Can Bitcoin Replace Gold in Permanent Portfolio

Bitcoin by Antana

17 Sep Can Bitcoin Replace Gold in Permanent Portfolio

Bitcoin is a very novel and there are more skeptics than supporters for it.

It reminds me of the Innovation Adoption Cycle. There will always be a resistance to adopt new technologies and most products fail if they cannot get the early majority to buy. Bitcoin is probably at the Early Adopters stage and if it is able to ‘cross the chasm‘, Bitcoin will be here to stay and no one will be able to refute but live with it.

Innovation Adoption Lifecycle

Bitcoin is not a Currency, it is a Commodity

Although Bitcoin is labelled as a digital currency, it doesn’t behave like a currency. It is a digital property and here are some reasons why it is a commodity

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  • Limited supply of Bitcoin at 21 million, after which no additional Bitcoin can be created. Unlike fiat currency, the government has the power to print money.
  • Bitcoin is not controlled by anyone. Currency on the other hand is controlled by the government to a certain extent.
  • The price of Bitcoin is too volatile. A currency need to be stable otherwise the users will be fearful that the value can tank any time and lose their wealth.
  • Countries like Japan and Finland have officially classified Bitcoin as a commodity. Bitcoin can attract capital gain tax in some countries and it attracts GST in Singapore.

Think of Bitcoin as online Gold

Here are some of the similarities between Bitcoin and Gold

  • The value in Bitcoin and Gold are perceptive. Humans attached a value to them otherwise they are worthless. They become more precious when more people acknowledge their value.
  • You need to mine Bitcoin and Gold. The difference is that one is digital and the latter is physical.
  • A symbol of mistrust of authority. Gold is a safe haven when bad things such as political and currency instability happen. Similarly, Bitcoin is attractive because of the non-interference from governments.

Role of Gold in Permanent Portfolio

The role of Gold in Permanent Portfolio is to hedge against inflation. Gold price is expected to rise during inflationary economic condition.

However, there is an additional role of Gold which most people overlooked. In the worst case scenario where your country goes to war, physical gold is the only asset class of value which you can bring along. Stocks and bonds would likely be custodized and the exchange may not even be opened for you to cash out. Even if you are able to cash out, you would expect to sell the securities at rock bottom prices due to the outbreak of war. Even the currency value would tank too, holding cash would erode your wealth in reality. Regardless how many properties you have in the war zone, they would not worth much and you cannot bring them along.

It would be handy at this point to have gold coins and small bars which are portable. And they would be able to preserve your wealth while the war wages. If you ask me, you can only trust Gold in the most dire situation. It is not the perfect asset class, but it is your best bet.

Bitcoin in Permanent Portfolio?

Bitcoin is not bounded by country. You just need to hold dear to a private key to your Bitcoin wallet and you can access your funds with any IT device connected to the internet. There are many ways to secure this key. You can totally remove from the internet and cold storage the number in physical form. No hackers would be able to steal your key online.

In times of war, you would not need to worry so much as Bitcoin is always there and should be able to hold value while other asset classes devalue. You can also move on to any parts of the world and still have your bitcoins.

Hence, Bitcoin fulfils the role of Gold in this aspect. In fact, Bitcoin does it better. You need not lug along kilograms of Gold while you travel.

However, we are unsure how Bitcoin would perform in an inflationary period. Can Bitcoin hedge against inflation? Theoretically it should perform well in inflationary period as most people would want to convert cash into other forms of assets. This is unproven in reality.

Also, if Bitcoin is so similar to Gold, the collective supply has increased. This means that Bitcoin may compete with Gold and result in a smaller demand for Gold. Gold price may be depressed in the future as Bitcoin become more accepted. This would negatively affect Permanent Portfolio holders as Gold price becomes less volatile during inflationary period.

We need to monitor the development of Bitcoin as it may change the inflationary landscape.


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