Financial Advisors: It’s Time to Study Bitcoin (2024)

Industry

This isanopen letter tofinancial advisors and their firms about the dangers ofignoring Bitcoin and the opportunity ofembracingit.

Dear colleagues,

Clients first started asking meabout Bitcoin in2017, and Itold them itwas digital BeanieBabies.

Iexplained that although Bitcoin’s supply may becapped at21 million, that doesn’t make itscarce because anyone can create anunlimited amount ofnew “crypto” tokens. Itold them that Bitcoin was ahype-fueled bubble, apurely speculative asset, and afoolish long-terminvestment.

Iwaswrong.

After ignoring Bitcoin for the next three years, Inoticed in2020 that itwasn’t deadyet. Idecided that ifIwas going tocontinue dismissing it, Ineeded toatleast read abook aboutit. SoIread The Bitcoin Standard bySaifedean Ammous and Inventing Bitcoin byYanPritzker.

Iquickly learned that brilliant people from multiple industries and disciplines had answered all myinitial objections toBitcoin dozens oftimes. Intwo years, Iread more than 40 books about Bitcoin, monetary history, computer science, Austrian economics, and centralbanking. Ilistened topodcast interviews like The Saylor Series and read blogs like Nick Szabo’s Unenumerated.

Today, Ibelieve Bitcoin isthe most important financial innovation that will happen inmylifetime. Ittook mehundreds ofhours ofresearch toconclude, soIdonot expect toconvince you ofitwith thisletter. Mygoal istoconvey asimple message tothe wealth management industry: You need tostudyBitcoin.

Bitcoin will impact every area offinancialservices. Ifyou’re afinancial advisor, itwill disrupt your business and yourcareer.

That may sound like aboldclaim. Ifyou’re skeptical, Iinvite you toaccept this letter asachallenge. Dowhat Idid: Ithought Bitcoin was stupid, but Iwanted toknow itwas stupid, soIstarted researchingit. And Idiscovered something far more interesting.

Ithink you’ll discover thattoo.

Judging New Technology

In1911, Marshal Ferdinand Foch declared that airplanes were “Interesting toys, but ofnomilitary value.”

Afew years after that, Foch served asthe supreme allied commander during the First World War (1914-1918).

The Imperial War Museum webpage for “The Underworld” notes that: “Between May 1917 and May 1918, more than 300,000 people used the tube toshelter from German aeroplane attacks.”

Inhindsight, it’s easy tomock Marshal Ferdinand Foch, but it’s worth noting that airplanes had only existed for eight years when hesaidthat. Bitcoin had only existed for eight years when clients started asking meabout itin2017, and back then, the most common opinion Iheard about itfrom financial professionals was eerily similar: “Bitcoin isinteresting technology, but ithas noreal value asanasset.”

Istill hear financial professionals sayingthis. Like Foch did with airplanes, they judge Bitcoin based onhow itfits within the existingparadigm. Because ofthat, they fail tounderstand Bitcoin fundamentally and donot see what itisbecoming: anew paradigmaltogether.

Bitcoin’s Innovation

Bitcoin isdigitalmoney. It’s easy tooverlook how profound thatis. After all, most U.S. dollars don’t exist inphysicalform. They exist only asdigital entries inabank’sledger. Sodon’t wealready have digitalmoney? Wealready make digital payments without Bitcoin, sowhat problem isitsolving?

We, infact, did not have digital money beforeBitcoin. Wehad digitalcredit. Inher book Broken Money, Lyn Alden describes how new telecommunication technologies like the telegraph and the telephone created amassive divergence between the speed ofpayments and the speed ofsettlement. Inthe late 19th century, itbecame possible totransmit payment information worldwide atthe speed oflight. Gold, however, can’t move thatfast.

Asaresult, the global monetary system evolved asaninterbank credit network with gold atthe baselayer. This enabled the high-volume, high-frequency exchange ofbank-issued credit claims ongold, while the burdensome final settlement ofphysical gold only needed tooccur periodically betweenbanks. However, this system had amajor flaw: Expanding the gold supply requires significant time, energy, andresources. Issuing additional credit claims doesnot.

