Bitcoin as a complement or alternative to gold in the PP

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Smith1776
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Bitcoin as a complement or alternative to gold in the PP

Post by Smith1776 » Sat Feb 20, 2021 2:32 pm

This was originally posted as a reply in the Gold Scream Thread. After typing it out it seemed a little off topic, so here I am. Let's talk about Bitcoin and its future potential role in the PP. I think the topic deserves serious discussion here.

Bitcoin makes me uncomfortable.

let's go back to first principles here. What is the underlying philosophy of the PP? Why did Browne recommend we hold gold? He called gold the world's second favourite form of money. More broadly, it's the primary alternative currency that is not dictated by fiat. It's the asset that people presumably run to when paper is approaching ruin.

There was nothing religious about Browne's recommendation of gold. It was merely the tool that best served to solve a problem. Now Bitcoin is on the scene. Okay, so we need to ask ourselves: is gold still the preferred alternative currency of the people not dictated by fiat? Will it still be the primary asset that people run to when paper is in trouble? I'm not so sure anymore. I'm inclined to believe, especially given how much easier it is for people to transact in cryptocurrencies, that it's more likely to be Bitcoin.

Now, a cynic might say that I'm only typing this because of the bull market it Bitcoin. You might say I'm just being swept up in the hype and mania. Yeah, maybe. However, another way of looking at it might be that high prices signal more mainstream adoption. A high price might not be a mania. It could simply mean that the world is coming around to Bitcoin as the preferred alternative store of value. It seems to me that both a bubble and mainstream adoption would engender a massive price increase. It's hard to tell the difference.

I'm thinking a 1% allocation to Bitcoin in the PP isn't such a crazy idea at this point. So that would be 24% in gold and 1% in Bitcoin. This number could be revisited as the market evolves.

Really, I can understand why an investor who shuns gold might not hold Bitcoin. They're both non-productive assets. However, anyone who holds gold is going to have a hard time arguing against Bitcoin. The arguments we make to hold gold can easily be appropriated as an argument to hold cryptocurrency. The only old chestnut left is "gold has been around for thousands of years, and Bitcoin hasn't." Yeah, well, are we really going to wait thousands of years before realizing that a regime change has taken place?

Interested in hearing people's thoughts.
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." - Alan Greenspan, 1966
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Mark Leavy » Sat Feb 20, 2021 3:22 pm

One of the attractive things about the four primary assets is that they are relatively uncorrelated. If bitcoin is also uncorrelated with the other four, then that would be a reason in of itself to hold some. Obviously not equal-weighted as it doesn't carry the same volatility, risk and 'proof of time' as the other assets.

Just one thought...
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Vil » Sat Feb 20, 2021 3:52 pm

Mark Leavy wrote:
Sat Feb 20, 2021 3:22 pm
One of the attractive things about the four primary assets is that they are relatively uncorrelated. If bitcoin is also uncorrelated with the other four, then that would be a reason in of itself to hold some.
Very good point. I feel it might be correlated only to the extent where money flowing out of assets in prolonged bearish trends are moved towards assets like BTC. However, there are many more uncorrelated assets one can think of, so if we focus only on such 'explosive' assets like BTC, ok, then we are talking about speculation ..

On the other hand - decentralized blockchains (which can be used in many diverse areas of application) - I feel those are a valuable technology vehicle ... But the blockchain technology itself has little to do with what the price of BTCUSD is at the moment and where it is heading.

I will repost it once again here, it's a valuable(IMHO) opinion from Dalio named "What I Think of Bitcoin". What he says as a sum up:
That is why to me Bitcoin looks like a long-duration option on a highly unknown future that I could put an amount of money in that I wouldn’t mind losing about 80% of..
Can't say it any better. But Smith, even though 1% sounds reasonable allocation to BTC, does that allocation really makes any difference worth the efforts to enter position ..?
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Smith1776 » Sat Feb 20, 2021 4:01 pm

https://www.reddit.com/r/investing/comm ... ch_sooner/

Here's another wrinkle to the argument. What about quantum computing attacks on the blockchain? The one thing I know about gold is that since it's physical there's no way that quantum computing can possibly affect it.

I want to add a big caveat to the ever ominous quantum boogeyman: I have absolutely no idea WTF I'm talking about. I've heard arguments on both sides here. Some people are saying it's a non-issue. Bitcoin supposedly already has some quantum resistant features, or that a simple fork can solve the problem. Others are saying that the coming age of quantum computers signals the end of legacy blockchains like Bitcoin.

