BTC in the PP

[Jack Jones]

I was recently perusing my copy of WtBLIPUGW&HYCFS&PiaUW (Why the Best-Laid Investment Plans Usually Go Wrong <takes a breath> AND How You Can Find Safety and Profit in an Uncertain World). I noticed that Harry gives some guardrails if you feel the need to go off script:

If you want or need to include other investments in the Permanent Portfolio, I believe their total value should be limited, if practical, to no more than 15% of the total.

Even if you believe that a particular path for the economy is especially likely, I hope you'll consider establishing a neutral portfolio. It will reward you whether you're right or wrong. But if you're determined to weight the portfolio in one direction, please don't give any investment more than 35%. And don't reduce any of the four essential investments to less than 20%.

Some random thoughts on the matter:

Personally, I'm not feeling great about the US $. I'm concerned my portfolio won't keep up with inflation. I'm thinking Bitcoin might help there. It seems appropriate for the PP because it's like gold, a bearer asset of limited supply that can be stashed away indefinitely. The earlier iterations of the PP held Swiss Francs as an alternative form of money, in addition to US dollars and Gold, so I think another form of money is kosher. Bitcoin is also volatile like stocks, bonds and gold, so it might perform well in a portfolio like the PP.

Here's a potential HB-approved asset allocation:

Stocks: 25%
Bonds: 20%
Gold: 20%
Cash: 20%
Bitcoin: 15%

What do you think? WWHBD?

Personally, I think Harry Browne would have gone deep on Bitcoin. I don't know if he would have money in it at this point, but he would certainly know all about it. I believe Harry made a killing around the time when "How you can profit from the coming devaluation" was released by being aware of the macro picture and knowing which tools to apply. I know neither, but I'm looking into this new tool, and it seems past the toy stage.

Thanks to Bitcoin in the VP for inspiring this thread.

[Hal]

Just make it 20% each and call it "The Bitcoin Butterfly Portfolio"

But being serious, I think weighting up to 20% in any broad asset class is OK. Just not 20% in say, GME.

[Jack Jones]

Just not 20% in say, GME.

On that point, elsewhere in the book he says that if you're picking individual stocks, to keep the position below 1% of the total portfolio, e.g. 25 companies for your 25% in equities.

Bitcoin butterfly portfolio would be too bearish. I'm happy with 25% equities.

[Jack Jones]

The U.S. dollar is the leading money of the world, and gold is its principal challenger. It hasn't always been that way, and it may not always be. Sufficient inflation in the U.S. could dethrone the dollar -- making way for gold or another currency to be king. But, in the late 1980's, we're quite a distance from such an event.

Are we still?

Why are countries willing to hold U.S. dollars when it's clear that the U.S. is bent on devaluing its currency to service our debt? Maybe because it's easier to move around than gold. Seems like these factors are changing; we now have a money that will not be inflated, and is easy to send around the globe.

[Kbg]

The U.S. dollar is the leading money of the world, and gold is its principal challenger. It hasn't always been that way, and it may not always be. Sufficient inflation in the U.S. could dethrone the dollar -- making way for gold or another currency to be king. But, in the late 1980's, we're quite a distance from such an event.

Are we still?

Why are countries willing to hold U.S. dollars when it's clear that the U.S. is bent on devaluing its currency to service our debt? Maybe because it's easier to move around than gold. Seems like these factors are changing; we now have a money that will not be inflated, and is easy to send around the globe.

Context, always helpful. So you need to do transactions whose number ends in the words several hundred million or billion. What currency are you going to use?

Euro, arguably a worse situation than the US

Yen, not even arguable that they are in a WAY worse situation than the US

Renminbi, the most manipulated large scale currency on the planet (and generally sorta fixed to the US dollar anyway) plus that whole communist party thing that seems to be coming back with a vengeance as of late.

And to trade in the world's largest economy you don't get a vote or a choice - you must use the dollar.

Not saying the Fed isn't going to do exactly as you suggest. I'd definitely lean toward your observation myself. But, if you got the problem I mentioned and you want to trade with the US, where you going to go that looks better?