This led toafractional reserve banking system that granted asmall number ofinstitutions the enormous privilege ofexpanding the credit-money supply atvirtually nocost. The result was that credit claims ongold incirculation vastly exceeded the amount ofphysical gold backing thoseclaims. Every central bank inthe world eventually defaulted onits obligation toredeem credit claims ongold, culminating inRichard Nixon closing the gold window permanently in1971. This ushered inthe modern age offiat money— currency backed bynothing, with noconnection tothe real world tolimit itssupply.

This isthe fundamental problem Bitcoinsolves. Inthe words ofBitcoin’s pseudonymous creator:

“The root problem with conventional currency isall the trust that’s required tomake itwork. The central bank must betrusted not todebase the currency, but the history offiat currencies isfull ofbreaches ofthat trust.”

– Satoshi Nakamoto

Bitcoin isabearerasset. Itisnoone’sliability. Delivery ofBitcoin constitutes the final settlement ofapayment. Unlike gold, Bitcoin can besent across telecommunication channels because the payment information isthemoney.

Bitcoin isoften described as“digital gold.” That’s ahelpful analogy for someone trying towrap their head around what itis, but it’s insufficient. Itwould belike describing the internet asadigital newspaper in1990. Itisn’t wrong, but itfails tocapture the significance ofthe new technology and what the existence ofthat technology implies for thefuture.

Like gold, Bitcoin’s scarcity isenforced bythe unforgeable costliness ofenergy. Anyone can expand the gold supply, but itcosts energy todoso, and there isnoway around thatcost. The same istrue for Bitcoin, except Bitcoin has asupply cap of21million. Atthe time ofthis writing, about 19.7 million Bitcoin have been mined sofar, and itwill take over acentury tomine therest.

This makes Bitcoin the scarcest monetary good inhumanhistory. Because it’s digital, itcan bedivided, stored, verified, and moved atamarginal cost that approaches zero—all without the use ofatrusted intermediary.

Wehave never seen anything like thatbefore!

The debate over the military usefulness ofairplanes got settled pretty quickly when bombs started falling from thesky. Adopting superior military technologies, such asgunpowder and the airplane, isnotoptional. Nations either adopt them orthey get outcompeted bythose thatdo. The same istrue for superior monetary technology.

AsSaifedean Ammous has said, “History shows itisnot possible toinsulate yourself from the consequences ofothers holding money that isharder than yours.”

Rather than trying toconvince you ofBitcoin’s theoretical merits orofits future prospects, Iinvite you tosimply lookup. The “bombs” are starting tofall.

Institutional Adoption

In2020, MicroStrategy became the first public corporation toadopt Bitcoin asits primary treasury reserveasset. Michael Saylor, the founder and Chairman ofMicroStrategy, described his company’s dilemma in2020 as“hundreds ofpeople working ashard asthey can and going backward.”

Saylor has noted that the U.S. dollar money supply expanded byahistorical average ofabout 7% per year over the last century, and that expansion accelerated in2020. Saylor recognized that the cash and credit instruments MicroStrategy held onits balance sheet could not generate ayield ashigh asthe rate ofmonetarydebasem*nt. This meant that the corporate treasury was dilutive toshareholders. Saylor also recognized that, except for afew technology companies with large network effects, itisnot reasonable toexpect amature business tocontinue growing its cash flows atthe rate ofmonetary debasem*nt every singleyear.

MicroStrategy made aninitial investment of$250 million ofits corporate treasury intoBitcoin. Today, MicroStrategy holds 214,400 Bitcoin worth about $15.2 billion, acquired atatotal cost of$7.538billion. Itacquired most ofthat byissuing equity and convertible debt, yet the company’s Bitcoin per share continues toincrease. While MicroStrategy’s treasury ofcash and credit was dilutive toshareholders, Saylor makes the case that its Bitcoin treasury isaccretive.

MicroStrategy published their Bitcoin Initiative Roadmap for any corporation touse. Arecent change tothe FASB accounting rules for Bitcoin also allows GAAP-compliant corporations tohold Bitcoin ontheir balance sheets without artificially impairing their financial statements through indefinite intangible accounting (which used tobethe rule for Bitcoin). OnMay 28th ofthis year, Semler Scientific became the latest public company toadopt Bitcoin asits primary treasuryasset.

Pension funds and endowments have the same long-term treasury problem ascorporations and are also adoptingBitcoin. For example, inthe first quarter of2024, the State ofWisconsin Investment Board added $160 million ofexposure toits state pensionfund. And onJune 3rd, the University ofAustin (UATX) announced the creation ofthe first long-term Bitcoinendowment.

