Implementing Bitcoin into the Permanent Portfolio

[Marc De Mesel]

If bitcoin succeeds in becoming a mainstream currency, that by itself would have no effect on the PP.  Your cash allocation would still be in the currency where you are living/working/spending.

Bitcoin in the VP is perfectly fine.  Unless a major country dumps its own currency and substitutes bitcoin,  I don't see it as part of the PP.

What do you mean with 'Your cash allocation would still be in the currency where you are living/working/spending.' Do you mean your cash would be fiat or bitcoin?

[l82start]

i suspect a transition to bit coin much like one to silver, would be similarly protected by gold since much of golds volatility is connected to uncertainty and any currency transition would be accompanied by a considerable amount of that..

[Pointedstick]

You did not address, let alone debunk, my main arguments in favor of implementing bitcoin into the PP. If you can debunk them I would value that highly.

Okay, okay. Here's my counter-argument:

Bitcoin is an aspiring currency that is not actually used much as a currency; as such, its present exchange value for other fiat currencies is primarily derived from the hope that in the future it will have an exchange value for goods and services--and that present holders will then be able to win big by holding large stores of the future currency.

Now most of what you say is true as long as that use as a real currency eventually materializes. But in order for that to happen, it will require people like you and me and all of us actually buying things with our Bitcoins, not just holding them in anticipation of a future where other people do and we can cash out big time.

If you're counting on stores deciding to only accept Bitcoins, it's just not going to happen for mainstream sellers until the volatility smooths out and large numbers of customers actually want to buy with their Bitcoins. Like I said, I run an online store that accepts Bitcoins, and there is NO WAY I would only accept Bitcoins at the moment. I'd be reducing my business by 99%. Furthermore, it's just too volatile. I wouldn't be able to count on consistently measurable profit from week to week because the value is springboarding up and down so rapidly.

[Marc De Mesel]

i suspect a transition to bit coin much like one to silver, would be similarly protected by gold since much of golds volatility is connected to uncertainty and any currency transition would be accompanied by a considerable amount of that..

That's a good point. And it certainly might happen that way though I think other scenario's are possible too.

For example we might get a 'prosperity' cycle again the coming decades where the amount of money printed goes down, and true inflation too, impacting gold's value negatively while at the same time bitcoin continues to grow exponentially in adoption and value.

This because during times of prosperity fiat also loses purchasing power at a high rate. I estimate true inflation during the 80's and 90's also around 5% per year. It's true that in such times saving accounts offer a similar interest which solved the problem in the past. However, this crises may end the coming years in more widespread bank defaults ala Cyprus where savers actually lose money. This likely will be remembered for a generation and eventhough saving accounts may again offer an interest comparable to true inflation, people might still prefer bitcoins over savings accounts due to the lack of counterparty risk. At the same time they might ignore gold even more then during the 80's and 90's as bitcoin is also an excellent long term store of value.

Thinking out loud here, if you feel I miss something I value you point it out.

[AdamA]

I don't think you answered the question 'what happens with the PP if bitcoin succeeds in becoming a mainstream currency?'

Your answer is basically 'it will not happen' but ofcourse that's the same as answering to 'what happens with the PP if we get a great depression?', 'it will not happen'.

What if it happens?

I don't think anyone can answer that question with anything other speculation.

My question to you is this:  If one or two of the assets in the PP went on a tear over the next couple of years, would you be comfortable rebalancing those profits into bitcoins?  Or, if bitcoins crash, are you going to take money out of gold, stocks, bonds or cash to catch it back up to 20%?  That would be very difficult for most of us to do at this point, but...

...if you can do it, then I guess it might make sense to keep them in your modified PP. 

But why not just buy a finite amount and set it aside as insurance against the scenario you are describing?

[smurff]

If bitcoin succeeds in becoming a mainstream currency, that by itself would have no effect on the PP.  Your cash allocation would still be in the currency where you are living/working/spending.

Bitcoin in the VP is perfectly fine.  Unless a major country dumps its own currency and substitutes bitcoin,  I don't see it as part of the PP.

What do you mean with 'Your cash allocation would still be in the currency where you are living/working/spending.' Do you mean your cash would be fiat or bitcoin?

