EconomyBitcoin

Bitcoin: The World's Safest Asset

This article was originally published on Mimesis Capital's Medium account on December 7th, 2020, and was edited to represent updated market data.


Bitcoin is the world’s best treasury reserve asset, the emerging dominant monetary network, and the solution to the store of value problem faced by 7.5 billion people & $300 trillion in capital. At this point, it is all but unstoppable.

Michael Saylor, Founder & CEO, MicroStrategy

Bitcoin is the most certain asset in the entire universe.

It is an asset that has two unique characteristics that no other asset has combined.

  1. No Counterparty Risk — the other party in an investment, credit, or trading transaction may not fulfill its part of the deal and may default on the contractual obligations.
  2. No Dilution Risk — additional units of the asset cannot be created. There can only ever be 21 million bitcoin. It is perfectly scarce.

These two unique characteristics put together make Bitcoin the safest asset you can own, but most of the world has yet to recognize this.

“But Bitcoin is too volatile”

Bitcoin has now been trading for more than a decade, and with no leader, marketing department, or centralized organization, it was still the best performing asset in the world.

Because Bitcoin trades 24/7/365, started from $0, and has now grown to half a trillion dollars, its price movement has been inherently volatile. Nothing is going to grow from zero to hundreds of billions of dollars in a perfectly straight line.

That is why it is important to ask yourself, “why is Bitcoin so volatile?”

The answer has to do with where the world currently is in the adoption cycle of Bitcoin.

Clearly, if you have a 4 year investing time horizon, all of Bitcoin’s volatility is to the upside. It does have 80% drawdowns, but those only occur after 2,000% bull markets.

Looking at where we are in the adoption cycle, it is still absurdly early. This indicates that we should continue to expect massive upside volatility until a large majority of the world uses Bitcoin as their primary store of value.

Technology Adoption S-Curve. Source: @Croesus_BTC

Sharpe Ratio

Now that we’ve determined a large majority of Bitcoin’s volatility is to the upside, is there a way to calculate Bitcoin’s risk adjusted returns to figure out if holding Bitcoin is a good bet?

Yes! This is called the Sharpe Ratio.

EMH/CAPM Risk & Return. Source: @100trillionUSDBitcoin’s astronomically high Sharpe ratio reveals that even after accounting for its high volatility, its risk-adjusted returns are unprecedented. In fact, Bitcoin’s Sharpe ratio is the only asset with a Sharpe ratio greater than 1.

Money Is a Hedge Against Uncertainty

As Pierre Rochard says, “holding money is a hedge against uncertainty. Why? Because money is the asset with the least uncertainty.”

We know Bitcoin’s unique characteristics with certainty, and we know those characteristics are what makes Bitcoin the best form of money.

I cannot make you or anyone else hold bitcoin, but I can decide that Bitcoin is the money I should hold. Because of my knowledge of Bitcoin’s superior properties I can be certain that Bitcoin will outperform other monetary goods even if you continue using inferior monetary goods.

However, it is highly likely that the number of Bitcoin users (Bitcoin savers) will continue to grow exponentially just like it did in the previous decade due to the benefits of saving in the world’s safest asset. Those that continue to save in Bitcoin will continue to get rewarded compared to those that save in dollars, euros, Treasury bonds, and even stocks.

No Monetary Risk

How do we know Bitcoin is the best money?

The two characteristics of Bitcoin (no counterparty risk and no dilution risk) that make it the world’s safest asset can be derived from Bitcoin’s unique monetary properties.

Because of Bitcoin’s superior monetary properties, Bitcoin is the world’s best form of money, making it the world’s safest asset.

Its scarcity and decentralized nature make it the only good in the universe capable of possessing those two characteristics. It cannot be replicated because it is impossible to create decentralized scarcity again due to Bitcoin’s immaculate conception and path dependence of its creation. A decentralized scarce monetary energy network is destined to achieve a natural monopoly on all stored wealth.

Bitcoin is the game theoretic monetary Schelling point because of its scarcity, decentralization, divisibility, portability, etc.

Bitcoin is nothing short of the world’s safest asset.

Few understand this.

Joe Burnett is a Research Analyst at Mimesis Capital.