[Kriegsspiel]

The U.S. dollar is the leading money of the world, and gold is its principal challenger. It hasn't always been that way, and it may not always be. Sufficient inflation in the U.S. could dethrone the dollar -- making way for gold or another currency to be king. But, in the late 1980's, we're quite a distance from such an event.

Are we still?

Why are countries willing to hold U.S. dollars when it's clear that the U.S. is bent on devaluing its currency to service our debt? Maybe because it's easier to move around than gold. Seems like these factors are changing; we now have a money that will not be inflated, and is easy to send around the globe.

I like this quote from the director-general of Chinese banking regulatory commission, Luo Ping in 2009 (quoted from Zeihan):

Except for US Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or UK bonds,. US Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion-$2 trillion [in new debt]... we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.

Now, that's from 2009, and we don't know if he was head-faking, but Zeihan's take is that the Bretton-Woods regime dictates that countries use dollars and buy American debt in exchange for us being Team America: World Police, maintaining shipping lanes and the status quo (my words).

[Kbg]

It’s complex and not easy to explain but what Kriegs posted is the essence of why non-government crypto will never be a thing in terms of serious commercial use.

But I’m a broken record on this…apologies.

[Kbg]

Sorry, cryptocurrency.

I don’t think I’ve read anything that doesn’t say this technology could/is/may be a game changer for applications and activities that need ultra high levels of trust, verification and authentication.

From a technical perspective there are several folks on the board who it appears have a solid understanding of this field. I do not. I do have a bit of experience in the dynamics of government power and I just don’t see governments ever giving up the amount of power that goes with setting the official currency. Doing so would be a major blunder.

From a financial perspective what I’m quite interested in is if non government cryptocurrency will stick around as a good speculative asset/item. BTC futures was kinda like breaking into the major leagues. To me putting them into the PP is a contradiction of terms and completely against HBs concept. Cryptocurrencies may very well end up being a great VP item though.

I don’t pay super close attention to BTC but I don’t think I’d mess with it unless I was day trading it based on what I’ve observed. Thus far, I don’t know how anyone could say with a straight face that it’s a good substitute for gold. Currently, there’s not enough data to really say what drives it beyond speculative venture. I’ve seen references to a couple of papers which IIRC the summaries said the studies couldn’t really figure anything out.

The above para is a memory stretch or figment of my imagination…so table full of salt

[glennds]

But I think the proper tax treatment (ie as property) which is what most jurisdictions are treating it as will prevent the mainstream use of BTC for payments.

Exactly. I don't understand why the currency conversation keeps coming back (in the US at least), when the IRS has deemed all crypto to be property. Therefore, unless one were willing to risk committing tax fraud, every "transaction" carries with it implied gain or loss, all of which must be reported. Therefore way too cumbersome to actually be used as a currency in daily practice.
Incidentally the same is true for gold.
When people say they're "buying" something in BTC, what they're really doing is bartering.

As a speculative asset, that's a different story.
As a technology that could form the foundation for other applications, that too is a different story.
As a cool social phenomenon that can create a sense of belonging for its holders (i.e. a cult with its own acronyms and gurus), that's very possible too.
But I think the currency ship sailed in 2014.

One *good* thing about being deemed property is that directly held crypto can be sold for harvesting tax loss and repurchased immediately without triggering wash sale treatment because the wash sale rule does not apply to property.

[Kbg]

One *good* thing about being deemed property is that directly held crypto can be sold for harvesting tax loss and repurchased immediately without triggering wash sale treatment because the wash sale rule does not apply to property.

Good to know, thanks!

[glennds]

There are a lot of people who don’t think cryptocurrencies will ever be currencies like fiat currencies and they are probably right but I don’t know of any crypto that is really trying to do that yet I can see many that have serious commercial uses.

This is what is particularly interesting to me, namely the commercial applications of crypto or the underlying technology. I'd like to learn more about it, can you point me in any particular direction where I might get more educated?
Maybe the play is not the crypto itself but fintech or other disruptor companies implementing commercial applications.