OnJanuary 10th, 2024, the SEC approved 11 spot BitcoinETFs. This made itpossible for financial advisors inthe UStooffer clients exposure toBitcoin through atraditionalsecurity. Asofmarket close onJune 6th, 2024, the combined AUM ofthese ETFs had grown toabout $61.5billion. Ibelieve introducing these ETFs has reversed the burden ofproof for financial advisors andBitcoin. Instead offighting tojustify offering Bitcoin toclients, advisors and their firms now need agood reason not toofferit.

Performance Track Record

When the Bitcoin protocol began in2009, the asset had nomonetary valuewhatsoever. Bitcoin monetized organically onthe global freemarket. Now, there’s over adecade ofreliable pricehistory.

Bitcoin’s price has increased byabout 60% per year for the last 10 years, from around $600 inJune 2014 toaround $70,000 inJune 2024 atthe time ofthiswriting.

Bitcoin’s market cap isnow around $1.4trillion. This sometimes causes people tobelieve they “missed out, ” but that isamistake. While noone knows what returns will beinthe future, Ibelieve the majority ofBitcoin’s returns lieahead. That’s because Bitcoin isnot atech stock. It’s anentirely new asset class. Itcompetes asastore ofvalue with gold, bonds, stocks, and real estate, but itisstill tiny compared tothose assetclasses.

Bitcoin’s price behaves differently from those ofotherassets. Roughly every four years, the Bitcoin issuance rate gets cut inhalf. When the protocol began in2009, Bitcoin miners generated 50 new Bitcoin every 10 minutes onaverage. In2012, that got cut inhalf to25. Most recently, inApril 2024, itreduced from 6.25 to3.125. Sofar, Bitcoin’s price has seemed tofollow a4-year cycle corresponding tothe issuancehalving.

Ifyou rank historical asset class returns from best toworst bycalendar year, it’s clear that Bitcoin does not behave like any otherasset. Based onthis historical price behavior, its potential toenhance the diversification and risk-adjusted returns ofaportfolio should beobvious.

Bitcoin isYour Competitor

You may not care about Bitcoin, but ifyou’re afinancial advisor, you donot have the luxury ofignoringit.

The last five decades offiat money have stimulated amassive artificial demand for wealth managementservices. Alarge portion ofour industry only exists because the currency bleeds purchasing power everyyear. Iwon’t pretend toknow precisely how large that portion is, but ifyou reflect onall the clients you’ve ever worked with, Isuspect you’ll see that what I’m saying istrue.

Many clients would avoid investments altogether ifthey could, but they know that ifthey want tobecome orremain wealthy, they can’t simply save inasavingsaccount. Inflation forces would-be savers totake investment risks they otherwise wouldn’t, and many ofthem hire professionals (like us) tohelp them navigate the complexities ofthe investmentworld.

Bitcoin may bevolatile, but itisnot aninvestment. Bitcoin ismoney. For the first time inatleast 50 years, saving money over the long term isawinning propositionagain. Bitcoin provides analternative toinvesting, and more and more people are embracing that alternative.

Italk toinvestors almost every week now that fit the following description:

• Within 10 years ofretirement

• 7-figure investable net worth

• More than 50% allocated toBitcoin

Some are 100% allocated toBitcoin (besides short-term savings).

Ofcourse, wediscuss diversification. They’ve all thought aboutthat. However, many ofthese investors held their net worth inBitcoin from the 2021 peak of$69,000 tothe 2022 low of$16,000, then back uptoover $70,000, and they neverpanicked. They know what theyown. They often ask me: “Why would Iwant toown anything else?”

Sometimes, there’s avery good reason why they should own non-Bitcoinassets. Sometimes there’snot. Either way, Ienjoy having these discussions with investors, and the only reason Ican have them isbecause ofmyknowledge ofBitcoin. That’s why these investors reached out tomeinthe firstplace.

Tomodify aquote Iused earlier: “History will show itisnot possible toinsulate your advisory practice from investors choosing tohold anasset that isharder than anything you can offer them.”

It’s happeningnow.

Ifyou are serious about understanding how you can embrace Bitcoin tobest serve your clients and grow your business, please get intouch. I’d behappy toshare what I’ve learned withyou.

You can reach out toMatt at[email protected]

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