*https://www.kanaandkatana.com/valuation-depot-contents/2019/4/11/the-case-for-a-small-allocation-to-bitcoin*
Wences Casares, CEO of Xapo, March 2019
Why most portfolios should allocate up to 1% to Bitcoin
Bitcoin is a fascinating experiment but it is still just that: an experiment. As such it still has a chance of failing and becoming worthless. In my (subjective) opinion the chances of Bitcoin failing are at least 20%. But after 10 years of working well without interruption, with more than 60 million holders, adding more than 1 million new holders per month and moving more than $1 billion per day worldwide, it has a good chance of succeeding. In my (subjective) opinion those chances of succeeding are at least 50%. If Bitcoin does succeed, 1 Bitcoin may be worth more than $1 million in 7 to 10 years. That is 250 times what it is worth today (at the time of writing the price of Bitcoin is ~ $4,000).
I suggest that a $10 million portfolio should invest at most $100,000 in Bitcoin (up to 1% but not more as the risk of losing this investment is high). If Bitcoin fails, this portfolio will lose at most $100,000 or 1% of its value over 3 to 5 years, which most portfolios can bear. But if Bitcoin succeeds, in 7 to 10 years those $100,000 may be worth more than $25 million, more than twice the value of the entire initial portfolio.
In today’s world where every asset seems priced for perfection, it is hard, if not impossible, to find an asset that is so mispriced and where the possible outcomes are so asymmetrical. Bitcoin offers a unique opportunity for a non-material exposure to produce a material outcome.
It would be irresponsible to have an exposure to Bitcoin that one cannot afford to lose because the risk of losing the principal is very real. But it would be almost as irresponsible to not have any exposure at all.
Throughout this essay I refer to the “Bitcoin Blockchain” when I am referring to the Bitcoin platform as a whole, including the Bitcoin Blockchain and the Bitcoin currency. Many different systems for different use cases may one day run on top of the Bitcoin Blockchain. When I refer to “Bitcoin” I am referring to Bitcoin the currency, that can be bought, sold, sent, received, held, etc. You can think of the Bitcoin currency as the first system to run on top of the Bitcoin Blockchain.
The current state of the Bitcoin Blockchain is similar to the state of the Internet in 1992. Back then the Internet was very nascent and experimental. Just like with the early days of the Internet there are many bold claims about how the Bitcoin Blockchain will revolutionize the world and solve so many problems. Many of these claims are exaggerated or wrong. Even though right now most of us feel like we do not fully understand the Bitcoin Blockchain, over time we will all understand it as well and as intuitively as we understand the Internet today. You do not need to know the technical underbelly of the Internet to understand The Internet and, similarly, you do not need to know the technical intricacies of the Bitcoin Blockchain to understand it. If the Bitcoin Blockchain succeeds, the investors who develop this understanding and this intuition earlier will have an advantage over the investors that take longer to do so.
Understanding the Bitcoin Blockchain first principles will allow you to form your own judgment about its potential applications without you having to trust any expert. To understand the Bitcoin Blockchain first principles let’s understand what changed when the Bitcoin Blockchain first started running in January 2009. All of the Bitcoin Blockchain separate components (Public key cryptography, distributed databases, open databases, tokens and proof of work) existed many years before Bitcoin went live. What changed when Bitcoin went live? What was new and potentially revolutionary? The only thing that changed, that may potentially be revolutionary, is that all of those components were combined in a new, creative and intelligent way to create the first potentially sovereign computer platform. Up until that moment, all computer platforms belonged to a person, to a company or to a government and those platforms had to obey the will of their owners and the rules of the jurisdiction where they resided. A sovereign only obeys its own rules, no one can impose rules on a sovereign. Kings and Queens used to be sovereign, then nation states became sovereign and now, for the first time, a humble computer platform has the aspiration to be sovereign. That is potentially revolutionary.
The Bitcoin Blockchain is sovereign in that no one can change the transactions that already exist in its database and nobody can keep the system from accepting new transactions.
The main resources securing the Bitcoin Blockchain sovereignty are the Bitcoin miners and the Bitcoin nodes. If my laptop was the only computer mining Bitcoin in the world and it was also the only Bitcoin node in the world, the Bitcoin Blockchain would not be a sovereign platform, anyone who used it would simply be using my platform and trusting me. The Bitcoin miners and the Bitcoin nodes make sure that each transaction is valid, that new bitcoins are not being created out of thin air, etc. The more miners and the more nodes that join the Bitcoin network, the more sovereign the Bitcoin Blockchain is.
In the world of crypto you see the word “decentralized” a lot, often hailed as an end in itself when in reality decentralization is the means by which the Bitcoin Blockchain achieves the end goal of sovereignty.
Today the Bitcoin mining network consumes more than 5 GW of electricity a day which is equal to the total electricity production of the largest hydroelectric dam in the United States. Often this exorbitant electricity consumption is cited as a criticism of Bitcoin because of its environmental impact. I believe those criticisms are misplaced: the Bitcoin Blockchain’s value to society is proportional to its electricity consumption. If the Bitcoin Blockchain did not consume any electricity it would not be sovereign and it would be worthless. Only if you believe that society does not get any value from having a sovereign platform can you be correct to assume that the Bitcoin Blockchain electricity consumption is an enormous waste.