Advisors, how many clients have you heard tell you they want passive income? Let me rephrase that – name me one client who hasn’t told you they want passive income?
The chase for yield has and will continue to be one of the most difficult challenges an advisor faces from an investment standpoint.
I want to challenge the notion that clients will need passive income or yield if bitcoin is their unit of account. Why would you risk a compounded annual growth rate (CAGR) of high double digits for 6% or even 10%?
Not only are the risks of chasing yields in crypto space high, the idea of seeking a yield on bitcoin does not make fundamental sense since holding it should suffice.
So before seeking a yield on Bitcoin, let’s look at some of the risks of crypto yields and then consider why Bitcoin is an outstanding currency to hold due to its deflationary traits.
The recent events from centralized finance or “CeFi” lenders show clearly that yields aren’t worth the risk. The bankruptcies Celsius and Voyager are significant lessons that if you don’t understand where the yield comes from, it’s best to stay away. Speculation and wild risk-taking became rampant, and yield-farmers who left their crypto on those platforms were left holding the bag.
Celsius promised quick and outsized yields– as large as 18% — in order to attract hordes of new users to its platform. They subsidized the yields and took on losses in order to quickly boost their user base. But since the yields were subsidized, they were essentially fake and comparable to a ponzi scheme.
Voyager had also successfully attracted loads of yield-hungry depositors, but it made poor decisions on who to lend that money to. Its biggest lending customer, Three Arrows Capital, had large exposure to LUNA. When LUNA imploded, it caused a domino effect that led to the bankruptcy of Three Arrows and consequently Voyager.
And although the yields in some cases throughout the industry were advertised in the high double digits, the grand majority of the yields were a mere 6% to 9%. Which begs the question: Why risk a scarce asset that is appreciating 53% annually the last five years for a paltry single-digit yield?
The idea of yield comes from an ever-expanding money supply – the “yield” you need is to offset the newly created units. The reason we are obsessed with yield is that the number of dollars in circulation has significantly increased and will continue to increase.
Bitcoin doesn’t need a yield because you don’t need to offset the increase in the money supply. Unlike dollars that are inflationary and can be printed in endless quantities, Bitcoin is deflationary and capped at a supply of 21 million units.
Understand What Money Is,With dollars, your yield is to help you maintain purchasing power over time. But you don’t need to find yield to keep pace if you have a scarce asset. A great example is the median home price in the US – in 2018, it cost 24.5 bitcoin to own, and today it is 20 bitcoin. If we had saved in dollars, you’d need 30% more today than in 2018 for that same purchase.
In other words, simply holding Bitcoin would have increased your purchasing power over time, unlike holding dollars that would have reduced your purchasing power during that same period of time.
Money that cannot be increased holds its value better. If money holds its value, there is no need for yield since holding it suffices. Holding a currency is saving. Lending out a currency puts it at risk and thus needs a return or yield.
Deflation promotes saving, which is good, and bitcoin allows this to happen. Inflation erodes the value of savings, which is bad. Expanding the dollar supply causes inflation and encourages debt and speculation, which rarely turns out well. If you need a refresher on why this is the case, read Jeff Both’s seminal book called The Price of Tomorrow. The book will challenge those voices who claim inflation is needed for a well-run and functioning economy. All advisors should place this next on their reading list.
Bitcoin allows for saving (‘hodling’) to increase purchasing power and then investing only when it makes sense to put funds at risk. Bitcoin seems risky, but you trade short term volatility for long term stability.
Bitcoin can be held to navigate the unknowns of the future. We can effectively save Bitcoin, unlike dollars, knowing the protocol rules will be defended. Those rules include Bitcoin’s hard cap supply of 21 million and its decentralized traits. A great example of rules being defended is the Block Size Wars.
The rule set and historical precedent demonstrate those that save in bitcoin don’t need yield to maintain purchasing power. Therefore, clients can benefit from living below their means – to save into bitcoin!
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