If you are living in the USA and the US dollar is the currency, then then your cash (and presumably the bulk of your PP) would be denominated in US dollars--unless the USA--the government or the people--decided to adopt bitcoin as the national currency.  In that case the cash and portfolio would be denominated in bitcoin.  Likewise if you are living in Italy or Spain, then the denomination would be Euros--unless bitcoin had been adopted as a replacement for the Euro.

Any newly adopted currency would likely come into use over a long period of time.  I think a question would be, in the run-up to adopting bitcoin as a legitimate currency, what effect would that have on the current PP, which is based on fiat currencies?  One good thing about the Permanent Portfolio is that it is agnostic about such matters.  Half of the portfolio is made of assets that are primary/non-fiat (gold) and that have value outside the currency they trade in (stock).  As Pointedstick  pointed out, bitcoin is too volatile to be used in everyday commerce.  Right now that volatility has no apparent relationship to the four economic environments Harry Browne Browne described for the PP.

[Marc De Mesel]

I don't think you answered the question 'what happens with the PP if bitcoin succeeds in becoming a mainstream currency?'

Your answer is basically 'it will not happen' but ofcourse that's the same as answering to 'what happens with the PP if we get a great depression?', 'it will not happen'.

What if it happens?

I don't think anyone can answer that question with anything other speculation.

My question to you is this:  If one or two of the assets in the PP went on a tear over the next couple of years, would you be comfortable rebalancing those profits into bitcoins?  Or, if bitcoins crash, are you going to take money out of gold, stocks, bonds or cash to catch it back up to 20%?  That would be very difficult for most of us to do at this point, but...

...if you can do it, then I guess it might make sense to keep them in your modified PP. 

But why not just buy a finite amount and set it aside as insurance against the scenario you are describing?

It is not speculation to ask the question 'what if?' It's speculation whether 'it will happen'. But answering the question 'what if' can be answered with pure logic, without requiring any speculation. And my logic says that 'if bitcoin becomes mainstream currency' the PP will lose a lot of purchasing power. Nobody here has validated this. Why? Is my logic wrong? Or is my logic being ignored for other reasons?

Also note that my second strong argument why to implement bitcoin, that it gives way better protection against government confiscation and having to leave your country, than physical gold, has up until now not been validated or debunked but been ignored. Why?

I believe in the long term viability of bitcoin, even when it is outlawed by some major countries, so I would personally feel comfortable about balancing into bitcoin. However I am not certain yet whether bitcoin should be 20% in my PP. In fact I reject that idea still as my 'security' part refuses to cooperate But he agrees with a small allocation in my PP, 5%.

Why not buy a finite amount of bitcoins and simply hold? Because if bitcoin simply continues to grow at the same rate it has, it quickly becomes much bigger than my PP, and I don't find that secure. All can be lost, doesn't matter how big it becomes in the meantime. So I really like to protect half of my capital in a balanced PP, always, so that I don't risk losing that.

[l82start]

For example we might get a 'prosperity' cycle again the coming decades where the amount of money printed goes down, and true inflation too, impacting gold's value negatively while at the same time bitcoin continues to grow exponentially in adoption and value.

as bitcoin is also an excellent long term store of value.

Thinking out loud here, if you feel I miss something I value you point it out.

i would add the word "potentially"  to the "excellent long term store of value" statement, as others have pointed out we really don't know how government or banks will react to decentralized currency and a bit of pessimism is probably warranted..

i am a long time fan of bit coins and was following them from before they actually existed (i may have even posted one of the first bit coin threads on this forum) but as much as i love the idea i am not an investor yet, i have to many worries about the complexity of exchanging/buying them and the prospects of  lots choppy waters between now and stability and acceptance.
i do keep a small VP position in silver and when bit coins start to look stable and easy to work with i will probably pick up some for the same reasons i hold silver.. (the advantage of getting there ahead of time) i think there is still opportunity to both "be an early adopter" and "wait until some more of the uncertainty about bit coins is resolved".

i would still classify it as a VP play and not a part of my PP until the transition was well under way (at which point it would be cash)

[Marc De Mesel]

You did not address, let alone debunk, my main arguments in favor of implementing bitcoin into the PP. If you can debunk them I would value that highly.