I've heard it said that Ethereum holds more potential than Bitcoin in this regard, but this is just idle hearsay and might have been specific to NFTs.

Sorry for drifting this off topic to the original post. It's probably more of a Variable Portfolio discussion.

[Jack Jones]

But I think the proper tax treatment (ie as property) which is what most jurisdictions are treating it as will prevent the mainstream use of BTC for payments.

Exactly. I don't understand why the currency conversation keeps coming back (in the US at least), when the IRS has deemed all crypto to be property. Therefore, unless one were willing to risk committing tax fraud, every "transaction" carries with it implied gain or loss, all of which must be reported. Therefore way too cumbersome to actually be used as a currency in daily practice.
Incidentally the same is true for gold.

What we're talking about is money on the nation-state level. The IRS's opinion is not applicable here. The IRS having deemed gold as property has had little bearing on people and nations hoarding it as money. I believe that when Bitcoin's market cap can support such use, countries will hold it in reserve and settle debts with it because it's better than the alternatives.

[Jack Jones]

Also, regarding Bitcoin vs cryptocurrencies in general. My mental model of the cryptocurrency world is that Bitcoin is like gold, almost an unchangeable elemental commodity, and other cryptocurrencies are like individual stocks, being under development, having a leader, etc.

As such, I would never hold ethereum in a PP because there's no chance of it becoming the world's reserve currency. When Harry was unsure of the dollar's future, he held Swiss Francs, not duPont.

[Kbg]

But I think the proper tax treatment (ie as property) which is what most jurisdictions are treating it as will prevent the mainstream use of BTC for payments.

Exactly. I don't understand why the currency conversation keeps coming back (in the US at least), when the IRS has deemed all crypto to be property. Therefore, unless one were willing to risk committing tax fraud, every "transaction" carries with it implied gain or loss, all of which must be reported. Therefore way too cumbersome to actually be used as a currency in daily practice.
Incidentally the same is true for gold.

What we're talking about is money on the nation-state level. The IRS's opinion is not applicable here. The IRS having deemed gold as property has had little bearing on people and nations hoarding it as money. I believe that when Bitcoin's market cap can support such use, countries will hold it in reserve and settle debts with it because it's better than the alternatives.

Completely wrong. If you can go to Walmart or any large retail chain anywhere on the planet and buy something in gold let me know and I'll take back my completely wrong. Small one off islands don't count. Black markets don't count, barter doesn't count.

Obviously the IRS doesn't state the rules for the world (or the US) but those nation states do for their turf and there are very few that recognize gold as legal currency. And those that do, do so at a huge discount to gold's market value.

Don't you find it interesting how the cross is always stated in the currency value and not the other way around? Should tell you something.

[Jack Jones]

What we're talking about is money on the nation-state level. The IRS's opinion is not applicable here. The IRS having deemed gold as property has had little bearing on people and nations hoarding it as money. I believe that when Bitcoin's market cap can support such use, countries will hold it in reserve and settle debts with it because it's better than the alternatives.

Completely wrong. If you can go to Walmart or any large retail chain anywhere on the planet and buy something in gold let me know and I'll take back my completely wrong. Small one off islands don't count. Black markets don't count, barter doesn't count.

Obviously the IRS doesn't state the rules for the world (or the US) but those nation states do for their turf and there are very few that recognize gold as legal currency. And those that do, do so at a huge discount to gold's market value.

So you would disagree with the statement that gold is hard money? Just because the IRS or Walmart doesn't accept something doesn't mean it's not money.

Don't you find it interesting how the cross is always stated in the currency value and not the other way around? Should tell you something.

I'm not following. The cross? Ah you mean how it's written $39000 USD-BTC. My phone says 2,618 Sats/USD. What does that tell you?

[Kbg]

Good points, as are mine.

Let me know how the Walmart test goes (or pick any regional or national chain).

With Paypal, practically speaking you are getting pretty close to money I will admit. But Paypal is serving as "money exchanger" and if you live in the US and aren't breaking the law then you'll have to treat BTC according to those nation state laws and regulations...

