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“Faith is a wise bet. Although faith cannot be proven, what harm will it do you if you bet on its truth and it is proven false? If you win, you gain everything; if you lose, you lose nothing. Bet then, without hesitation, that it exists.”
– Blaise Pascal
Blaise Pascal only lived to be 39 years old, but he became world-famous for his many contributions to the fields of mathematics, physics, and theology. The quote above summarizes Pascal's Wager – a philosophical argument for the Christian belief in the existence of God.
The conclusion of the argument states that a rational person should live as if God existed. Even if the probability is low, the reward is worth the risk.
Pascal's Wager as a Justification for Bitcoin? Yes, I'm familiar with the fallacies: false dichotomy, appeals to emotion, begging the question, etc. This is not the point. The point is that Binary outcomes incite extreme outcomesMoney game theory suggests that it is a winner-take-all game.
The Pascalian Investor: A Rational Approach to Bitcoin
Humanity's adoption of the “best money over time” principle simulates a series of binary outcomes – A/B tests.
Throughout history, inferior forms of money have faded away as better alternatives have emerged (see India's failure to switch to the gold standard). If Bitcoin is trying to be the number one currency in the future, it will either succeed or it will not.
“If you're not first, you're last.” -Ricky Bobby, Talladega Nights Money works over time.
Therefore, we can look at Bitcoin's success similarly to Pascal's bet – let's call it Satoshi's bet. The translated points will be as follows:
- If you own Bitcoin early and it becomes a world-valued money, you will gain a lot. 😀
- If you own Bitcoin and it fails, you have lost that value. 😢
- If you don't own Bitcoin and it goes to zero, there's no pain, no gain. 😐
- If you don't own Bitcoin and succeed, you will have missed out on the great financial revolution of our lifetime and will be relatively left behind. 😡
If Bitcoin succeeds, it will be worth much more than it is today and will have a massive impact on your financial future. If you fail, losses are limited only to your exposure. The most you can lose is the money you invested.
Bitcoin could theoretically be worth 100 times more than it is today, but it would likely only lose value once when it reaches zero. The concept we are discussing here is Upside down asymmetrical – Big gains with relatively limited downside. In other words, the potential rewards of investing outweigh the potential risks.
Bitcoin offers an asymmetric uptrend that makes it a wise investment for most portfolios. Even a small allocation provides potential protection against severe currency depreciation.
Salt, gasoline and insurance
“Don't oversalt your steak, pour too much gas on the fire, or buy too much insurance.”
A little goes a long way, and you can easily overdo it. The same is true when looking at Bitcoin in the context of a financial plan.
Bitcoin's asymmetric upside gives it “insurance-like” qualities, and this insurance pays off very well in times of money printing. This was exemplified in 2020 when the value of Bitcoin increased by more than 300% in response to pandemic money printing, far outpacing stocks, gold and bonds.
Bitcoin is presenting a similar asymmetric uptrend today. Bitcoin has a maximum supply of 21 million coins, making it resistant to inflationary declines. In contrast, the purchasing power of the dollar is constantly declining through unrestricted money printing. History has shown that societies prefer money that is difficult to inflate.
If the recent rampant inflation is uncontainable and the dollar system falters, Bitcoin is well positioned as a successor. It's still early days to test this global cash A/B, but given the size of both, a little bit of Bitcoin can go a long way. If successful, early adopters will benefit significantly compared to latecomers. Of course, there are no guarantees, but the potential reward justifies reasonable exposure despite the risk.
Let's imagine nervous Nancy, a very conservative investor. She wants to invest but also take as little risk as possible. She invests 100% of her money in short-term cash equivalents (short-term Treasuries, money markets, CDs, and maybe some cash in a coffee can). With this investment allocation, she will almost certainly recover her initial investment and receive a modest amount of interest as a gain. However, she has no guarantees that the investment returned to her will buy the same amount as before. Inflation and money printing cause each dollar to become less purchasing power over time. Depending on the severity of inflation, he may not buy anything at all. In other words, you did not lose any dollar, but rather the dollar lost its purchasing power.
Now, let's salt her wallet with Bitcoin.
99% short-term Treasury bonds. 1% Bitcoin.
With a 1% allocation, if Bitcoin dropped to zero overnight, it would lose just 1 cent against the dollar, and its Treasury interest would quickly fill the gap. Not at all disastrous for her financial future.
However, if the hypothetical hyperinflation scenario mentioned above comes true and Bitcoin grows in purchasing power by 100 times, you have saved everything. Figuratively, her dollar house burned to the ground, and her “bitcoin insurance” destroyed her. strong. A little bit of Bitcoin salt goes a long way.
(When protecting against the existing system, it is important to remember that you need to take your bitcoin out of the system. Keeping your bitcoin on an exchange or with a counterparty will not do you much good if that entity fails. If you are looking at bitcoin as insurance, it is essential to keep your bitcoin Keep your keys in cool storage, otherwise it's someone else's lock.)
When you have a hammer, everything looks like a hammer…
Construction joke:
There are only three rules to construction: 1.) Always use the right tool for the job! 2.) A hammer is always the right tool! 3.) Anything can be a hammer!
Yes. That's what I thought too. A little funny and mostly useless.
But if you spend enough time swinging the hammer, you'll eventually realize that it can be more than it seems at first glance. Not everything is nails. A hammer can knock down walls, break concrete, hold things in place, and shake other things. The hammer can create and destroy; He builds tall towers and humiliates the fingers of beginners. Use cases expand on the carpenter's skill.
Like hammers, Bitcoin is a monetary instrument. An asset allocator of 1-5% will usually see a valid “speculative insurance” use case. Bitcoin is speculative insurance, but it is not only speculative insurance. People invest and save in Bitcoin for many different reasons.
I've seen people using Bitcoin to pursue all of the following use cases:
- Hedging against financial collapse (speculative insurance)
- Saving for family and future (general long-term saving and safety net)
- Increased down payment for a home (specific medium-term savings)
- Shooting for the moon is equivalent to winning the lottery (gambling)
- Opting out of government-run and bank-controlled financial systems (financial choice)
- Make a quick profit (short term trading)
- Escaping a hostile country (wealth evacuation)
- Locking up wealth that cannot be confiscated (wealth preservation)
- As a way to influence opinions and gain followers (social status)
- Fix the money and fix the world (message and goal)
Keep this in mind when taking other people's financial advice. They often play a different game than you. They have different goals, upbringings, worldviews, family dynamics, and circumstances. Although they may be using the same hammer as you, it may be for a completely different job.
wrapping
The massive allocation of Bitcoin may seem crazy to some people, but to others it is completely reasonable. The same applies to the 1% allocation.
But, given the current macroeconomic environment and Bitcoin's trajectory, I find very few use cases where 0% Bitcoin makes sense. By not owning Bitcoin, you are implicitly saying that you are 100% sure that it will fail and go to zero. Given its 14-year history now, I'd recommend lowering your confidence. No one is 100% right forever. A little salt goes a long way. Your financial plan may be riskier without Bitcoin. Diversify accordingly.
“We must learn our limits. We are all something, but none of us are everything.” – Blaise Pascal.
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