Okay, okay. Here's my counter-argument:

Bitcoin is an aspiring currency that is not actually used much as a currency; as such, its present exchange value for other fiat currencies is primarily derived from the hope that in the future it will have an exchange value for goods and services--and that present holders will then be able to win big by holding large stores of the future currency.

Now most of what you say is true as long as that use as a real currency eventually materializes. But in order for that to happen, it will require people like you and me and all of us actually buying things with our Bitcoins, not just holding them in anticipation of a future where other people do and we can cash out big time.

If you're counting on stores deciding to only accept Bitcoins, it's just not going to happen for mainstream sellers until the volatility smooths out and large numbers of customers actually want to buy with their Bitcoins. Like I said, I run an online store that accepts Bitcoins, and there is NO WAY I would only accept Bitcoins at the moment. I'd be reducing my business by 99%. Furthermore, it's just too volatile. I wouldn't be able to count on consistently measurable profit from week to week because the value is springboarding up and down so rapidly.

lol I'm sorry Pointedstick but I feel you did not address them. You are answering the same way that Craig did: 'It won't happen'.

What if it does happen?

[Pointedstick]

lol I'm sorry Pointedstick but I feel you did not address them. You are answering the same way that Craig did: 'It won't happen'.

What if it does happen?

Then you need to better define what it "happening" would actually mean. Are we talking about the United States or other countries adopting Bitcoin as an official currency? Are we talking about all the citizens of the world transacting with Bitcoin despite their governments continuing to push their own currencies?

These are big changes you're imagining. If Bitcoin became a widespread global currency, its impact on our PPs is small potatoes. It would reshape the entire world. That's why I think it's implausible. Now I do think it's possible, in order to get there, people need to start using it as a currency and buying things with their Bitcoins.

[craigr]

You did not address, let alone debunk, my main arguments in favor of implementing bitcoin into the PP. If you can debunk them I would value that highly.

The issue is how the mainstream public will use this new currency, or if they even will. If they expect the same level of convenience as current fiat systems (to include ATMs, writing checks, debit cards, electronic bill pay, etc.) bitcoin has a lot of distance to cover.

I guess I would counter by saying that electronic gold services offer comparable features and some that Bitcoin does not (it is a true physical money). But when people try to introduce electronic gold currencies they inevitable have run afoul of various anti money laundering laws, tax laws, child pornography laws, etc. Many of which are probably deliberately in place to prevent the emergence of competing currencies.

I just personally feel it's highly speculative at this point. If it becomes much more mainstream and can demonstrate it has qualities of gold to diversify currency risks it may be an option to consider.

[Libertarian666]

I'll consider adding bitcoins to my portfolio as soon as someone explains why they should have any value at all other than because someone else might want them in the future, that is, what their use value is.

For example, if they were redeemable for a fixed quantity of something, like maybe a metallic element? I have a fondness for element 79...

[Pointedstick]

Marc,
Put more simply, I'm not necessarily saying that it won't happen, only that it hasn't happened yet. It seems that we agree on this count. And therefore, integrating Bitcoin into the PP cannot be about anything fundamental to an economic role that Bitcoin currently serves in a portfolio; it's instead a speculation about the role that you suspect and hope Bitcoin will serve in the future once it becomes established as a viable and popular currency, with the bonus that by already owning a bunch, you'll be in a great position to profit. That's great! There's nothing wrong with that type of speculation, and I think the VP is a fine place for that. But the PP is not supposed to be used for this sort of thing.

[Marc De Mesel]

For example we might get a 'prosperity' cycle again the coming decades where the amount of money printed goes down, and true inflation too, impacting gold's value negatively while at the same time bitcoin continues to grow exponentially in adoption and value.

as bitcoin is also an excellent long term store of value.