Anyone more knowledgeable care to chime in?
Vil wrote:
Sat Feb 20, 2021 3:52 pm
But Smith, even though 1% sounds reasonable allocation to BTC, does that allocation really makes any difference worth the efforts to enter position ..?
That's a totally fair point. My thinking behind that relatively arbitrary 1% is that: 1) it's a way to "ease into" Bitcoin and reevaluate as the underlying economics evolve; and 2) maintain the philosophy of stability and safety of the PP given Bitcoin's insane volatility.

Your guess is as good as mine though.

EDIT: Physicist Lawrence Krauss explains quantum computing in plain english. (https://youtu.be/UUpqnBzBMEE)
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." - Alan Greenspan, 1966
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by pugchief » Sat Feb 20, 2021 6:10 pm

The fact that IRS form 1040 now asks
"At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"
leads me to believe that bitcoin might be good for speculating, but not much else.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by pp4me » Sat Feb 20, 2021 6:15 pm

pugchief wrote:
Sat Feb 20, 2021 6:10 pm
The fact that IRS form 1040 now asks
"At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"
leads me to believe that bitcoin might be good for speculating, but not much else.
I saw that on the form too and posted about it. If you do your taxes online you might not even see the 1040 but the question is asked right after your personal information and before your dependents.

If I was doing my return by paper I think I would just decline to answer. The correct answer for me would be NO but why are they even asking this?

The only thing I can think of is to record the fact that you use virtual currency and may need to be looked at some day. If anybody has a less sinister theory I'd be interested in hearing it.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Mark Leavy » Sat Feb 20, 2021 6:31 pm

pp4me wrote:
Sat Feb 20, 2021 6:15 pm
...
The only thing I can think of is to record the fact that you use virtual currency and may need to be looked at some day. If anybody has a less sinister theory I'd be interested in hearing it.
It is 100% laying the groundwork to initiate taxation / reporting and penalties for tax avoidance and/or perjury.

Gold is truly anonymous. Bitcoin, not so much.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by I Shrugged » Sat Feb 20, 2021 6:44 pm

I know it is tempting to feel one has to get in before it’s too late. But a lot of the too late scenarios would be problematic. I have some FOMO, but if it’s truly going to have a great future, it should be okay to wait.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by whatchamacallit » Sat Feb 20, 2021 6:52 pm

First I think the masses are just buying bitcoin through Robinhood. From what I can tell, you don't really have control of it there.

I have never felt great about direct bitcoin holding. It feels very clunky. I don't see the masses ever adopting it in that form so it really isn't so moneyish yet. At least central banks hold gold.


I do wish I loaded up when it came to Robinhood for speculation.



Second, just for fun forcasting. When bitcoin or crypto makes front cover of time magazine in a positive light. Look out below for possibly the whole market. Who knows what price will make it to though. Could be 500k.

Just like housing made the front cover before the crash.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by pors » Sun Feb 21, 2021 2:53 am

Smith1776 wrote:
Sat Feb 20, 2021 4:01 pm
https://www.reddit.com/r/investing/comm ... ch_sooner/

Here's another wrinkle to the argument. What about quantum computing attacks on the blockchain? The one thing I know about gold is that since it's physical there's no way that quantum computing can possibly affect it.

I want to add a big caveat to the ever ominous quantum boogeyman: I have absolutely no idea WTF I'm talking about. I've heard arguments on both sides here. Some people are saying it's a non-issue. Bitcoin supposedly already has some quantum resistant features, or that a simple fork can solve the problem. Others are saying that the coming age of quantum computers signals the end of legacy blockchains like Bitcoin.

Anyone more knowledgeable care to chime in?