"Just like with any cryptocurrency exchange, PayPal users who sell, spend, or otherwise dispose of their cryptocurrency on the PayPal cryptocurrency hub will incur tax reporting requirements. ... Your gains and losses ultimately need to be reported on IRS Form 8949 and submitted with your tax return each year."

[Kbg]

I was just thinking today that when the fedcoin is released, they could probably program it so that only crypto that had a legal proof of funds would be able to be converted back into the fedcoin and all merchants would be mandated to accept the fedcoin only.

This would make legal btc property, illegal btc money outside the system and to most people worthless, but we have previously established in another thread that the only relevant unit of account for most here is the USD and so that is what money is.

If you have to qualify it by “hard” when referring to gold, then it’s not money until it’s converted like kbg alluded to.

At the end of the day "money" is whatever people will accept for tangible goods and services. "Good money" is whatever is widely accepted in exchange for tangible goods and services. "Legal/official money" or a national currency is whatever the sovereign government says it is and collects taxes in.

I'll concede BTC is "money" at this point. Unless something drastically changes you won't be getting "good" out of me.

[Jack Jones]

If you have to qualify it by “hard” when referring to gold, then it’s not money until it’s converted like kbg alluded to.

Yeah I guess we're quibbling with definitions. You guys say gold isn't money because it's not a medium of exchange. I consider gold money because it's a sure-fire way to store the value you generate now so that it's accessible for your future self or descendants.

This thread is about the suitability of Bitcoin as an asset in the PP. The fact that we don't use gold as a medium of exchange, doesn't preclude us from holding it in the PP.

[glennds]

This thread is about the suitability of Bitcoin as an asset in the PP. The fact that we don't use gold as a medium of exchange, doesn't preclude us from holding it in the PP.

That's a valid point.
But if you want to get technical about it, the PP is a correlation based capital preservation strategy. HB's writings talk extensively about the selection of gold for its behavior characteristics in his four defined economic conditions. IMO Bitcoin and its market is still so young that it is not predictable (yet) as to how it will behave in future economic conditions.

The primary goals of the PP are capital preservation and volatility reduction. Bitcoin has seen a 50% drop in value during a very short period this year. Yes, I know it has partially recovered, but my point is that no bucket in the conventional PP has seen that kind of volatility and if you kept BTC in lieu of gold, there would be no bucket with offsetting volatility in the other direction hence the overall portfolio would now become volatile.

Does this mean it is not a good investment? I'm not saying that at all.
But to force fit it into the PP as an equivalent substitute for gold is premature, is all I'm saying.
One thing already discussed in this thread is the susceptibility of Bitcoin to regulatory risk shocks. Look at what just happened with China. That's not a risk with gold.

This said, there are dozens of variations on the PP. Just take a look at the ones showcased on Tyler's portfoliocharts site. So if you are creating a modified PP totally or partially substituting Bitcoin for gold, there's nothing to stop you. It may be a good bet and it may not. And depending on your situation and patience level, the volatility might not bother you.

Changing subjects to your points on HB's ideology, I would say in some respects the PP aims to hedge the US dollar, and I think the Libertarian mistrust of government is probably baked into the thinking. Remember HB was a product of the 1970s when the US government did a good job mismanaging the economy.

So to the extent that BTC is the utopian answer to mistrust of the government and central bank manipulation, then yes maybe he would be a fan, if not now at some point. Given his age though, I think he might have a hard time getting comfortable with the complexity of the technology and the opaque aspects of crypto in general.

[Xan]

Given his age though, I think he might have a hard time getting comfortable with the complexity of the technology and the opaque aspects of crypto in general.

I'm MUCH younger than Harry Browne, and I have a hard time with those things too. I don't think it's an issue of being "comfortable": Bitcoin relies on people believing that this string of ones and zeros has value in the real economy while some other random string of ones and zeros does not. With gold, it's gold. It's just there. It is what it is.

[glennds]

Given his age though, I think he might have a hard time getting comfortable with the complexity of the technology and the opaque aspects of crypto in general.