Thinking out loud here, if you feel I miss something I value you point it out.

i would add the word "potentially"  to the "excellent long term store of value" statement, as others have pointed out we really don't know how government or banks will react to decentralized currency and a bit of pessimism is probably warranted..

i am a long time fan of bit coins and was following them from before they actually existed (i may have even posted one of the first bit coin threads on this forum) but as much as i love the idea i am not an investor yet, i have to many worries about the complexity of exchanging/buying them and the prospects of  lots choppy waters between now and stability and acceptance.
i do keep a small VP position in silver and when bit coins start to look stable and easy to work with i will probably pick up some for the same reasons i hold silver.. (the advantage of getting there ahead of time) i think there is still opportunity to both "be an early adopter" and "wait until some more of the uncertainty about bit coins is resolved".

i would still classify it as a VP play and not a part of my PP until the transition was well under way (at which point it would be cash)

Thanks for your valuable feedback. I agree with you that it is not urgent to implement bitcoin into the PP. Bitcoin's current value of a few billion may rise to a few hundred billion and it won't impact the assets of the PP. However, after that, once it grows into a few thousand billion it will start impacting the PP's value.

So I would agree that one does not need to implement bitcoin just yet based on the PP losing value if bitcoin becomes mainstream.

Thinking more about the other argument I gave in favor of adding bitcoin to the PP already today: the added protection bitcoin offers to a Permanent Portfolio when it comes to confiscation. Although that is certainly true, bitcoins are much harder to confiscate and having say 20% bitcoins in your pp as well as 20% physical gold would make you more protected against confiscation than just having 25% physical gold, however I realize now that the added currency risk of bitcoin is too high just to get that benefit.

Just on a sidenote, I admire your disciplined approach towards the PP but I am also surprised you never implemented bitcoin into your VP, considering you followed it from the start. Have you never found it to be a good speculation? To me the risk/reward seems very favorable. Do you not agree with that? Also, is it not hard for you to see that you missed out on some tremendous gains?

[Marc De Mesel]

Marc,
Put more simply, I'm not necessarily saying that it won't happen, only that it hasn't happened yet. It seems that we agree on this count. And therefore, integrating Bitcoin into the PP cannot be about anything fundamental to an economic role that Bitcoin currently serves in a portfolio; it's instead a speculation about the role that you suspect and hope Bitcoin will serve in the future once it becomes established as a viable and popular currency, with the bonus that by already owning a bunch, you'll be in a great position to profit. That's great! There's nothing wrong with that type of speculation, and I think the VP is a fine place for that. But the PP is not supposed to be used for this sort of thing.

You are right Pointedstick. Your reasoning was also my first thought that came up for me (mostly the best ideas ) but later I rejected it by reducing that argument to 'market cap too small' and then saying that Harry Browne also allowed assets with much smaller market caps to take an equal position (gold vs stocks for example). But you are right, it's not that the market cap of bitcoin is too small, it's that bitcoin is not required to preserve your purchasing power, there is no economic climate yet where bitcoin is the main protector and without it you are screwed. One day that might be the case but not today, and not tomorrow.

I think I'm going to cancel the whole idea and remove bitcoin in full from my pp. As just having the 5% bitcoin in my pp makes it asymmetrical and more complicated and does not add a lot of extra protection when it comes to confiscation as it's just 5%. Instead I am going to focus on getting my 25% physical gold and cash part better protected against confiscation.

Thank you so much for your valuable feedback. Often my bitcoin bull/speculation part wants to overtake my PP, and it happened again. Your rational and sympathetic feedback has been very important for me to see that I was wrong. Thank you

[WildAboutHarry]

I'll consider adding bitcoins [Federal Reserve Notes] to my portfolio as soon as someone explains why they should have any value at all other than because someone else might want them in the future

[Marc De Mesel]

I'll consider adding bitcoins [Federal Reserve Notes] to my portfolio as soon as someone explains why they should have any value at all other than because someone else might want them in the future

I like your name and your transformed quote

Bitcoin made me realize that fiat actually is alright, as long as they don't print too much (2% per year would be acceptable and equal to gold's inflation). The fact that they sold the gold that once backed it up is not a problem an sich.

[HB Reader]

[Just on a sidenote, I admire your disciplined approach towards the PP but I am also surprised you never implemented bitcoin into your VP, considering you followed it from the start. Have you never found it to be a good speculation? To me the risk/reward seems very favorable. Do you not agree with that? Also, is it not hard for you to see that you missed out on some tremendous gains?

