Bitcoin as an Alternative Investment

Date Published
March 10, 2021
Written by
Deniz Saat
Reviewed by
Jonathan Hamel

Alternative investments are essentially any investments that do not fall under stocks, bonds, ETFs, index funds, mutual funds (tied to the stock or bond markets), one’s personal income, and cash.

Major categories of alternative investments:

  • Commodities: These include assets that bring utility or are considered “raw” resources. They serve as tradable goods and may also be used for several industrial functions. For example, gold may be outfitted for jewelry and circuit boards, or oil may be used as an energy source while also having the properties to be processed into plastic products.
  • Real Estate: Land and buildings are the bread and butter for most of American wealth. These types of investments are not considered traditional because they may be used in multiple ways. For example, real estate can be used as a store of value, a rental business to create cash flow, or it may also be used as farmland to generate revenue by growing crops. However it is not publicly available for everyone and usually requires a significant amount of capital to get started.
  • Private Equity: Private equity is similar to public equity within stocks and bonds. The major difference with private equity, as the name suggests, is that it is not publicly available to be purchased by the majority of people. Most of the time, private equity is available for those who are considered accredited investors or for those who are directly and indirectly involved with the day-to-day operations. Employees, friends, family, and venture capitalists are likely candidates for private equity investment opportunities.
  • Art, antiques, and collectibles: Determining the value of art, antiques, or collectibles is usually based on the scarcity and popularity of the object. Examples of art includes paintings, drawings, sculptures, or anything created by a well known artist. Antiques consist of anything from cars and furniture to kitchenware. Collectibles may be pieces that are limited in quantity, scarce, and more attractive to a very niche group. This may include merchandise from a famous television show or movie. Collectibles are not the most liquid investments and it may be hard to find a buyer who appreciates the piece for the requested value.
  • Bitcoin and cryptocurrencies: Bitcoin and other cryptocurrencies are a very new category to alternative investments. Bitcoin is the oldest (about 11 years old as of this writing) in the space and is a decentralized ledger that must have consensus agreement for each transaction. Bitcoin cannot be controlled by any one single entity. Its scarcity is also verifiable by anyone with a computer. Bitcoin’s digital properties, transparency, and liquidity make it more desirable than the rest of the listed alternative investments.

Why should I consider alternative investments?

To be clear, I am not a financial adviser and I am merely sharing my personal opinion in this article. I will present several points to consider before allocating a small percentage of your net worth to an alternative investment, like Bitcoin. All investment decisions should be done after you’ve done ample research or have consulted with a financial fiduciary.

We must first understand that holding our savings in cash would mean that we are exposing ourselves to the risk of losing purchasing power in the future. Beating inflation is the main motivation for a lot of large institutions to find adequate returns. In order to combat this insidious destruction of wealth, many will turn to the next best asset to hold: businesses with cash flow. For a number of decades, the “conservative” route of wealth preservation has been to invest in traditional markets. To fully address this claim, we must consider the current state of how publicly traded companies are valued by investors today.

As we see equity markets continue to climb in price, the current fundamentals of many companies paint a different picture. Earnings for companies, with the exception of the larger and more popular tech behemoths, have slowed or fallen. This causes the price to earnings (P/E) ratio of the S&P 500 and other indices to continue going up as well. Historically, a P/E ratio of 15 would indicate a fairly priced company, but we are currently around 28 with no sign of dropping. This is mainly due to the Federal Reserve continuing to prop up markets by purchasing corporate bonds and bailing out “zombie companies”. Simultaneously, retail investors on main street continue to use these market indices as a store of value to hedge against inflation, rather than determining whether or not stocks are sound investments. This could lead to several issues in the future, but the rules continue to change in equity markets. To mitigate one’s exposure to traditional markets and avoid the potential of future volatility, investors may find refuge in alternative investments.

Alternative investments allow investors to “hedge” their bets in case one market or a group of related markets experiences continued volatility. In general, alternative investments are uncorrelated with traditional assets. For example a crash in the stock market doesn’t necessarily signal a drop in home prices. There are many schools of thought into how great of a percentage one should invest in each specific market or investment vehicle. The decision ultimately lies on the individual and their current situation. An individual may make a meticulous contingency plan, but there is no guaranteed price for specific time periods in any given market. An individual should also be prepared for any situation outside of market movements. In the case of an emergency situation like; emergency medical bills, unforeseen house expenses, funerals, savings to cover recent unemployment, or car payments, it is always prudent to have a fund set aside for those inevitable, yet unpredictable life events. Savings (possibly in cash) may provide most people with the comfort of knowing that there is a certain amount of “protection” from liquidating their current investments. For example, if an individual has invested too much in a certain asset but has no access to savings that can be withdrawn in an emergency, they will have to sell their assets and pay taxes on their capital gains. This could result in losing more than intended.

Three reasons to add Bitcoin to your portfolio

1. Scarcity can be verified by everyone

Arguably the most attractive feature of Bitcoin is its limited supply of 21 million. Bitcoin is a digital ledger and requires a block, which a digital page of the most recent transactions on the network. Mining is accomplished with the processing power of GPUs or ASIC hardware that are configured to solve a series of complex problems. This incentive structure requires miners to have the most up to date hardware in order to ensure the continued increase in security for the Bitcoin network. With this system, bad actors are unable to manipulate the transaction history of Bitcoin’s blockchain. After every 210,000 blocks that are mined, the reward for each block is cut in half. This will guarantee Bitcoin’s scarcity and increase in security. In 2009, each block that was solved would award a miner 50 bitcoin (BTC). As of 2020, a miner will receive 6.25 BTC and this number will continue to be cut in half until the year 2140.

