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The industrial revolution of money: Investing in bitcoin and cryptocurrencies

June 1, 2021

Three short years ago, bitcoin and cryptocurrencies were the Wild West of investments, much like the dot-com craze of the late 1990s. Now the world of digital currencies has moved from the Wild West to the beginning of the industrial revolution. Those people over a hundred years ago who would not give up on the buggy whip carriages for the future of travel, the automobile, were left in the dust of technological advancement—and we find ourselves at a similar juncture of transformational change when it comes to embracing a technology that will impact our personal and business lives and how society will be influenced in the future.

What is this technology? It’s the blockchain, and the most well-known technology that uses the blockchain is bitcoin. The blockchain is a distributed ledger that is decentralized, which means it is stored over thousands of servers globally, where information is exchanged peer-to-peer and is recorded or time-stamped and immutable (can’t be changed). In a nutshell, it’s the ability to transact business without a middleman with verification.

Why it's important

So what’s the big deal about this? In the ’90s, the technology of the decade was the internet, which offered websites and email to the world. This technology opened the door to interaction way beyond our personal domain and business communities. Then the next decade introduced “big data” through such mediums as Facebook, YouTube, Instagram, Spotify, Google Maps, LinkedIn, and more, which amplified our way to communicate through the internet and cell phones. This is incredible technology; but, as most of us know, these “centralized” corporations use our personal data almost as a commodity to sell to other companies.

With the introduction of the blockchain over the last decade, now there’s a way to protect our data, do business with fewer fees, invest personally with lower fees, and a lot more.

Bitcoin is built on the blockchain and is essentially the gateway to the world of cryptocurrencies. Since it was the first cryptocurrency developed in 2009, it makes up around 60% of the entire cryptocurrency universe, which is only $1.5 trillion.1

Bitcoin is considered “digital gold” because there will be only 21 million bitcoins ever created or mined, and more than 18 million are already in circulation (most likely fewer due to lost bitcoin). Since there is only a limited number of bitcoin, it is the ultimate inflation hedge and why many investors are gravitating to it due to the inflationary consequences of the government pumping dollars into the economy. Being considered “digital gold” and the first one makes it the reserve currency of the cryptocurrency world.

Investment backed by research

Although this has always been the case with bitcoin, naysayers such as JP Morgan’s CEO Jamie Dimon said bitcoin was “a fraud” and “worse than tulip bulbs”in 2017.2 But again, those were the days of the Wild West, and now are we entering the industrial revolution or the early adoption phase of cryptocurrencies. Why? Because there are many big corporations, such as PayPal, Square, Tesla, Micro Strategy, Mass Mutual, and others investing their corporate treasury in bitcoin. When corporations and financial institutions start having a vested interest in bitcoin, it’s a sign of confidence that bitcoin is a legitimate investment. Even Dimon now says that he regrets making that comment on bitcoin and that the blockchain has a future.3

If you haven’t already done so, is it time for you to consider adding some bitcoin or cryptocurrencies to your investment portfolio? If it helps, the top-performing asset for eight of the last 10 years has been bitcoin.4 Being dentists, we all like evidence-based dentistry, so we should also like some research to back up our investment decisions.

The good news is that there has been some recent research done by Bitwise Asset Management5 to support the decision to enhance your portfolio with another asset class. Adding only 2.5% of bitcoin to a 60:40 Vanguard portfolio rebalanced quarterly from January of 2014 to March of 2020 increased the annualized rate of return by over 18% per year (26.2% to 44.9%). Most important, the standard deviation or volatility was essentially the same (10.1% with bitcoin and 9.9% without). What this means, according to the research,is that not investing in bitcoin may hurt your overall portfolio!

How to get started

How does one get started investing in bitcoin and cryptocurrencies? There are essentially two ways. One is to do it on your own. The entry point is a fiat-exchange, such as Coinbase, Gemini, or others, where your bank account is connected to the online exchange. The process to set up an account is relatively straightforward, but you will need to show a proof of identity with a driver’s license or passport and possibly a utility bill. On these fiat-exchanges, you can invest in a number of cryptocurrencies, such as bitcoin, ethereum, or uniswap.

Once invested, you don’t want to keep your cryptocurrencies on this exchange, but you’ll want to move it to what is called a wallet. There are two types of wallet, a cold wallet (Trezor or Ledger) or hot wallet (Exodus or MyEtherWallet). The cold wallet is the most secure, which means resistant to hackers, and the best way to store your cryptocurrencies, but hot wallets are more convenient and can be connected to your cold wallet. These steps make investing in cryptocurrencies a bit more complicated and can potentially mean losing your investment if you don’t keep track of your seed phrases, passwords, copy and paste incorrectly, or get hacked. Since this a decentralized system, there really is no customer service to help you recover your lost assets.

For those who don't want to deal with fiat-exchanges or crypto-to-crypto exchanges, there are places to invest in bitcoin, such as the Grayscale Bitcoin Trust (GBTC) or cryptocurrency funds offered by registered investment advisors that invest in a multitude of cryptocurrencies without having to deal with all the nuances and complications of doing it yourself. Many times you have to be an accredited investor in order to invest in these funds, but most dentists do qualify to invest in this way. This is a great turnkey option to consider because, as mentioned in the research paper,5 in order to get those better returns, the portfolios need to be rebalanced accordingly and the cryptocurrency funds should do that for you.

The world of cryptocurrencies has moved from the point where individual investors were like pioneers, gold miners, or outlaws seeking the potential of the frontier to the point where big corporations are starting to adopt cryptocurrencies and the blockchain due to their incredible benefits for personal lives, our practices, and society. Henry Ford’s assembly line was transformational for many future industries, and the blockchain will do the same thing by enabling us to transact business in a more economical sense and have the ability to reclaim our personal identity from the world of “big data.” Like all companies and individuals at the beginning of the industrial revolution, innovation in these industries created generational wealth, and the blockchain has similar opportunities, especially if bitcoin becomes the reserve currency in the future. In the words of investor Roger Ver, “Bitcoin is the most important invention in the history of the world since the Internet.”6

References

  1. Today's cryptocurrency prices by Market Cap. CoinMarketCap. Accessed April 2021. https://coinmarketcap.com/
  2. Imbert F. JPMorgan CEO Jamie Dimon says bitcoin is a ‘fraud’ that will eventually blow up. September 12, 2017. https://www.cnbc.com/2017/09/12/jpmorgan-ceo-jamie-dimon-raises-flag-on-trading-revenue-sees-20-percent-fall-for-the-third-quarter.html
  3. Gupta R. Does Jamie Dimon still think that bitcoin is a fraud? December 24, 2020. https://marketrealist.com/p/jamie-dimon-bitcoin-quotes
  4. Novel investor. Annual asset class returns. https://novelinvestor.com/asset-class-returns
  5. Lawant D, Houghan M. The case for crypto in an institutional portfolio. May 2020. https://static.bitwiseinvestments.com/Research/Bitwise-The-Case-For-Crypto-In-An-Institutional-Portfolio.pdf
  6. 20 famous (and infamous) quotes about bitcoin. November 7, 2018. https://coinsource.net/20-famous-and-infamous-quotes-about-bitcoin

MART McCLELLAN, DDS, MS, is a financial strategist, fiduciary, and president of Macro Wealth Management. His firm is the only firm in America that utilizes a macroeconomic model for financial decision-making and has an orthodontist as an advisor. He assists clients in the world of cryptocurrency. He can be reached at [email protected], macro-wealth.com, or (800) 281-0703.

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