QC is a theoretical threat to bitcoin, but it will be many decades away before it might be useable for an attack. We should also worry about the security of our bank accounts by then :-)
More here: https://en.bitcoin.it/wiki/Quantum_comp ... nd_Bitcoin
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Kriegsspiel » Sun Feb 21, 2021 6:47 am

pors wrote:
Sun Feb 21, 2021 2:53 am
QC is a theoretical threat to bitcoin, but it will be many decades away before it might be useable for an attack. We should also worry about the security of our bank accounts by then :-)
More here: https://en.bitcoin.it/wiki/Quantum_comp ... nd_Bitcoin
Quantum computing can't do shit to physical bullion in my possession, though O0 O0 O0

Gold is one of the oldest financial technologies in existence. In Lindy Effect terms, gold is to financial technology like the wheel is to transportation technology. The first people to use the wheel for chariot warfare were able to conquer their neighbors until their neighbors adopted it as well. But it's proven useful over the millennia as well even if you didn't get in at the beginning, and it's still useful in a time when Starship exists. Bitcoin is like Starship; it might become the new standard in transportation (so you should invest in SpaceX right now because they're going to reap all the profits from it), or it might just be one pioneer in the field of spacecraft that is so big, you didn't have to invest in SpaceX to profit from.

So to sum up this metaphor-analogy jumble that I'm coming up with on the fly, gold is a useful, known quantity (long-lived, in Lindy terms)... btc is still in the beginning of it's Lindy life so it's speculative in those terms. As you said, in a couple hundred years it might be obvious which way it went, but right now it's too soon to add it to the pantheon of Long Lived Lindys.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by bitcoininthevp » Mon Feb 22, 2021 1:12 pm

Smith1776 wrote:
Sat Feb 20, 2021 2:32 pm
I'm thinking a 1% allocation to Bitcoin in the PP isn't such a crazy idea at this point. So that would be 24% in gold and 1% in Bitcoin. This number could be revisited as the market evolves.
I had recommended a PP with a Bitcoin sidecar. Maybe its one way to look at it for PP purists.
viewtopic.php?f=1&t=10551&p=190611&hili ... ar#p190611

But honestly this last year has me thinking a bit more in line with your thoughts here. Gold is actually open to risk from Bitcoin.
viewtopic.php?f=5&t=11753&p=220276&hili ... in#p219046

One thought I just had was if you do a 24% gold, 1% bitcoin split for the gold allocation in a modified PP, perhaps you DONT rebalance the bitcoin back to 1% during rebalancing if bitcoin goes UP. Maybe you just rebalance back down to 2.5%-5% bitcoin. This way you are retaining more exposure to bitcoin as its market cap (as its a potential second/third favorite money) grows.
Smith1776 wrote:
Sat Feb 20, 2021 2:32 pm
Really, I can understand why an investor who shuns gold might not hold Bitcoin. They're both non-productive assets. However, anyone who holds gold is going to have a hard time arguing against Bitcoin. The arguments we make to hold gold can easily be appropriated as an argument to hold cryptocurrency. The only old chestnut left is "gold has been around for thousands of years, and Bitcoin hasn't." Yeah, well, are we really going to wait thousands of years before realizing that a regime change has taken place?
This is the reason I like to evangelize Bitcoin in this totally obscure forum. You guys are primed for Bitcoin.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by bitcoininthevp » Mon Feb 22, 2021 1:16 pm

whatchamacallit wrote:
Sat Feb 20, 2021 6:52 pm
First I think the masses are just buying bitcoin through Robinhood. From what I can tell, you don't really have control of it there.

I have never felt great about direct bitcoin holding. It feels very clunky. I don't see the masses ever adopting it in that form so it really isn't so moneyish yet. At least central banks hold gold.
You are somewhat worried about the user experience properties of a potential monetary asset instead of its monetary properties. Sure, there is a touch of overlap, but such a concern disappears when viewing from bigger picture timeframes.

Reminds me a bit of the "What is Internet?" clip:
https://www.today.com/video/-what-is-in ... 2308421624
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by bitcoininthevp » Mon Feb 22, 2021 1:21 pm

I Shrugged wrote:
Sat Feb 20, 2021 6:44 pm
I know it is tempting to feel one has to get in before it’s too late. But a lot of the too late scenarios would be problematic. I have some FOMO, but if it’s truly going to have a great future, it should be okay to wait.
If you buy one bitcoin today, you can protect your USD value from a drop by buying a zero cost collar on it.

Example:

- Buy bitcoin $53,000
- Sell a December 2021, $120,000 call
- Use proceeds to buy a $48,000 put

You capture all the USD gains up to $120,000, the call strike.
You can lose MAX $5,000 on a drop from the put, even if bitcoin goes to $1.
Costs you nothing for the protection.