There is no other form of money in existence that can be verified as accurately as the scarcity of Bitcoin. All that is required to confirm these numbers is a computer, an internet connection, and the Bitcoin Core wallet. Once you have everything set up with Bitcoin Core, you may go to “Window”, and then “Console,” where you type in the commands needed to verify everything that occurs on Bitcoin’s blockchain. There are various blockchain explorers that are able to parse this data for users in a more readable interface. Additionally, if one feels inclined, users also have access to create or customize their own blockchain interface. This type of record keeping is a nightmare for criminals because it is so easily accessible throughout the world. Most people may still believe that Bitcoin can be used in nefarious ways, but it would certainly be the least desirable way to launder money. It would be much easier to avoid government scrutiny if a criminal laundered billions of dollars of physical cash by transporting it across borders rather than using Bitcoin. Bitcoin is by far the most convenient way to transport money through space and time, and it is easily traceable with sites like oxt.me. If anything, governments would prefer that their citizens use a network like Bitcoin to make transactions. The main issue governments have with Bitcoin is that it is not centralized or controlled, which is why many governments have been slow to act on developing regulations for the industry.

2. A decentralized asset that cannot be controlled or confiscated

The second most important benefit of using Bitcoin is that it cannot be controlled or confiscated by large entities like corporations or governments. While miners are able to mine and confirm each block within the blockchain, nodes (computers) are able to store the entire Bitcoin transaction history. Each node confirms with one another that every new block of transactions is added to the ledger. This allows the Bitcoin network to be independent of a third-party auditor. The network is self-governing as long as there are miners that are willing to continue mining for the block reward. Miners and nodes are located all across the globe and to shut each one down is impossible unless every nation on earth agreed to censor or ban internet use.

Known Miner Distribution

Bitcoin-mining-distribution

Source: https://cbeci.org/mining_map

Known Node Distribution

Bitcoin-node-distribution

Source: https://bitnodes.io/

3. Price discovery and established history

One of the main reasons many investors avoid allocating a portion of their investment portfolio toward Bitcoin is because the industry is considered too speculative, young, and volatile. However, the opposite opinion within the tech and altcoin community is that Bitcoin is too old and will be overtaken by a newer and “faster” coin. These views may be based upon an individual’s time horizon, self-interest, and possibly a lack of further investigation as to why Bitcoin already solves the problems that most altcoins claim to improve upon. Whichever camp one may find themselves in, one cannot deny that Bitcoin has still provided the most stability, security, and return for its holders.

Argument 1: Bitcoin is too young

For those concerned that Bitcoin has not had enough time to prove itself, consider comparing the amount of time Bitcoin has spent on the open market versus the S&P 500. Bitcoin is traded 24 hours a day, seven days a week, it continues trading during the holidays, and it is immune to trading halts. If a Bitcoin exchange decides to halt trading for whatever reason, there are several other exchanges to use as an alternative. In the event of a worst-case scenario where all exchanges are banned in a country, you are still able to trade Bitcoin locally if need be.

In March of 2010, Bitcoin began trading on Bitcoinmarket.com (no longer active). Ten years later, it continues to be traded on other exchanges. This would indicated that Bitcoin has had about 91,000 hours of price discovery. When we compare that amount of trading time to the S&P 500, we must remember that traditional equity markets are only open on weekdays, Monday through Friday from 9:30AM to 4:00PM. Along with holidays, this would mean that equity markets are only open for 253 days out of the year. Not including various half days of trading, equity markets trade for about 1,644.5 hours throughout the year. Additionally, the S&P was founded March 4, 1957. With 63.5 years of trading, the S&P has about 103,603.5 hours of price discovery. This should provide a clear perspective on how mature the Bitcoin market is. The total amount of time that Bitcoin has traded should easily overtake the amount of time that the S&P has traded within a few years.

Argument 2: Bitcoin is too old and slow

Bitcoin may seem old when compared to the most recent projects, but age in this space is a very good indicator of all the development, infrastructure, and “attacks” Bitcoin has had to overcome in order to continue being the most secure network in the world. Overall, age has helped solidify Bitcoin’s position. It is able to go through every stress test necessary to prove to holders that their funds are safely stored and scarce when compared to all of the new projects.

To address the “slowness” and high fees of the network, it really depends on what your main use case is for Bitcoin. If you wish to store value and have Bitcoin be part of your savings, then a 40-minute to 2-hour transaction time will not bother you in the slightest. Pending transfers to your personal savings account with any commercial bank will usually take over a day to process. Bitcoiners also have the option to select the pricing for fees within their wallets. For those who wish to spend their Bitcoin on coffee, they have the opportunity to use a second layer solution like the lightning network. Most of the things that people need to accomplish with using Bitcoin have been available since its inception. There may be some altcoin projects that address demand for certain features that Bitcoin may not currently have, but with enough time and testing Bitcoin could also implement the same solutions for those user demands.

Final thoughts

If you are still considering allocating funds toward alternative investing, it would be very prudent to have a manageable percentage in Bitcoin. It addresses all concerns with inflation, quantitative easing, and circumvents the possibility of being confiscated from the holder. An asset that cannot be inflated away or stolen by those in power will continue to be in demand during uncertain markets.


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WRITTEN BY
Deniz Saat
Deniz Saat is an IT services specialist and technical writer.
REVIEWED BY
Jonathan Hamel
CEO and Founder of Académie Bitcoin

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