I'm MUCH younger than Harry Browne, and I have a hard time with those things too. I don't think it's an issue of being "comfortable": Bitcoin relies on people believing that this string of ones and zeros has value in the real economy while some other random string of ones and zeros does not. With gold, it's gold. It's just there. It is what it is.

Hence the word opaque. Bitcoin fans talk about the transparency insofar as the white paper and source code is open and available to anyone to peruse. No central authority, etc, etc.
But it would be the remarkable person that has the time and is capable of performing a competent evaluation of the technology. For the rest of us, it's a game of confidence. Regardless of his age, trust and faith in others is just not a theme I was ever picking up from Harry.

My investments in crypto have been based greater fool speculation. Basically as I see more and more mainstream interest and enthusiasm for crypto the more confident I am that there will be a growing market. As long as the market of buyers is growing, the price should go up regardless of why they're buying or if they're wrong. Add the incremental institutional investors joining in. That's my thesis anyway, and I'm not risking any more than I can afford to lose.

But the regulatory risks are significant and I remind myself that the slightest whiff of inhospitable policy from Washington or the EU could send the crypto markets diving.

[Jack Jones]

Given his age though, I think he might have a hard time getting comfortable with the complexity of the technology and the opaque aspects of crypto in general.

I'm MUCH younger than Harry Browne, and I have a hard time with those things too. I don't think it's an issue of being "comfortable": Bitcoin relies on people believing that this string of ones and zeros has value in the real economy while some other random string of ones and zeros does not. With gold, it's gold. It's just there. It is what it is.

The real economy relies on people believing the ones and zeroes in the banking systems computer's are valuable. The ones and zeroes in the Venezuelan banking systems lost considerable value recently.

Why do people value gold as money though? It's because of the properties it has: it is rare, the supply doesn't increase much, it is indestructible. Prior to gold there were other forms of money, large stones, shells, beads. These were inferior in terms of the above properties and societies eventually settled on gold as the hardest money available to them. However, gold is not the ideal form of money. It is unwieldy for trade in the modern day, so we've settled on softer money, and we've accepted the tradeoff that the ease of use is worth the perils of fiat money.

[Jack Jones]

My investments in crypto have been based greater fool speculation. Basically as I see more and more mainstream interest and enthusiasm for crypto the more confident I am that there will be a growing market. As long as the market of buyers is growing, the price should go up regardless of why they're buying or if they're wrong. Add the incremental institutional investors joining in. That's my thesis anyway, and I'm not risking any more than I can afford to lose.

But the regulatory risks are significant and I remind myself that the slightest whiff of inhospitable policy from Washington or the EU could send the crypto markets diving.

I appreciate your perspective of crypto as a speculation.

As a counterpoint, my investment in Bitcoin is like my gold purchases. I buy anonymously. I don't plan on selling. This is off-the-books wealth, to be tapped as a last resort, or otherwise handed down to my kids.

[Jack Jones]

There is a good reason why BTC cannot actually be part of the PP at the moment, and that is because in order for you to allocate it to the PP, you need to be able to time the relative valuation of BTC against gold (i.e. whether BTC is over or undervalued compared to gold).

I don't follow. Is this because gold and BTC are in the same market as monetary commodities? E.g. demand for BTC means less demand for gold.

[Xan]

Given his age though, I think he might have a hard time getting comfortable with the complexity of the technology and the opaque aspects of crypto in general.

I'm MUCH younger than Harry Browne, and I have a hard time with those things too. I don't think it's an issue of being "comfortable": Bitcoin relies on people believing that this string of ones and zeros has value in the real economy while some other random string of ones and zeros does not. With gold, it's gold. It's just there. It is what it is.

I don't know many things more transparent than bitcoin...

You guys need to check out on-chain analysis.

Trying to tell people that they can run away with their wealth and start over or can be wealthy in some post-apocalyptic scenario is much harder to do when you're asking them to say "I have a very big number in my possession" as opposed to "I have a lot of gold in my possession". They're just not the same thing at all.