Typing this all out in the PP forums makes me feel dirty, very un-PP. Even if it is quite an amazing trade, especially for USD denominated folks.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by bitcoininthevp » Mon Feb 22, 2021 1:23 pm

Mark Leavy wrote:
Sat Feb 20, 2021 6:31 pm
Gold is truly anonymous. Bitcoin, not so much.
How does the IRS asking about it make it less anonymous? Completely irrelevant. If IRS asks about gold does that make gold all of the sudden less anonymous?
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Smith1776 » Mon Feb 22, 2021 1:30 pm

F*#k it. I've been thinking about it since I started this thread. I'm sold. 1% of my PP in Bitcoin.

In my case this doesn't engender any buying/selling. I was already holding Bitcoin in my VP. This is just a mental shift more than anything.
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." - Alan Greenspan, 1966
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Smith1776 » Mon Feb 22, 2021 1:52 pm

I just need to think of a suitable rebalancing policy.

One great thing about the fortuitous timing of the launch of the BTCC ETF is that I can now have "shallow" Bitcoin held in a tax-advantaged account. This is much like gold -- shallow Bitcoin in the ETF and deep Bitcoin in my software wallet.
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." - Alan Greenspan, 1966
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Kevin K. » Mon Feb 22, 2021 2:55 pm

This is the best article I've seen on Bitcoin:

https://www.whitecoatinvestor.com/top-7 ... r-bitcoin/

Crystal-clear about what it's useful for and what it's not. And NOT a gold substitute or equivalent in the PP, IMHO, though I can totally see its speculative appeal in a VP.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by whatchamacallit » Mon Feb 22, 2021 2:57 pm

@bitcoininthevp

What platform would you use for call and put purchases?

How much are they selling for?
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Smith1776 » Mon Feb 22, 2021 3:05 pm

Hmmmm. I didn't find that article particularly convincing.
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." - Alan Greenspan, 1966
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by bitcoininthevp » Mon Feb 22, 2021 5:48 pm

whatchamacallit wrote:
Mon Feb 22, 2021 2:57 pm
@bitcoininthevp

What platform would you use for call and put purchases?

How much are they selling for?
You can use the CME. Ledgerx is another fully regulated options exchange in the US.

Deribit is the biggest Bitcoin options exchange but not open to US retail customers due to regulation.

Both those December $48k puts and $120k calls are each going for about $11,5000 per each.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by bitcoininthevp » Mon Feb 22, 2021 5:51 pm

Kevin K. wrote:
Mon Feb 22, 2021 2:55 pm
This is the best article I've seen on Bitcoin:

https://www.whitecoatinvestor.com/top-7 ... r-bitcoin/

Crystal-clear about what it's useful for and what it's not. And NOT a gold substitute or equivalent in the PP, IMHO, though I can totally see its speculative appeal in a VP.
Not a very insightful article and author admits not being a Bitcoin expert. Not sure what crystal clear about it.

Also it literally has #7 as Bitcoin and gold as hedges.
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Smith1776 » Mon Feb 22, 2021 7:28 pm

There is one thing about quantum resistant encryption and algorithms I wanted to mention. Someone earlier mentioned how if Bitcoin is vulnerable to QC attack then we'd have bigger things to worry about like our bank accounts.

I'm not so much worried about QC attacks on my bank accounts and such, as the banks have unilateral control over what security protocols they employ. Bitcoin is very different because the governance is so gridlocked that it's hard to know if effective and decisive action would be taken to defend the ledger against a ruinous attack.

And if that decisive action is taken it could end up being a hard fork where we end up with a Bitcoin Cash debacle all over again. What if the Bitcoin Core holders are simply left holding the QC vulnerable bag?
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." - Alan Greenspan, 1966
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by Smith1776 » Fri Feb 26, 2021 9:51 pm

https://www.bloomberg.com/news/articles ... organ-says

Looks like JPMorgan is thinking along the same lines as myself! ;D


“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio,” strategists including Joyce Chang and Amy Ho wrote in a note Wednesday.
"This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." - Alan Greenspan, 1966
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Re: Bitcoin as a complement or alternative to gold in the PP

Post by bitcoininthevp » Sat Feb 27, 2021 6:04 am

Smith1776 wrote:
Fri Feb 26, 2021 9:51 pm
https://www.bloomberg.com/news/articles ... organ-says

Looks like JPMorgan is thinking along the same lines as myself! ;D


“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio,” strategists including Joyce Chang and Amy Ho wrote in a note Wednesday.
I’ve read some studies showing a 1% allocation to Bitcoin and 99% to cash has had crazy good returns with great sharpe ratios.
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