We waste energy every day, and having a sound, secure source of money is a great use of energy, not a bad one. Here's a simple graph that debunks this argument.
  • "Bitcoin has no inherent value." This is debatable. But this is also true of Gold, which has had no intrinsic value for the 5,000+ years humans have used it as a store of value. It's also true of the Canadian dollar, and everything we've ever used as a currency/unit of exchange. Bitcoin only has the value that people give it and only functions as a store of value when people collectively use the value system together. If this is your argument against Bitcoin, then you should give me all of your CAD which have no inherent value either.
  • "Bitcoin is not real". Okay maybe this is my favourite. Basically, if you think Bitcoin is fake, just take a look at our current financial system. Canada and the US have printed trillions of stimulus money since the COVID breakout. They are literally just punching numbers into a screen and TA-DA! Bitcoin at the very least has a systematic proof-of-work principle, a constrained supply, and pre-programmed halving's. Unlike Biden's plan to spend trillions that will 'cost zero'...

A quote from the article above to close off the week.

"In reality, only 13% of our planet’s population is born into the dollar, euro, Japanese yen, British pound, Australian dollar, Canadian dollar or Swiss Franc. The other 87% are born into autocracy or considerably less trustworthy currencies. 4.3 billion people live under authoritarianism, and 1.2 billion people live under double- or triple-digit inflation."

Bitcoin solves a real problem, and we need it more than ever.