Marc --

Some of us have had a very good experience with bitcoins as a part of our VP.

But the risk/reward only looks very favorable in retrospect -- it was not so evident in 2010, or in middle to late 2011 after a major hacking incident at one of the major bitcoin exchanges, nor is it particularly evident now.  I could see the whole experiment go well, or bad, from here without any correlation whatsoever to what occurs in the broader economic world. 

I have continued to hold a small number in my VP because I also see some possible long term potential, but I wouldn't put PP money I can't afford to lose in such a speculation. 

[Tortoise]

Bitcoin made me realize that fiat actually is alright, as long as they don't print too much (2% per year would be acceptable and equal to gold's inflation). The fact that they sold the gold that once backed it up is not a problem an sich.

Sanity check: 2% growth implies a 35-year doubling period. So 2% inflation in gold would imply that the supply of above-ground gold is doubling every 35 years.

2% inflation may be acceptable to some people, but saying that it's "equal to gold's inflation" seems like a stretch. Gold doesn't lose half of its purchasing power every 35 years.

[Marc De Mesel]

Bitcoin made me realize that fiat actually is alright, as long as they don't print too much (2% per year would be acceptable and equal to gold's inflation). The fact that they sold the gold that once backed it up is not a problem an sich.

Sanity check: 2% growth implies a 35-year doubling period. So 2% inflation in gold would imply that the supply of above-ground gold is doubling every 35 years.

2% inflation may be acceptable to some people, but saying that it's "equal to gold's inflation" seems like a stretch. Gold doesn't lose half of its purchasing power every 35 years.

Sorry, I meant around 2% extra gold being mined per year. Indeed since the economy also grows around 2% per year the purchasing power of gold remained fairly constant.

[Pointedstick]

Actually, I think Marc is defining "inflation" in this context to mean the growth in the supply of fiat money and gold, rather than a derived value that's the intersection of supply and demand (i.e. the price level).

With this method of looking at things, we should say that inflation in the USA is like 30% per year to account for all the massive money printing. I don't think it makes much sense, personally. If people were experiencing 30% increases in the price of consumption goods, there would be rioting in the streets. I think "change in the price level" is a much more useful definition of inflation than "quantity of money."

[WildAboutHarry]

I like your name and your transformed quote

Thanks.  The name is appropriated from a piece by William Bernstein extolling the attributes and virtues of the Permanent Portfolio.

Of course Dr. Bernstein appropriated his title from the 1921 song of the same name.

As for the transformed quote, something is only worth what someone is willing to pay for (or exchange for) it.

[Tortoise]

I understood Marc's statement just fine. Sorry, I probably wasn't sufficiently clear in my post. What I'm really wondering is if the above-ground supply of gold is really growing geometrically at a rate of 2% per year. I'm skeptical of that claim.

The reason I'm skeptical of it is because (to reiterate what I said in my previous post) a 2% growth in something implies a 35-year doubling period for that thing. In other words, claiming that the above-ground supply of gold is growing by 2% each year is equivalent to saying that the above-ground supply of gold is doubling every 35 years.

Is the supply of gold in fact doubling every 35 years? I don't think it is.

Hopefully I was clearer this time.

[AgAuMoney]

I understood Marc's statement just fine. Sorry, I probably wasn't sufficiently clear in my post. What I'm really wondering is if the above-ground supply of gold is really growing geometrically at a rate of 2% per year. I'm skeptical of that claim.

I don't know the actual rate, but 2% seems slightly higher than the historical average.

http://www.goldsheetlinks.com/production2.htm

'''50% of all gold ever produced was produced since 1967'''

[Tortoise]

I understood Marc's statement just fine. Sorry, I probably wasn't sufficiently clear in my post. What I'm really wondering is if the above-ground supply of gold is really growing geometrically at a rate of 2% per year. I'm skeptical of that claim.

I don't know the actual rate, but 2% seems slightly higher than the historical average.

http://www.goldsheetlinks.com/production2.htm

'''50% of all gold ever produced was produced since 1967'''

Ok, so 2% is at least in the ballpark. I should have just done a little research instead of derailing the discussion like this. My apologies